Pebblebrook Hotel Trust Q3 FY2023 Earnings Call

Greetings, and welcome to the Pebblebrook Hotel Trust Third Quarter Earnings Call. Please note that this conference is being recorded.

Thank you, Donna, and good morning, everyone. Welcome to our third quarter 2023 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer; and Tom Fisher, our Co-President and Chief Investment Officer. But before we start, a reminder that today's comments are effective only today, October 27, 2023, and our comments may include forward-looking statements under federal securities laws. Actual results could differ materially from our comments. Please refer to our latest SEC filings for a detailed discussion of potential risk factors and our website for reconciliations of non-GAAP financial measures referred to during our call. Now let's turn our attention to our Q3 results. We are pleased to report that despite two negative weather events and continuing entertainment industry strikes in LA, we were able to achieve same-property hotel EBITDA, adjusted EBITDA, and adjusted FFO at the top end of our outlook due to a continued recovery in corporate group and transient demand across many of our urban markets, solid cost controls, and a gradually moderating expense environment. Washington, D.C. led the rebound with hotel occupancy surging an impressive 13 points to 68% and RevPAR increasing 21.4%. This was closely followed by San Francisco, which climbed over 10 occupancy points to 72%, with RevPAR up 13.1%. In Los Angeles, our occupancy improved nearly 6 points to a healthy 78%, with RevPAR growing 5%. Significantly, weekday occupancies at our urban hotels, a good bellwether for business travel demand, rose to a solid 75.4%, up from 72.3% in the prior year quarter, marking a meaningful recovery over last year. Our urban properties also gained from a resurgence in leisure travel, particularly during the summer, bolstered by concerts and other cultural events. Consequently, weekend urban occupancies elevated to an impressive 82.3%, almost surpassing our weekend resort occupancy of 83.9%, which itself was nearly 2 points higher than the prior year quarter. As a result, RevPAR at our urban hotels increased by 3% compared to last year's third quarter. This improvement helped to offset moderating room nights and demand for suite and premium room upgrades, particularly in the leisure segment at our resorts. Resort RevPAR was down 10.2%, with occupancy flat. Resort rates continue to be, on average, about 40% or $111 higher than those in 2019. The resorts bore the brunt of the two weather impacts, so their results would have been better otherwise. For the quarter, we recorded a marginal increase of 0.2% for same-property total RevPAR, while room revenue dipped by 1%. Non-room revenue rose by 3%, attributable to the benefit of recovering occupancy levels, a persisting trend across our portfolio, alongside continued healthy out-of-room spending by our guests. The third quarter was not without its challenges, though. First, two named storms adversely affected demand on both coasts, triggering cancellations and curtailing bookings from mid-August through mid-September in several key markets. This led to an approximate 90 basis point decline in our RevPAR growth, saving an estimated $2.5 million in same-property EBITDA. Second, West Los Angeles properties continue to feel the impact of the writers' and actors' strikes, which have notably dampened demand from the entertainment sector. We estimate this caused a 30 basis point decline in RevPAR in the quarter and a $0.5 million decrease in same-property EBITDA. While the writers have recently settled, the continuing actors' strike is expected to curtail demand in the LA market in Q4, which we have estimated and reflected in our outlook. Finally, the completion of the redevelopment of Solamar into Margaritaville San Diego Gaslamp Quarter, coupled with extensive renovations at the guesthouses at Southernmost, resulted in an approximately 45 basis point impact on RevPAR and a $1.4 million reduction in same-property EBITDA. These renovation-related disruptions are largely anticipated and aligned with our original Q3 outlook. Despite these hurdles and one-off weather events, overall portfolio occupancy continues its upward trajectory, finishing the quarter at a healthy 75.4%, an increase of 2.5 points year-over-year. Our same property EBITDA at $114.3 million hit the upper end of our Q3 outlook with EBITDA margins at 29.4%, also at the top end of our expectations. These positive achievements were aided by prudent cost management strategies across all operating departments, as well as successful reductions in property taxes at several of our properties. Overall, wage rate pressures and other operating costs have notably eased as the year progressed compared to the significant strains witnessed throughout 2022. The year-over-year growth rate in our total hotel operating expenses, excluding property taxes, has declined from 27.8% in Q1 to 10.2% in Q2 to 5.4% in Q3. And on a per occupied room basis, they've declined from 7% in Q1 to 5.3% in Q2 and down to 1.8% in Q3. We provided these numbers, excluding property taxes, since they may vary materially on an unpredictable basis as we are successful in winning reduced assessments and making multi-year true-ups. We expect further easing in the growth of more normal course operating expenses, meaning excluding the noise from things like property tax true-ups or property insurance in the fourth quarter as we are lapping the success we've had restaffing in the last four months of last year. Energy expense growth also moderated to 10.7% in Q3, down from the nearly 14% spike experienced in the first half of the year. This reduction in the growth rate results primarily from our significant investments in energy and water conservation across the portfolio in some moderation of energy rates. However, we continue to have energy contracts we locked in several years ago that will roll over at significantly higher percentage increases. As a result, this will keep our energy cost growth rate from moderating in the next 12 to 18 months. Insurance costs were also a headwind, increasing 34.4% over the prior year quarter. On a monthly breakdown, RevPAR in July dipped by 0.5%. August saw a 1.1% decline, probably due to Tropical Storm Hillary, which made landfall on August 20, resulting in cancellations and reduced bookings at our 17 hotels in San Diego and Los Angeles. September RevPAR ended down 1.7%, partly due to Hurricane Idalia, which made landfall on August 30, which increased cancellations and negatively impacted bookings at our six resorts in the Southeast. Our adjusted EBITDA and FFO benefited from business interruption proceeds of $10.9 million for LaPlaya, slightly exceeding our forecasted $10.5 million. Lower-than-expected G&A also contributed to our positive variances versus our outlook. During the third quarter, we deployed $33.1 million in capital investments across our portfolio, with a significant portion related to two major redevelopments: the newly transformed Margaritaville San Diego Gaslamp, which occurred on August 15, and the $12.5 million redevelopment and substantial repositioning of the four guesthouses, comprising 50 guestrooms and suites at Southernmost Resort in Key West. Renovations of the guesthouses at Southernmost are on track for completion in November. The public space renovations at Estancia La Jolla are scheduled to commence in November with completion expected in early Q2. This marks the final phase of a 15-month long comprehensive redevelopment and repositioning of Estancia, which began with a full guest room renovation. Our last major redevelopment project for 2023 involves the sweeping transformation of Newport Harbor Island Resort, which is set to commence on November 13, with the closure of this property. We aim to complete this redevelopment in Q2 next year before the resort's peak season. We remain on track to invest $145 million to $155 million in the portfolio for the year, and we're pleased to report that the bulk of revenue disruptions and overall investment dollars associated with our strategic capital redevelopment projects are in the rearview mirror. We remain bullish about the substantial upside these repositioned properties will generate in both market share and cash flow in the foreseeable future. Shifting focus to LaPlaya Beach Resort & Club in Naples, substantial strides continue to be made in the resort's ongoing repair and refurbishment. The 40-room Bay Tower and 70-room Gulf Tower, which accompany the resort's key amenities like the lobby, restaurant, and club are substantially complete and fully operational. LaPlaya is beginning to look like an upscale resort again. Rebuilding work on the 79-room beach house is now well underway with a clear end in sight. We currently forecast this final portion of the resort to be substantially complete and reopened in the first quarter next year. This represents a delay from our prior year-end estimate due primarily to delays in permitting. Impressively, despite the absence of a full-fledged resort experience and the inevitable noise and disruption from ongoing construction, the 110 guest rooms currently available across the two operational towers achieved a notable 50% occupancy rate and an average daily rate of $389 during the third quarter, its seasonally slowest period, and is striking a 60% uptick over 2019 rates. For context, it's important to note that before the devastation brought by Hurricane Ian, we projected LaPlaya to contribute over $4 million in EBITDA for Q3 as opposed to the $0.2 million loss it actually incurred. This underscores the impact the loss of the resort has had on our financial results. As a reminder, we currently exclude LaPlaya from our same property operating results. Regarding our Q4 outlook, we have not incorporated any additional business interruption or BI proceeds related to Q3 losses. Instead, for LaPlaya, we anticipate that BI proceeds for lost income for both Q3 and Q4 in the current year will occur in 2024. As of the end of the third quarter, we have recorded approximately $33 million in BI-related revenues. As part of our strategic capital reallocation strategy, we have entered into a contract to sell Hotel Zoe Fisherman's Wharf for $68.5 million with the sale targeted for completion in Q4. Assuming a successful closing, this will bring our total asset sales for the year to six properties, generating $300.8 million in gross proceeds year-to-date. All divested properties have been urban, in line with our overarching strategy to rebalance the leisure and business segments of our portfolio for optimal long-term risk-adjusted returns. Jon will speak more about this strategy in his remarks. On the capital allocation front, we did not purchase any common shares during Q3. However, we reduced our total debt and increased our cash position while replacing a $161.5 million loan secured by our Margaritaville Hollywood Beach Resort with a new secured loan of $140 million. This loan carries a three-year term extendable by two one-year options with a fixed rate at 7% for the issuing four-plus years. Regarding our balance sheet and liquidity position, we have over $829 million of liquidity, comprised of $191.6 million in cash and $637 million available on our unsecured line. The weighted average cost of our debt is 4.4%, with 78% currently with fixed rates and 92% unsecured. Our increase in cash reserves and unsecured credit facility, augmented by additional asset sales, provided us with more than sufficient liquidity to navigate our upcoming debt maturities over the next 12 to 24 months. And with that comprehensive update, I'll turn the call over to Jon. Jon?

Thanks, Ray. I'd like to touch on three topics this morning. First, our observations on industry trends. Second, I intend to discuss our ongoing strategic capital allocation program and our continuing pivot from a heavy urban and business travel focused investment company to a more balanced portfolio, more evenly split between business and leisure, and between urban and resort. And then third, I'll talk about our outlook for the fourth quarter. In terms of industry trends, it's fair to say the industry has seen a flattening out of the recovery in demand on an overall basis. In fact, the industry was unable to successfully absorb even the smallest amount of supply growth in Q3, with overall industry occupancy declining, albeit slightly, in every month in Q3, a trend that continues from Q2. We were surprised that this trend did not reverse in Q3. However, the revenge travel related to outbound international travel and cruising this year seems to have overwhelmed improving demand in business travel and international inbound travelers. We believe business travel, both group and transient, continues to gradually recover. Leisure, on the other hand, has declined slightly as international outbound travel and cruising rebounded to above pre-pandemic levels. International inbound travel, especially leisure, has only gradually returned. The leisure softness has primarily been reflected at resorts, while urban weekend occupancies have continued to recover. We believe next year, leisure will normalize at higher levels of domestic travel as we lap this revenge travel, and international inbound continues its gradual recovery. The resurgence in business travel we've seen is evident by improving occupancies in the urban and top 25 markets, specifically during weekdays. This trend is particularly strong in the luxury and upper upscale segments of hotels, which are predominantly located in major cities. The STR data for Q3 shows a consistent softening of occupancies at the mid- to lower end of the spectrum. We've not seen any evidence of trading down in the industry. In fact, the STR numbers show the weakest demand and worst performing properties are at the bottom end of the quality and price spectrum, with the economy hotel category performing the worst. Geographically, in general, the previously slower recovery markets such as Chicago, San Francisco, Washington, D.C., and New York are now experiencing stronger demand growth, while the earlier to recover markets such as Miami, Tampa, Orlando, and Atlanta are witnessing weaker demand growth. The top 25 markets continue to see increasing demand in occupancies, while other markets continue to see declining demand in occupancies. Amidst this industry-wide stabilization of demand, ADRs in Q3 also displayed a moderating growth rate, though ADRs in September and so far in October have bumped up from the low points in July and August. None of these trends come as a surprise, and we don't expect much change in these industry trends for the rest of the year. However, we do expect a modest boost in October's performance due to the favorable calendar of the Jewish holidays this year, which fell completely in September. Of course, given the Fed's efforts to bring down inflation and slow the growth of the economy, we shouldn't be surprised if we see a slowdown or recession sometime in the next 12 months. Now I'd like to move on to a brief discussion of our capital investment strategies and our overall pivot to a more evenly balanced business and leisure demand mix. Our reduction in urban properties has been ongoing since 2016 when we began to sell out of New York. Prior to the LaSalle transaction in late 2018, we sold a total of seven properties for gross proceeds of $592 million, and all of them were urban. Acquiring LaSalle added six unique resorts, all with significant repositioning upside. Simultaneously with the corporate transaction, we also disposed of five LaSalle's urban properties for total gross proceeds of $821 million. Since then, we've sold 24 additional properties, including the upcoming sale of Hotel Zoe in San Francisco, all urban, generating gross proceeds of an additional $1.725 billion. In total, we've sold 36 urban properties since 2016 for over $3.1 billion. In 2021 and 2022, we acquired five leisure-focused resort properties and two guest houses in Key West, which were added to Southernmost Resort for a total of $822 million. Jekyll Island, Estancia La Jolla, Newport Harbor Island, and the two guest houses have undergone extensive upgrades, repositionings, and operator changes that will drive significant upside going forward. This is on top of the very substantial investments in our other resorts, including Skamania Lodge, Chaminade, Mission Bay Resort, The Marker Key West, Southernmost Resort, L'Auberge Del Mar, and LaPlaya in Naples. We believe all of these resorts, due to the investments we've made in upgrading them and remerchandising them, will continue to gain market share, thereby enhancing cash flow. So from 2016 to today, we went from two resorts to 13 resorts, which also helped us increase the leisure mix within our portfolio. Today, we believe the business-leisure mix in our portfolio is roughly 50-50. Assuming we sell additional urban properties over the next couple of years, we expect the leisure portion to edge slightly higher. We don't think it will move much as many of the urban properties we've sold or are selling, such as those in San Francisco, Portland, Seattle, and Washington, D.C., have a strong leisure mix as these markets are very attractive to leisure travelers. Moreover, most of the resorts we've been acquiring have very large business group components, while their business and corporate transient mix tends to be more limited. This helps explain the actual increase in our group mix overall in our portfolio as this pivot has continued. We believe this roughly 50-50 mix between business and leisure will serve us well in the years to come as we believe the slowest to recover segment will continue to be business transient travel, and we believe the secular trends favor leisure travel as well as group, particularly group in resort locations with significant outdoor meeting and event space and numerous amenities, activities, and experiences. As we move forward, we continue to focus on taking advantage of the public-private arbitrage opportunity that exists today. We're selling urban properties in slower recovery markets with lower cash flows and within our individual property NAV ranges and then using those proceeds to reduce our net debt and repurchase our common and preferred shares at very significant discounts to the NAV of the company. Since the pandemic began, we've sold 14 properties, including the upcoming sale of Hotel Zoe in San Francisco for gross proceeds of $881.8 million at an average trailing 12-month NOI cap rate of 0.5% and a trailing 12-month EBITDA multiple of 105.8x. We've generally sold our lowest quality properties in the slowest recovery in urban markets, thus improving the quality and growth prospects of our remaining portfolio. We've sold five properties in San Francisco, two in Portland, two in Seattle, one in Nashville, one in New York, one in Coral Gables, one in Philadelphia, and a small retail property in Chicago. We believe strongly that taking advantage of the significant financial arbitrage opportunity, which is being funded by the sales of urban properties in slower recovery markets at attractive relative pricing, is by far our best capital investment strategy. The opportunity available in the past year, including right now, represents a far better value creation opportunity for our shareholders than either using all of the proceeds to pay down our debt, which we believe is at a modest level, or holding cash to take advantage of undefined opportunities in the acquisition market at an undefined time in the future. We just don't believe any opportunities in the future will be more attractive or available at a bigger discount than buying our current properties at a 25% to 30% discount to their estimated current gross values and a 50% plus discount to the overall value of the company. Now let me turn to our view of the near term. As we look at the fourth quarter, October started out well with healthy business and leisure travel. October is also benefiting from both Jewish holidays falling into September this year versus them being split between September and October last year. This, of course, helps the performance of the entire industry. In addition, we have some favorable convention calendars in the fourth quarter in San Diego, San Francisco, Washington, D.C., and Boston, which benefit a significant portion of our portfolio. This is evident in the year-over-year pace for our fourth quarter, which shows robust growth in both group and transient business. Specifically, compared to a year ago, we have a 9.6% increase in room nights on the books at a 2.9% higher ADR, resulting in total revenues on the books substantially higher, up 12.8%. Breaking it down further, our group business on the books is particularly strong with a healthy 10.3% year-over-year increase in room nights, a very strong 7.5% increase in group ADR, and 18.6% growth in total group revenue. Transient is not as strong, but is still very favorable with room nights and revenues up 9.1% and rates flat year-over-year. As a note of caution about how our pace may ultimately translate into our performance, we need only to look at this past quarter. We had a great pace advantage going into the third quarter, but we experienced the deficit and pick-up in the quarter for the quarter. We feel comfortable in saying that we believe this doesn't represent a slowdown in business activity, but rather normalization and booking patterns. We believe that more business is being put on the books further out, consistent with more normal pre-pandemic patterns, as business and leisure customers have increasingly felt more confident looking further out, with pandemic-related concerns increasingly in the rearview mirror. In Q3, we booked almost $10 million, or 8.2% less in room revenues for the third quarter than we did a year ago. So our 5.5% revenue advantage turned into a 1% deficit by the time the quarter ended. We expected this normalization of booking patterns as evidenced by our down 2% to plus 1% outlook. What we didn't forecast was the impact from the negative weather patterns. So while we're very pleased and encouraged by the fact we're almost $14 million ahead of the room revenue that was on the books for the fourth quarter at the same time last year, we expect a significant reduction in the pace advantage over the course of the quarter. As a result, our outlook for Q4 RevPAR versus last year is forecasting growth ranging from 1% to 4%, which certainly compares favorably to our Q3 actual results. As has been the case all year, we expect the bulk of this growth will be driven by increased occupancy. Our outlook for total revenues for Q4 is for growth of about 1.5% to 4.5%, or approximately 50 basis points higher than our outlook for rooms revenue growth. So that completes our prepared remarks. We'd now like to turn to your questions. Donna, you may now proceed with the Q&A.

The first question today is coming from Dori Kesten of Wells Fargo.

I think operating expenses, if you hold to the site, energy taxes insurance is in the 3% to 4% range for Q4. Do you think that's fair as a run rate for the medium term?

Dori, yes. I mean, I think that's certainly in the ballpark. Obviously, the more volume we do, either in occupancy or food and beverage or other revenue activities, there'll be expenses that are tied to that, and we'll see growth in expenses at a higher level. But as a baseline for a stabilized operation, I think that's reasonable.

Okay. And just within that, would you expect your total RevPAR to continue to outpace RevPAR?

Yes, we believe that as the group continues to recover, we will see an increase in volume in our food and beverage revenues as well as in many of our other revenue streams, which should also contribute positively to the margins in the food and beverage sector.

The next question is coming from Bill Crow of Raymond James.

Jon, hopefully, you can hear me better than I can hear you.

Sorry about that.

Could you talk about group for next year and the outlook and which markets might be the better markets, and which ones might be the worst markets?

Sure. So currently, our pace for group for next year is positive. Let me see if I can pull it up here. We're currently sitting at a revenue pace advantage of about 14.4%. That is about 10.5% for group. It's almost 30% for transient. Again, those are small numbers in terms of how much transients on the books, so the percentages should be ignored. But in total, we're up 12.2% in room nights, 1.9% in ADR, and 14.4% in total pace. Group is up 8.7% in room nights, 1.7% in rate, and revenue on the books is up 10.5% year-over-year. The stronger markets next year include Chicago, San Diego, and Washington, D.C. Boston will be probably flat on a year-over-year basis, but actually, it's at a very high level for this year. And then we see San Francisco, which is up in the first half of the year, will be down substantially in the second half of the year with some of the cancellations that occurred over the last 12 months. So that's, I think, how they generally break out within our portfolio.

And then, Bill, just a little color on the convention calendars for '24. In D.C., the room nights on the books '24 versus '23 is up about 32%. San Diego is up about 17%. Chicago is up 13% and Boston and L.A. are flattish. As we know, San Francisco is down mostly in the second half of '24.

I just wanted to follow up on the question that Dori asked earlier about the expense normalization. I know she cut out property taxes, insurance, and energy. But that's kind of like cutting up food and housing in CPI. So where is expense growth? Where do you think it's going to be next year? Are we looking at another year of, call it, 5% expense growth? And I guess the question I keep getting from investors is, at what point does 3% RevPAR growth translate into growing margins and EBITDA?

Well, you should ask them what their predictions are for inflation because that's really what's driving the increases in the industry that we see. I think the intent of cutting out those three categories was not to say they're not important. It was because they tend to be more volatile on a year-over-year basis, particularly property taxes, which are volatile, not because of cities raising the tax rates, but because we tend to be unsatisfied with the initial assessments we get, as the cities are trying to keep as much revenue as they can, as you and I have talked about before. As a result of that, it takes us one to five years in some cases to fight through the process to get successful appeals and reduced assessments. When that happens, it tends to have a multi-year effect on property taxes for those properties in terms of true-ups because we're accruing them at generally the levels that we get the bills at, and then we have reductions when those bills get reduced. We hope we will get some true-ups next year. We don't know when those processes will be successful. We expect to get true-ups over the next three or four years from these pandemic years when the assessments didn't come down. But as we all know, the values have come down dramatically. So we'll have to come up with those numbers as it relates to the run rate on the property taxes and look at what percentage impact that will have on the overall revenues. It's going to have some impact on an overall basis.

Yes. So Bill, we know insurance. The good news is we pretty much know what the cost is going to be here over the next couple of quarters because as part of our renewal on June 1, those rates did increase. So over the next couple of quarters through the second quarter, we know we'll continue to have this as a headwind, and we'll have to see what happens at the renewal. Now if you look back to what happened after Hurricane Katrina, the same thing happened where the rates got jacked up in the year following Hurricane Katrina, that stayed elevated for two years, and then they started declining double-digit rates for a number of years. We refer to those as the good years, by the way, as opposed to our insurance carriers. So we'll have to see what happens this year. Typically, property insurance, unlike other expenses, tends to go up and down. So we could be looking a year from now at property insurance being lower than it is now, unlike things like wages and other costs that tend to be stickier and stay up there.

Okay. All right. But it sounds like when you put all together, it's likely that margins are probably going to have a tough time being flat next year just with all these headwinds. I mean, maybe I misunderstood, but that would be my takeaway.

Yes. It really depends on the revenue growth we achieve. We need to see revenue growth of at least 4% to maintain flat margins next year, and ideally we should aim for even higher growth. We do have some favorable conditions due to significant disruptions we faced this year that resulted in lost revenues, which should help support that growth rate for next year.

The next question is coming from Floris Van Dijkum of Compass Point.

Thank you for taking my question. I understand that we can get caught up in the details of insurance and property taxes, which are both important. However, considering the bigger picture, you have invested nearly $300 million in revenue-enhancing capital into your portfolio over the past couple of years. A significant portion of that investment has occurred since last year, and you have not yet seen the benefits. Additionally, this year you faced a disruption costing approximately $12 million to $13 million in EBITDA due to renovations. What I'm trying to ascertain is what the adjusted EBITDA run rate should look like moving forward. Despite concerns about margins, it seems reasonable to expect that your EBITDA could be $30 million to $50 million higher than it was this year. If I calculate based on the capital invested and assume next year will be the first full year of stabilized earnings, could you discuss the future earnings potential of your portfolio?

Yes. I mean, I think that's what we've tried to lay out in our investor presentation and some of our prior calls for us that there's significant upside. Now some of that, some of the share gains from the investments we've made have occurred. But others, as we've shown in the investor presentation with the bridge that we have, are in the future. That will be next year, that will be the year after, and probably some in the year after that. These major repositionings tend to take three to four years, and we gain share more quickly in good years and strong years and otherwise take longer if the environment is flatter. So there's significant upside from the investments we've made. The dollars are out the door. That impacts our balance sheet, obviously. The good part is the investments have already been made. And as you say, the investment side, the return side is still to come. And so it's hard for us to lay out exactly what that looks like from a timing perspective. We haven't even started our process with our property teams about what next year looks like. But we do have a good pace going into next year. We're encouraged that the macro side is at least any slowdown has been deferred. Who knows, maybe it gets eliminated, but I think more likely deferred or softer. We are somewhat cautious regarding the current macro environment. However, once we overcome the uncertainty surrounding the timing of the recession or slowdown, I believe we will feel more assured about when we will begin to see substantial returns from our investments. Next year should benefit from having less disruption within the portfolio.

Jon, I’d like to follow up on that. Typically, you can expect returns from this revenue-enhancing capital expenditures to be at least 10%. Historically, what has been the range of returns on that investment once stabilized?

Yes. On a stabilized basis, we tend to get to 10% plus depending upon the extensiveness of the redevelopment. Generally, the larger the redevelopment, the higher the returns on those. And look, it's not perfect in terms of every property, some end up being lower, some end up being higher. Some of that gets impacted by the market and competition, etc. But we've averaged out at 10% plus.

The next question is coming from Aryeh Klein of BMO Capital Markets.

Maybe just following up on the expense question. When you look across the portfolio, are you still seeing cost savings opportunities out there given all the streamlining that's already been done since COVID? And then just on the insurance side, aside from the rate increases, has your coverage changed in any kind of meaningful way?

So on your first question, Aryeh, the effort to be more efficient is continuous. I've been in the hotel business since 1984. Over the course of that lengthy period, we've continued to find efficiencies every year within our portfolio. I think the industry generally has as well. We operate these properties with far fewer people today than we did 10 years ago, and way, way fewer than 15 or 20 years ago. We think that's going to continue as technology continues to develop as the industry begins to adopt uses that come from AI. See, I got that in there, AI, AI, AI. But we do think there's opportunities in a number of areas. Yes, it's a continuous effort within the portfolio. Curator, which has 100 hotels today, has over 100 vendor partner agreements, master service agreements, which have also helped to bring down our costs in our portfolio by millions of dollars on an annual basis. They continue to pursue additional contracts, reducing costs on a per unit basis. New technologies, the Curator team reviews new technologies almost on a daily basis. Many of them are geared to reducing costs. We see a lot of technologies related to reducing energy costs over the long term. Water usage, in particular, is seeing a lot of focus within the technology industry. We'll see the adoption of that over time as those become more widespread and available. We do think efficiencies are going to continue. And again, if you go back and look historically at our margins at the LaSalle margins all the way back to the late 1990s, what you'll see is gradual improvement in those margins over the long term. Obviously, they're cyclical, they go up and down, and we tend to get more costs eliminated when things are difficult. I would say we're still in an environment which has its challenges because of inflation. So we continue to focus on reducing costs.

And then, Aryeh, on the second part of your question on the insurance coverage. We have the same amount of overall property coverage today than we did last year. It's $500 million, which takes a lot of storms and different events. Here and there, we'll have the higher deductibles at some different parts of the layers of the insurance structure. But overall, we have the same amount of coverage as we did before. I think that speaks to the benefit we had compared to if you're a smaller owner-operator with the relationships on the insurance carrier side. When push comes to shove in markets like this, the carriers that you have relationships with will stick with you. We're able to maintain those levels of coverage, probably more than if you are a smaller owner or didn't have the long-term relationships that we had. But overall, the insurance market goes up and down. The property market is tough. The GL market is better. Cyber has gone a little better. There are varying phases. Right now, we're going through a rough patch here in the property side. But as history has shown, we go through periods with fewer storms, and then it comes back down because a lot more carriers will come back to the space.

The next question is coming from Smedes Rose of Citi.

So Jon, in addition to AI, you need to be able to work in Ozempic in your remarks.

Wait, you're talking about corporately, not personally, right?

I think he's saying something.

All right. Operator, can we move to the next? No, I'm just kidding. Go ahead, Smedes.

I wanted to ask you about what you're observing in the transaction market. It appears you have two more properties listed, and there seem to be various others emerging in the media. However, we've noticed the impact of rising interest rates. I'm curious if transactions under $100 million are still easier to complete, or what your perspective is on the ability to make deals in this environment?

Smedes, it's Tom. That's obviously a great question. I think it continues to be kind of a bifurcated market in terms of those assets that have cash flows and those assets, for example, like the ones we're selling, maybe in those assets that are in recovery markets. Overall, the transaction market is pretty challenging. I would say the deals we're selling are below $100 million; that trend continues to be the same. I think deals are taking longer. I would tell you that at the end of the day, our perspective is there's a lot of strong interest. We're seeing a lot of interest; we're just trying to translate that into conviction in terms of the investors, given the effect of the macro market. There are still some challenges ahead. The ongoing narrative from the Fed about prolonged higher rates is not particularly beneficial for financing. Nonetheless, there will be some transactions with high cash flow; the CMBS market is active, and you can expect some deals exceeding $100 million to occur. However, these deals must have strong cash flow. In some recovery markets, we're not just looking for returns but also at price per key. Investors are focusing on getting in early in the cycle if they believe in the market, as the price per key is attractive, particularly compared to replacement costs and in light of limited supply in several of these markets moving forward.

The next question is coming from Duane Pfennigwerth of Evercore ISI.

I wonder just to follow up, if you could talk about your outlook for asset sales into 2024. Of course, it will depend upon the environment and conditions. But in your ideal optimal scenario, how many assets would we be talking about? How would you be thinking about shaping the portfolio?

Yes. From a strategic point of view, the outcome will largely depend on our stock trading and the comparative value between public and private markets. We have mentioned that when asked how many of our 47 properties we might sell to capitalize on any arbitrage opportunity, my response has been all 47. We do not set specific sales targets for the upcoming year, such as selling five properties for $300 million. That's not how we operate. We do not need to sell any of these properties. We believe we have successfully transitioned the portfolio to a more favorable leisure business mix, as I mentioned earlier. It's really going to be opportunistic, and that will be driven by not just the overall macro. Obviously, it will be driven by the debt markets. It will be driven by what the view of investors is related to the future of both of those. But I think where we see the opportunity for fairly significant value improvement is as interest rates come down, we get past this macro view; we have an environment, as we've said in our markets, cities, and resort markets, probably four to five years of very, very nominal supply growth. Assuming we have a good macro environment, it's going to lead to pretty strong RevPAR growth. That will ultimately get built into buyers' underwriting fairly early on as we start to see an acceleration in the growth rate of RevPAR. It's really going to depend upon how that market plays out, how the macro environment plays out, and then the relative value opportunity between what we can sell for on any given day and where our stock is trading, and the opportunity to buy that back and create value for the shareholders.

Thanks for those thoughts, Jon. And maybe just take a rifle shot on LaPlaya. When you think about the timing of getting that asset completely repositioned and completely renovated and launched, do you think you have enough time to catch the heart of the season in the first quarter? Or is it a little bit late, and it would be more about the second half of 2024?

Sure. Well, we're working really hard to catch the season. There's an intense effort at the construction and project management level to get this project done and open. Of course, the one unknown continues to be how quickly we can get the county to respond. I think we're down to one last permitting approval, though we'll have continuous inspections. There, you may lose days, but you're not going to lose weeks. Right now, we're losing weeks waiting on a permit. But I think from a ramp-up perspective, we've been trying to ramp up. We have a lot more money going into sales and marketing efforts. We have had to unfortunately move some business out of January that we can't accommodate without having the Beach House building. But going into the prime season of really President's Day on, we're starting to build a pretty good base. The nice thing is we have a lot of people who want to come back to Naples, who have been coming on vacation there for a couple of years. A lot of the business tends to be annual because they have family in the marketplace.

The next question is coming from Anthony Powell of Barclays.

Question on cash flow for next year and the year after. In terms of your CapEx, where do you think your CapEx spend could go next year, given you've finished up a lot of these projects? Also the dividend. You've got some NOLs this year; you have an impairment. I’m curious if you have enough NOLs to maybe not pay a dividend next year even as RevPAR improves?

Sure. Regarding capital expenditures, we are making an investment of approximately $150 million this year in the property. We anticipate that this amount will be $100 million or less in 2024. We have not yet begun our budgeting process with our teams, but we expect a significant reduction next year, which will continue at a lower level for several years, unless we choose to seek approval for a project like Paradise Point in San Diego. As mentioned previously, we have completed the major renovations in our portfolio, so the capital expenditures we will require moving forward will be considerably lower than in the past couple of years. This is the outlook for 2024 and beyond. And then regarding the dividend, yes, we still have an NOL that we could certainly burn through. Also, as we make progress on sales, it's good for the cash and takes advantage of the public-private arbitrage on that. But as a result, for example, for Brazil, the completion of that sale will incur a tax loss, which we can add to our NOLs. So it is most likely we wouldn't have a need in '24 to increase the dividend for taxable income purposes; we may choose to otherwise. But you should not assume that in '24 we have to increase the dividend. Beyond that, we'll have to see where the world plays out, what the macro is, and additional sales that we complete.

The next question is coming from Michael Bellisario of Baird.

Jon, just on the top line, can you just walk us through the puts and takes compared to last year? I know there are a lot of moving pieces last year. You mentioned the convention calendars being stronger this year. But could you maybe remind us of the good and bad in both periods to kind of help us get a better feel for what the underlying kind of true run rate is in the fourth quarter?

We had a few renovations last year that began around November or December, which had a somewhat minor impact. I don’t remember it being significant; we can provide the exact number later. However, I would estimate it was likely small, around $1 million to $2 million, or perhaps even less. Overall, the revenue side looks pretty clean.

The expense side, the biggest negative impact is we had a nice true-up in property taxes of over $3 million in Q4 last year. Without any expected true-up this year in Q4, that will show an increase in overall expenses this year.

Outside of that, I don't think there's any major item on the revenue side.

For last year, no, nothing that's notable. We did comment about this earlier, but the fourth quarter of this year in terms of the pluses is a very good convention calendar in San Francisco; it's about four times what it was fourth quarter last year. San Diego, the convention center room nights are almost more than double than it was last year. In Boston, it's also double what it was last year. The only market that is down year-over-year is Chicago. So in the fourth quarter, one of the reasons why we have the group case going in is very favorable, and we're starting out.

And, Mike, the one other thing is related to LaPlaya, which is not in our reporting numbers, but obviously, is in our overall numbers. I think LaPlaya was slightly negative in Q4. There was some impact in Key West, and LaPlaya in Q4 this year should be $2 million to $3 million positive.

Got it. That's helpful. And then just sort of along the same lines, just on Q4 because last year, you had a big shortfall on the bottom line. Maybe we're all just on our side, bad at modeling Q4 this year. But there's been a lot of portfolio changes. Is it just post-pandemic changes in demand patterns? Or is there something else going on in the fourth quarter that's causing profitability to be lower than we sort of remember it to be?

The thing that happens in Q1 and Q4 is when you lose volume, obviously, your fixed costs are still there. It tends to have worse flow compared to more normal volumes pre-pandemic. Thus, there tends to be less ability to absorb that shortfall in Q1 and Q4, whereas in Q2 and Q3, you have a lot more volume and occupancy; you've got higher rates in those quarters. It's a little easier to absorb that flow, that shortfall from pre-pandemic volumes than you can in Q1 and Q4. I don't think it has much to do with the change in the portfolio on an overall basis.

Yes. And Mike, also just a reminder that energy, property taxes, and property insurance, those three items alone caused about a 160 basis point impact to margins in the quarter, which was not the case last year, and that's harder to forecast. These are not related necessarily to hotel operations. So the good news is there's less pressure on the labor side, which is less of a headwind than it has been. But these three items had a big component of it. If you look at our guidance of down 100 basis points plus, it reflects a 100 basis points headwind from those three items.

The next question is coming from Gregory Miller of Truist Securities.

This question is about your two W Hotels. As Marriott is nearing completion of W renovation in New York's Union Square, and to my understanding, using the hotel as a flagship for the new direction of the brand, do you anticipate any major operating changes or any forest renovations to your Boston or Los Angeles properties to meet new brand standards?

No.

Okay. I can't argue with that. And then just since others are asking a second question, last one as well. This one is about the so-called hidden fees. Have you noticed any changes in booking trends for hotels that are already presenting the total hotel charge early in the booking process relative to hotels and alternative accommodations in the same market that have yet to present total hotel charges?

That's a really good question, Greg. The answer is, we haven't seen anything anecdotally. It's probably a better question for Marriott, since they've been the one who've completely switched over and have some time period now to do some data measurement to see whether they're losing share or not. We've not seen it with our Marriotts. But I can't tell you we've dug into the detail into minutiae to see if there's been a change in share within our Marriott properties, and what might it be related to. The whole industry is going to go there. We, as an industry at the association level, which includes owners, operators, and the brands, are supporting legislation that incorporates all charges interestingly, except for government charges, into the upfront rate, so searches would occur based on that rate. That would apply across all types of lodging accommodations, and that's really been the focus of the industry to ensure it's a level playing field. I think what we've seen, which has been beneficial and will likely mitigate any long-term effects, is the weather. You can refer to it as a destination fee, resort fee, or urban amenity fee; it has been embraced by most properties in urban and resort markets, particularly in major cities. I don't believe it will significantly alter the competitive landscape. As your question suggests, there may be some minor impact in the short term due to uneven adoption. However, I expect that within the next 12 months, it will be widely implemented, and it is already mandated in California.

Our final question today is coming from Chris Darling of Green Street.

Jon, going back to the discussion around dispositions, Boston and Washington, D.C. stand out to me as markets where you've kept your portfolio fairly intact since COVID at least. Maybe I'm reading too much into it, but just curious to understand how you're thinking about the long-term prospects for those cities relative to some of the other urban markets where you've sold out.

Yes. I think we are more optimistic about Boston in the long term compared to D.C. D.C. seems to be facing similar challenges as some of the cities on the West Coast. We appreciate that many people have returned to work in Boston. However, in D.C., the federal government is struggling to encourage a return to the office, which means it will take longer for that to happen. Additionally, we currently hold a small position in D.C. We sold off several properties when we exited that market with LaSalle. Our investment in D.C. has never been significant at Pebblebrook, so we are likely to maintain a smaller presence there compared to Boston. Even though the number of properties may be similar, their sizes and EBITDA figures differ significantly. We're big fans of Boston. We're big fans of San Diego and L.A. We believe in San Francisco, but we've been reducing our position there. And there are some other markets, obviously, that we've been reducing our position.

Okay. That's helpful. And then just one quick one related to the entertainment strikes in Los Angeles. Historically, when you've seen those strikes come to an end, how quickly does business pick back up?

It depends on the time of year. There are quite a number of productions that could start the next day as the studios and production companies have their plans ready. However, as we move further into the fourth quarter, the entertainment industry tends to slow down significantly between Thanksgiving and the second week in January due to its culture. Whether they buck that trend and do a lot more than they normally do to get things done, or in the work so they can have a season in the spring next year, not sure. I don’t have enough insight into that. Historically, they’re pretty anxious to get those productions going. If this runs much further and deeper into November, I'm not sure we're going to see a whole lot get done in the last four to six weeks of the quarter.

Thank you. At this time, I'd like to turn the floor back over to Mr. Bortz for closing comments.

Thank you everyone for joining us. Let's also give a nod to Jimmy Buffett, who is likely enjoying a Cheeseburger in Paradise right now. We look forward to talking with you next year.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.