Pebblebrook Hotel Trust Q3 FY2025 Earnings Call

Greetings, and welcome to the Pebblebrook Hotel Trust Third Quarter Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Co-President and Chief Financial Officer. Thank you, sir. You may begin.

All right. Thank you, Christine, and good morning, everyone. Welcome to our third quarter 2025 earnings call. 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, I'd like to remind everyone that our remarks are effective as of today, November 6, 2025. Our comments may include forward-looking statements that are subject to various risks and uncertainties. Please refer to our SEC filings for a detailed discussion of these risk factors and visit our website for reconciliations of any non-GAAP financial measures mentioned today. Now let's jump into the quarter. We're pleased to report that our third quarter performance was in line with our outlook in a challenging quarter shaped by heightened geopolitical and macroeconomic uncertainty as well as an unfavorable holiday calendar shift; we again delivered solid operating results and industry-leading cost controls. This execution sets us up well for 2026, given the robust convention and major event calendars across our markets. Same-property hotel EBITDA totaled $105.4 million, in line with our midpoint, while adjusted EBITDA came in at $99.2 million, exceeding our midpoint by $2.2 million. Adjusted FFO per share was $0.51, $0.03 above our midpoint. Together, these results reflect the resilience of our operating model, our relentless focus on driving operating efficiencies, and our disciplined cost management. On the ground, performance was led by our properties in San Francisco and Chicago, alongside strong contributions from several of our recently redeveloped resorts, including Newport Harbor Island Resort and Jekyll Island Club Resort. Turning to portfolio trends. Same-property occupancy increased nearly 190 basis points, while ADR declined 5.4%, resulting in a 3.1% decline in RevPAR and a 1.5% drop in same-property total RevPAR. If you exclude Los Angeles and Washington, D.C., our 2 most challenged markets in the quarter, total RevPAR actually was up 0.6%. The decline in ADR was primarily driven by competitive pricing in D.C. and L.A., stemming from disruptions related to ICE activity and the National Guard deployments. We also saw more demand coming through lower-priced booking channels, offsetting softer group attendance and government travel. Even so, occupancy increased in 6 of our 7 urban markets and across nearly all of our resorts. San Francisco was once again the standout. RevPAR rose 8.3% in Q3 on a 690 basis point jump in occupancy, driving EBITDA higher by 10.9%. Growth was broad-based with increases fueled by an active convention calendar and a continued recovery in both business travel and leisure demand. Results would have been even stronger but for the massive Dreamforce citywide convention shifting into October from September of the previous year. Importantly, positive momentum continues in San Francisco with a very strong fourth quarter well underway. No doubt, San Francisco has gone from a laggard to a leader led by the AI revolution, which is headquartered in the city and by San Francisco's tremendous progress in becoming a cleaner, safer, and more vibrant city. Chicago also posted another solid quarter with RevPAR increasing 2.3% on healthy leisure events such as concerts and sports, improving weekday corporate travel and stronger weekend leisure. These positive results were achieved despite Chicago facing an extremely difficult comp to last year when the city hosted the Democratic National Convention in August. Both San Francisco and Chicago continue to pace well through year-end and into 2026, which reflects one of the many reasons we're more constructive on next year. Our resort portfolio also remained resilient with total RevPAR increasing by 0.7%, led by exceptional growth at Newport Harbor Island Resort, where RevPAR jumped 29% and total RevPAR surged an impressive 35.9% versus its pre-renovation performance in 2023. Jekyll Island Club Resort generated an 8% RevPAR increase with total RevPAR growing over 11%, while Estancia La Jolla's RevPAR rose 5.7%. These properties illustrate the power of our redevelopment program, which is driving market share gains and growing profitability as these properties climb towards stabilization. Across our urban markets, performance was more mixed. Urban total RevPAR declined 2.7% as strength in San Francisco and Chicago was offset by ongoing weakness in Los Angeles and Washington, D.C. and the lighter year-over-year convention calendars in Boston and San Diego. Washington, D.C. was our softest market, with RevPAR down 16.4% due to reduced government and government-related travel demand and lower tourism activity. We expect these challenges to persist throughout much of Q4 given the federal government shutdown. However, the setup in D.C. should improve significantly in 2026 with more normalized federal travel, a favorable convention calendar, and numerous America 250 events. In Los Angeles, RevPAR declined 10.4%, driven entirely by rain. Greater price competition emerged from the negative impact of the devastating fires earlier in the year, and the pressure did not decline in Q3 as the ICE rates and National Guard deployments created a perception of disruption and safety concerns, driving continued rate pressure. Conditions are stabilizing as the political environment cools and entertainment production gradually improves. So we expect L.A. to only be a minor headwind in the fourth quarter. Boston and San Diego experienced year-over-year declines attributed to lighter convention calendars in the city as well as softer group attendance. San Diego has also been negatively impacted all year by the significant cutback in federal government travel. That said, both markets continue to exhibit steady underlying trends in leisure and business travel. On a monthly basis, July same-property total RevPAR decreased 1.1%. August was essentially flat, and September fell 3.3% with the midweek timing of the Jewish holidays being a major headwind for September as expected. On the revenue side, same-property out-of-room revenues grew 1.7%, supported by stronger event space utilization, elevated food and beverage performance, and the benefit of upgraded amenities across our redeveloped properties. Transient demand strengthened by 3.8% in Q3 as the booking window remains shorter, aided by growth in our wholesale and consortia channels. Group occupancy declined by 2%, primarily due to lighter-than-expected attendance at health care, education and government attended or related events. This trend is consistent with the national data STR has been publishing, which we also highlighted last quarter. On the operating expense side, execution remained excellent. Same-property hotel expenses before fixed costs rose just 0.4% year-over-year. And on a per occupied room basis, expenses declined about 2%. That's another quarter of exceptional operating discipline by our hotel teams and asset managers, creating efficiencies and lowering operating costs. Turning to LaPlaya in Naples, Florida. Our weather resiliency improvements are just a week or 2 away from being substantially complete. We expect LaPlaya to generate approximately $36.6 million in adjusted EBITDA this year, including both hotel EBITDA and BI income. This compares to $42.8 million in 2024, which benefited from elevated BI collections following Hurricane Ian. On the capital side, we invested $14.2 million in the quarter and remain on track to invest $65 million to $75 million this year, reflecting a return to a normalized capital investment pace following our now completed multiyear redevelopment program. This lower run rate supports higher discretionary free cash flow and gives us more balance sheet flexibility. We also entered into an agreement to sell one of our hotels for $72 million, with a buyer having provided a nonrefundable deposit under the contract. Consistent with the purchase agreement, we can't disclose a specific hotel or buyer at this time. The property has been classified as held for sale, and we expect the transaction to close in the fourth quarter, subject to customary closing conditions. That said, there is no assurance that the sale will be completed on these terms or the time. The potential disposition is not reflected in our fourth quarter or full year outlook. Shifting to our balance sheet. We remain extremely pleased with the successful $400 million offering of 1.625% convertible notes we completed in September. We used these proceeds to retire $400 million of our 1.75% convertible notes due 2026 at a 2% discount to par, leaving a very manageable $350 million outstanding. We also concurrently repurchased $50 million worth of common shares during the quarter at a significant discount to NAV, which is accretive to FFO and NAV per share. We ended Q3 with $232 million of cash, and we expect to generate over $100 million in free cash flow by the end of 2026. Our plan is straightforward: use cash on hand and free cash flow to take out the remaining convertible notes maturing in December 2026. All told, it was another quarter of disciplined execution amid a choppy and uncertain demand backdrop. And with that, I'll hand it over to Jon to provide more details on the third quarter, our outlook for Q4, and a look ahead to 2026.

Thank you, Ray. When we examine the industry's performance, the third quarter resembled the second, although it was somewhat weaker. Year-over-year demand saw a slight decline, which resulted in increased pricing competition and stagnant ADR growth. Group demand was particularly affected, falling in all three months due to reduced government travel, lower international participation at conventions, and rising attrition rates. Transient demand, particularly leisure, remained more stable, showing positive growth compared to last year. This trend favored weekends over weekdays for both the broader industry and Pebblebrook. Regarding industry performance by price segment, there is a noticeable gap between the high-end and low-end markets. Premium hotels and resorts are faring better, while the lower segment is suffering as cost-conscious consumers reduce discretionary spending. In Q3, we encountered similar challenges as the industry, but localized disruptions in L.A. and Washington, D.C. pushed our third quarter performance below industry averages. To quantify this disruption, L.A. and D.C. accounted for around $7 million of the $7.9 million decline in same-property hotel EBITDA compared to last year. Across our portfolio, we continue to see a recovery in business transient travel. Like the industry, group room nights and revenues were down slightly in the quarter compared to last year, while business and leisure transient demand showed signs of improvement. Thanks to resilient leisure demand, occupancy rates during weekends increased across our portfolio, both in urban areas and resorts, showcasing the ongoing appeal of our high-quality properties, especially to leisure and social group customers. Weekday occupancy also rose due to a continued recovery in business transient travel and our team's efforts to compensate for group and government shortfalls by enhancing overall occupancy through discounted wholesale and consortia channels. I would like to briefly highlight the performance of our redeveloped properties, which is crucial to our improved performance in 2025 and is expected to provide additional support in 2026. We commended the outstanding performance of Newport Harbor Island Resort last quarter, and it continues to shine this quarter. In Q3, Newport topped our portfolio with $11.8 million in EBITDA during its peak seasonal quarter, reflecting a year-over-year increase of $2.9 million alongside a 21.6% rise in total revenue with strong flow-through. This aligns perfectly with the anticipated ramp-up following the thorough $50 million transformation completed last spring, resulting in a higher-quality overall resort experience with enhanced venues, increased event capacity, and an upgraded food and beverage offering, all contributing to superior ADRs and greater out-of-room guest spending. For the full year, we now expect Newport to generate almost $17 million in EBITDA, surpassing the $13.6 million at acquisition and significantly exceeding our forecast from 90 days ago. We are very enthusiastic about Newport's future. Kudos to the resort's operating team. Moreover, 2025 will mark our first full year of operations following redevelopment, and we believe the resort is well-positioned to deliver even stronger results over the next few years as it continues to improve and attract group and leisure demand. Newport exemplifies the advantages of our strategic redevelopment initiative. Our well-upgraded and transformed hotels and resorts throughout our portfolio are capturing market share and boosting cash flow, with more potential for growth ahead. This includes properties like Estancia La Jolla, Chaminade Resort & Spa, Hotel Zena, Viceroy in D.C., 1 Hotel San Francisco, Hilton Gaslamp, Margaritaville Gaslamp, L'Auberge Del Mar, and Jekyll Island Club Resort. These locations are showcasing the benefits of our redevelopment program through sustained market share gains, increased out-of-room spending, and improved profitability. Operationally, our teams executed well this quarter, finding efficiencies and managing costs. Same-property total expenses increased by only 0.7%. On a per occupied room basis, expenses decreased. This is a direct outcome of our team's consistent effort to enhance our operating cost structure through strategic productivity and efficiency initiatives. On the technology front, we are piloting AI-enabled tools designed to enhance hiring, retention, service delivery, cleanliness, and overall productivity across our portfolio. The pace of AI and robotics innovation is rapidly accelerating, and we are collaborating closely with Curator to identify and implement the most impactful solutions. We anticipate that the hotel operating model will evolve significantly over the next few years, and we aim to stay ahead of this evolution. We have also started implementing new technologies aimed at decreasing energy and water consumption and are investing in new systems, including solar and HVAC upgrades, wherever the ROI is compelling. Looking ahead to the fourth quarter, we remain cautious due to the macroeconomic outlook and ongoing uncertainty surrounding the government shutdown, tariff policies, government spending reduction efforts, and the overall economic impact of these issues. While we are gaining clarity on the likely stabilization of travel tariffs, especially in light of recent developments in Asia, both businesses and consumers are exhibiting increased caution until there is more transparency regarding these agreements and the conclusion of the shutdown. Economists predict slower growth in the near term. The ongoing government shutdown, now at six weeks, is evidently affecting travel. Government-related travel is down nationwide, with a pronounced effect in Washington, D.C. Many business and leisure travelers are displaying hesitance towards air travel as the shutdown continues. Unfortunately, we have noticed a significant rise in government-related cancellations across the country, alongside slower market recovery in various locations, particularly in D.C. and, to a lesser degree, San Diego. These negative trends are now reflected in the STR numbers for the industry. RevPAR growth, which was initially expected to be quite positive for October, is now trending closer to slightly negative for the month. Our preliminary October results show total RevPAR increasing by about 4%, underscoring the advantages of our high-quality properties and the additional venues, event spaces, and amenities throughout our portfolio. Our main concern for the remainder of the quarter is that air travel may experience escalating impacts as the shutdown prolongs, and recovery could be gradual once the shutdown concludes. The Department of Transportation's recent announcement of a 10% reduction in flights starting Friday will not boost demand unless it facilitates a quicker resolution of the shutdown. Consequently, it is challenging to predict the rest of Q4, but our current outlook anticipates that the shutdown will come to an end soon. As of October 1, our revenue pace for Q4 was ahead of last year by 2.1% or $2.6 million, reflecting an improvement compared to 90 days ago. Given the government shutdown throughout October, and now a week into November, this positive trajectory for Q4 has likely been adversely affected, but we do not yet have the data to confirm this, and we will not until a few more days have passed. Our Q4 forecast estimates that same-property RevPAR will fluctuate between a decline of 1.25% and an increase of 2%, with total RevPAR varying between a decrease of 1.25% and an increase of 2.7%. On the cost side, due to the advantages of our strategic efficiency and productivity measures, we anticipate total hotel expenses to grow a mere 0.8% at the midpoint, implying that expenses per occupied room should decline again in Q4. As we look towards 2026, we maintain a cautiously optimistic stance, believing that the fundamentals indicate a favorable setup for the coming year. We expect macroeconomic uncertainty to diminish. Hotel demand is expected to normalize alongside GDP growth, while new supply is anticipated to remain at historically low levels. Although numerous analysts are predicting limited RevPAR growth for 2026, there are several significant factors that could contribute positively for that year, both for the industry and specifically for our portfolio. We foresee favorable demand growth in 2026 and a return to a positive correlation between GDP growth and hotel industry demand growth. Some skeptics argue that this correlation no longer exists, but we disagree. We firmly believe that our industry has faced a unique set of temporary factors that disrupted this correlation, and as these factors recede, demand growth should revert to its historical positive relationship with GDP growth. For context, the annual hotel room night demand growth from 2010 onward showed consistent and healthy figures: 7.2% in 2010 following the Great Financial Recession, then 4.6% in 2011, 2.8% in 2012, 1.5% in 2013, 3.9% in 2014, 2.4% in 2015, 1.6% in 2016, 2.2% in 2017 and 2018, and 1.5% in 2019. Skipping the pandemic years of 2020 to 2022, in 2023, demand growth was 1%, followed by 0.6% in 2024, and for 2025, demand growth was negative at 0.2%, significantly affected by government spending cuts, a drop in international travel due to nationalistic policies, and notable economic uncertainties from significant policy changes. While future disruptions are possible, we believe it is more likely that much of this uncertainty will dissipate. The recent business-friendly legislation, combined with significant deregulation benefits, is expected to yield positive outcomes and provide a strong economic tailwind in 2026. Additionally, the supply landscape continues to offer a fundamental advantage, with minimal new supply being added to the industry and construction starts lagging behind deliveries. Since developing new high-rise urban or resort properties takes 3 to 4 years from planning to completion, the recovery timeline is extended. Whenever we reach this recovery point, which we hope will be next year, we believe the market will be positioned favorably. Next year, the holiday calendar is significantly better than in 2025, which should aid in demand. For instance, Valentine’s Day falls on a Saturday instead of a Friday, and coincides with President’s Day weekend, potentially leading to stronger leisure traffic. Juneteenth will be on a Friday rather than a Thursday, which lessens its negative impact on weekday business travel. July 4th will also be on a Saturday instead of a Friday, offering an ideal weekend for celebrations. The Jewish holidays in fall are occurring on weekends or Mondays, minimizing adverse effects on business travel. Halloween and Christmas are positioned favorably as well, with the former on a Saturday and the latter close to the weekend, encouraging holiday leisure travel. Additionally, the hotel industry will experience a particularly active events calendar in 2026. Major occurrences such as the World Cup in the U.S. will boost many cities, along with events related to the 250th anniversary celebration. For Pebblebrook, we anticipate benefiting from these positive trends and several of our own. Based on our current insights, we believe we will outperform the industry next year. Our redeveloped properties, which are still gaining momentum, will play a key role in this outperformance. Certain urban markets like San Francisco, Portland, and Chicago show promising recovery prospects. The easier comps in L.A. due to last year’s negative impacts will help, as will D.C.’s favorable convention calendar. Moreover, we expect to enjoy significant incremental demand from numerous major events next year, such as the 28 World Cup matches in our markets, including 8 in L.A., 7 in Boston and Miami, and 6 in San Francisco, alongside other major sporting tournaments. While many of these events do not yet have substantial bookings, our group and overall revenue projections for next year are currently positive. As of October 1, 2026, group room nights are up 4.1%, ADR has risen almost 3%, and group revenues have increased over 7% or $7.6 million compared to 2025. The overall revenue growth, combining both group and transient segments, is up by 6.1% or $9 million compared to the same period last year. While these factors do not guarantee a fantastic year, the outlook for 2026 is very promising. We have a favorable revenue trajectory, easy comps in L.A., a stabilizing D.C. market, strong recovery in San Francisco, significant upside from our many redevelopments, a more favorable holiday calendar, and a robust events calendar that will greatly benefit our markets. As business uncertainties are likely to decrease with resolutions on tariff policies and substantial business investments driven by AI and reshoring, we feel optimistic about a positive direction for the coming year. By executing our strategic plan, driving revenues, maximizing efficiencies, and increasing free cash flow, we lay the groundwork for sustainable long-term value. With a solid balance sheet, an upgraded portfolio, and favorable multi-year supply dynamics, we are well-positioned to capitalize on a growing economy. We simply need the macro factors to align without major disruptions. That concludes our prepared remarks. Christine, we are now ready to take questions.

Our first question comes from Gregory Miller at Truist.

First off, very detailed and helpful commentary on 2026. I'd like to ask about San Francisco lodging performance given some encouraging trends as of late. I could ask several questions about how you see the market today, but I'll start with a few items in particular. Looking at CoStar data, there has been some encouraging room rate growth, especially during major convention citywides, and obviously, there are many potential citywide sellout days ahead in the next couple of quarters. I'm curious what you're seeing in terms of the level of confidence from hoteliers in the market to push room rates during high occupancy nights and any implications to your properties?

Thank you for highlighting San Francisco. It's a key market for us that has struggled for many years, but this year it's performing very well. Your question about rates speaks to the current market trend. There is a significant opportunity that is already being pursued to increase rates, especially not just during citywide events but also on weekdays and specific weekends with major events. We are observing that regular Monday, Tuesday, and Wednesday nights without citywide events are still fully booked. This substantial rise in demand is enabling our teams to confidently raise rates. As this trend spreads throughout the market, we expect continued growth. We still have a lot of ground to make up in terms of rate recovery since 2019, and we're beginning to see positive movement. Next year, this will be even more significant, especially with upcoming events like the Super Bowl, which will drive higher rates, and the World Cup, which will not only boost rates but also greatly increase occupancy in the market.

Regarding your question about the momentum building in 2026, the convention center has made significant progress this year, thanks to the new leadership at SF Travel. For instance, over 100,000 room nights have been booked for 2026 since January, representing a 20% increase. Initially, it looked like convention demand for 2026 would decline compared to 2025, but it's now actually up in a relatively short time, indicating positive momentum. Additionally, we had 44 sold-out nights in 2025, and we expect that number to rise in 2026. As Jon mentioned, this presents more opportunities for great demand during peak periods.

And I think one of the things that's kind of unique about San Francisco, obviously, you've got a big factor in that AI and much of technology and biomedical is headquartered there. But a lot of the conventions and citywides that occur in San Francisco are corporate led. And as a result of that, corporate tends to book much more short term than the bigger associations do. So bringing in that major corporate-sponsored events like Microsoft Ignite, which is occurring here in November, where they just canceled out of 2 other markets for '26 and '27 and have signed up to be here in San Francisco. So we're really encouraged about the positive momentum there.

That's all very helpful. Maybe switch gears on a different demand segment in San Francisco. We get a lot of investor questions that relate to transient corporate and specifically how the AI industry is impacting demand at this point of maybe the next couple of months. I'm curious if you could provide a little more context in terms of what you're seeing as of late and perhaps your expectations for the fourth quarter.

Sure. We've noticed a growing number of companies emerging this year that we weren't familiar with before. They are not only securing temporary business but are also booking in-house groups, recruiting events, and training sessions at our hotels. Some of these companies have expanded to the extent that they host their own conferences, like Snowflake, which wasn't known just a few years ago. This trend is positively affecting the demand for Monday, Tuesday, and Wednesday nights in the market. Additionally, these companies are rapidly taking on office space, as has been reported, due to their fast growth. Over the past six months, there has also been a significant number of IPOs for companies based in San Francisco. This influx of capital into the industry is being utilized for expansion, often involving the hiring of high-caliber talent.

Our next question comes from the line of Cooper Clark with Wells Fargo.

You continue to make really strong progress on the expense side. Could you provide color on how much of that is the result of reduced headcount? And is it fair to assume we see labor costs moderate into '26?

I've been in the business since the early '90s, and throughout each cycle, we've reduced the number of staff in our hotels. This has led our employees to become more efficient and productive, and that trend is ongoing. There are additional tools available that help us with scheduling, leading to fewer mistakes and less reliance on third-party services. We believe this efficiency will persist as we remain focused on it. Regarding wages, due to the front-end loading of many city labor contracts, we expect wage growth next year to be lower than this year, although this may be slightly countered by rising healthcare costs. Overall, the growth rate for wages and benefits combined should decrease. Our emphasis is also on how we can be more efficient with energy consumption. There are new tools and better methods that allow our hotels to use less power and water, which is beneficial for both the environment and our financial performance. This aligns with what our customers value. Moreover, we’re focusing on lowering insurance costs and reducing accidents. This involves implementing best operating practices and making physical improvements to our properties to enhance resilience against weather-related issues, thus minimizing downtime and damage. We're looking into infrastructure upgrades, like roofing and window sealing, across our portfolio. We're also seeking ways to decrease credit card commissions by encouraging payments via ACH. Every aspect of our income statements is under scrutiny for potential improvements, and this will remain a priority moving forward, especially with the advent of AI-powered tools and robotics that promise to enhance service quality, often exceeding what humans can provide. We're optimistic about the opportunities to cut costs, improve work quality for our staff, and address workforce shortages as many employees age and are not being replaced.

Okay. That's really helpful. And then shifting to L.A. I appreciate some of the more positive commentary on L.A. into the fourth quarter. Could you just talk about how we should think about L.A. into 2026, given what should be softer comps, but some continued challenges on the demand and labor side of things? I guess, said differently, do you expect L.A. to continue to drag on results from a RevPAR and EBITDA perspective over the next 12 months relative to the rest of your portfolio?

We believe that L.A. will likely be one of our stronger performers next year due to easier comparisons and a market recovery. The data we are receiving suggests an increase in TV and movie production in the state based on the approvals from the film commission granting the necessary funds. We anticipate a slight uptick in the fourth quarter, with a more significant increase expected in the second quarter of next year because of the six-month timeline required after approval for production to begin. The rise in production credits provided by the state for California will start to take effect by mid-next year. Assuming no major disruptions or political issues that could affect safety or the appeal of the area, we expect L.A. to significantly benefit our overall portfolio next year.

Our next question comes from the line of Smedes Rose with Citi.

I appreciate the detailed discussion about next year. However, I wanted to ask about your asset held for sale. What do you see in the transaction market regarding overall pricing? And how do you plan to move forward with potential asset sales if the transaction market remains favorable?

Thank you for the question, Smedes. The transaction market has been fluctuating this year between periods of optimism and caution. However, the debt markets have shown consistent improvement, becoming more competitive with increased availability and better pricing. In some cases, this is becoming a viable alternative to sales for many sellers. The equity side remains uncertain, particularly with potential government shutdowns and the flat to negative performance seen in recent reports, leading to a pause in activity until we have clearer macroeconomic conditions. Over the last couple of months, there's been noticeable pent-up demand from investors, with some significant transactions occurring and a resurgence of prominent private equity firms and owner-operators. It seems everyone is waiting for a catalyst to spark further activity. As mentioned by Jon regarding 2026, once visibility improves, we can expect a surge in demand for transactions. Currently, the cautious sentiment is limiting interest in risky leverage, so there is a focus on smaller deals, but until we gain more clarity, activity will remain somewhat stagnant.

And I think from a strategy perspective, our focus continues to be to sell assets and use that capital to take advantage of the public-private arbitrage opportunity to buy our stock back, pay down debt, remain leverage neutral or slightly reduce leverage over time. But I think from the disposition perspective, there have been new entrants into the market. There's certainly a lot more high net worth individuals out there looking at lodging where they might not have previously because I think folks see the potential upside opportunity and the ability to take advantage of what are historically pretty low per key values, particularly as it relates to what has been continuously increasing, which is the replacement cost of hotels. So I think we're encouraged, but I think what we need, and we've continued to need and we've talked about this before is, we need operations to turn positive. It's hard for a buyer to buy into a market that's declining. They need to see things go up. Everybody is well aware of the long runway of limited supply growth, which will allow for both occupancy and rate to grow arguably faster than inflation, which is what it's done historically. But it's got to turn. So I think that's where we're going. And hopefully, we have fewer of these macro disruptions next year.

That's helpful. I was just wondering, you mentioned that there's a noticeable difference between higher-end leisure customers and lower-end ones. Within your portfolio, could you provide examples of some higher-end resorts that experienced solid year-over-year RevPAR gains and a few that were weaker, considering the types of customers that frequent those properties?

Smedes, well, there's a couple of other moving parts. I mean you take Newport Harbor as an example, which caters to people who are from Boston and New York. So we have a very strong leisure component there and also very strong corporate demand. Our demand has been tremendous there. As we cited during the call, the RevPAR up double-digit, 30-plus when you look at those levels over year-over-year. So those are examples where we're also benefiting from the redevelopment side there, but that's where we continue to have less price sensitivity. When you get to some of the markets, maybe in some markets, say, like in South Florida for Key West, there's a little more pricing sensitivity. But we've adjusted our revenue management strategies accordingly. So we actually did okay there. But I think we're opening up channels to look at other sort of customer bases and doing our best there. But I think overall, the quality level of our hotels are so higher. We're a little more insulated versus if you start going down the quality spectrum, and you're seeing in STR numbers much more than our resorts.

And I think a couple of other examples would be LaPlaya in Naples and Inn on Fifth in Naples, both luxury properties, a fair bit of insensitivity to pricing by our customers down there. L'Auberge Del Mar in Del Mar out in California would be another example of a property at much higher average rates, relatively small property where the customers, again, are relatively insensitive to pricing, but very sensitive to us providing them good service. So those would be a couple of other examples.

Our next question comes from the line of Duane Pfennigwerth with Evercore ISI.

Jon, on government shutdown impacts, given your time in D.C., any perspective on how quickly this activity can spool back up? Because if I think about this year, we already absorbed the DOGE impacts earlier in the year. I assume you had won some of that back, but maybe not all of that back, and now we have the shutdown. So I don't know if you covered it in your extensive 2026 event navigation, which was very helpful. But have you sized the impact from the government sector this year in totality? And how big of a tailwind could it be next year?

It's challenging to estimate these factors. Government activity appears to be down approximately one-third to 40% compared to last year. This reduction likely accounts for about one to two points of overall demand for our portfolio and similarly affects the entire industry, particularly impacting the lower to middle market. The shutdown has broader implications beyond just government travel, affecting discretionary travel, which constitutes the majority. People are becoming anxious about flying and are concerned about the risks of cancellations and delays, which the media tends to highlight. Although it's difficult to quantify, these issues are significant, alongside the ongoing disparity between domestic outbound and international inbound travel. Domestic travel is at 120% of 2019 levels, while inbound travel is in the lower 80s compared to 2019. This situation could change, but it requires a shift in how our government conveys its willingness to welcome visitors. Currently, we haven't seen that change, but we remain hopeful for improvements in time for next year's World Cup, which is a priority for the President and his administration.

And then just relatedly, I ask you the same question I asked was, given that the assumption that we have a no storm fall and we're not like rebuilding this fall on the Gulf Coast, what does that allow you to do and thinking more about like 2026?

So I think the first thing it allows us to do is sell a property that's not been damaged. One of the things we were hearing from clients in Naples, as an example, is, gosh, you've had all these storms in the last few years. We've had to move our meetings to other markets or other properties. Is this going to ever end? Or is this the new pattern? And having a year where there's no impact, I think, is helpful from a sales perspective. Certainly easier to sell when you don't have that. It's easier to sell when you have a property that's primed and in great condition, which is not what we had last year in terms of selling for this year. So I think it bodes well for, again, LaPlaya to ramp from $25 million of EBITDA this year to maybe closer to $30 million next year on its way to hopefully getting back to that $35 million or $36 million level of where it was heading in 2022.

Our next question comes from the line of Michael Bellisario with Baird.

Jon, you mentioned attrition or increased attrition during the quarter. Can you elaborate on that? Which markets or segments were affected? And I assume this trend has continued into the fourth quarter? Any additional insights on short-term booking trends would be appreciated.

Yes, the impact varied across our portfolio in different markets, but it was more noticeably linked to government and related sectors. However, it's not always clear what's government-related until the customer identifies it. Many of these cases involve education, particularly since numerous conferences and departments rely on grants that are currently frozen or not expected, especially due to the disruptions affecting universities. This primarily affects those sectors. We’re not observing similar trends in technology or medical fields. There are some declines in attendance at other conventions, particularly where individuals are covering their own expenses, which leads to a 3% to 5% drop in attendance. Interestingly, on a year-over-year basis, our attrition payments in Q3 were lower this year compared to last year. So, while it's not at a high level yet, it is more pronounced in groups connected to government.

Yes. So, Michael, we're not highly concerned with the attrition cancellation. It's not heading in a really bad direction, but it's certainly something we do monitor because it does go quarter-to-quarter because that's usually maybe early canary in the coal mine, so to speak, if companies are feeling differently about their spending. So nothing materially that we're concerned about, but we continue to monitor it.

Our next question comes from the line of Jay Kornreich with Cantor Fitzgerald.

I just wanted to follow-up on the leisure transient side of the portfolio. The recently renovated resorts have all been performing quite well. But just curious, how would you characterize kind of the overall leisure customer and its price sensitivity these days? And as you look out towards next year, on the same-store part of the portfolio, do you feel like there's more upside from that leisure customer improving or more from the urban side of the portfolio?

The leisure customer significantly impacts our urban properties, especially since many of our cities are major tourist destinations. Looking ahead to next year, cities like D.C. and L.A. have seen a notable decline in leisure visitors this year, but we expect recovery. With government shutdowns affecting attractions like the Smithsonians and museums, there's not much for leisure guests to enjoy. Groups, such as school trips, are not visiting D.C. currently due to the lack of activities. This trend should turn favorable unless there are more government shutdowns next year. As the economy improves and leisure customers feel more secure in their jobs, we anticipate further improvement in this segment. It's important to recognize that weekends in the third quarter showed a year-over-year increase in occupancy and demand, indicating the resilience of leisure customers, even though they have become more sensitive to pricing. As customers move down the price spectrum, their sensitivity to prices increases, which is reflected in the differing rate declines reported by STR on a weekly and monthly basis.

And Jay, what sets our portfolio apart is the substantial redevelopment we've accomplished over the past few years, which is yielding significant benefits. This is helping us navigate some of the challenges posed by certain consumers. If we assess the projects completed in 2023 and 2024, we have seen an increase of over 700 basis points in penetration compared to the previous year. This positive trend assists in mitigating any weaknesses we may encounter with individual consumers.

Our next question comes from the line of Aryeh Klein with BMO Capital Markets.

Jon, I appreciate all the color on the disconnect between demand and GDP growth. And I was hoping you can touch more on why you think that disconnect has happened? And what gives you the confidence that, that resolves? And I guess alongside that, do you think that the growth in AI investments where building data centers doesn't provide all that much benefit to lodging demand has distorted the relationship between the two and just that maybe the underbelly of the economy isn't all that healthy that can continue into next year?

Sure. I believe the disconnect is largely influenced by significant policy changes and the normalization process following the pandemic. In 2022, we saw a considerable recovery in demand, with customers showing no sensitivity to pricing. During that time, there was a rush for premium products, and we couldn't meet the high demand due to staffing shortages. This situation needed to stabilize. Additionally, there is a significant disparity between international and domestic travel, which remains substantial. Typically, travelers spend about 10 days to 2 weeks abroad, while outbound trips average around 7 to 10 days. This gap has widened since the pandemic and hasn't rebounded. This issue isn't related to data centers, and the GDP situation isn't as strong since the investment goes into people, businesses, profits, wages, and bonuses, which all contribute to economic enhancement. The type of investment matters less unless it leads to rapid business failures. Capital investment is not limited to data centers; there's also a lot of manufacturing being brought back, which requires materials, shipping, workforce, and equipment. The majority of the funding for the CHIPS initiative and infrastructure projects hasn't been disbursed yet, despite being authorized. We hope that many of these disruptions will begin to normalize over time, but we don't expect that to happen by 2026. As noted, we didn't foresee a reversal in trends. The dollar's recovery in the first half of the year isn’t beneficial for international travel and negatively affects outbound travel. I believe this situation will eventually normalize, but I wouldn’t anticipate that occurring next year unless we see a change in the dollar and the influencing factors that drive people to travel elsewhere.

Maybe just a quick follow-up. Just for the World Cup for next year, any early thoughts on the magnitude or the potential tailwind that can add to RevPAR for next year?

I believe some analysts have indicated there could be a 30 to 40 basis points increase in RevPAR next year. However, I anticipate it will be slightly higher for our portfolio due to the number of matches we have. The challenge is that we’ve conducted extensive research on this, and looking at the last World Cup, 70% of bookings happened within 30 days of the matches. Some group bookings are starting to come in regardless of the teams and locations, but we expect most bookings to be very last minute. The teams haven’t been officially announced yet; while a few have qualified, the majority have not, nor have their game locations been decided. This indicates that many bookings will occur close to the event. On the positive side, there are 50% more teams this year than in the last World Cup, increasing from 32 to 48 teams, which will positively impact us. Therefore, I believe most activity will occur late in the first quarter and into the second quarter, particularly in the last 30 days before the matches in June and July. This suggests that people will likely wait and hold off on making commitments until closer to the event.

Our next question comes from the line of Chris Darling with Green Street.

Going back to San Francisco, we've obviously talked about how the market has plenty of momentum behind it. I think importantly, it seems like investor sentiment has really changed for the positive as well. With that in mind, Jon, curious where your head is at strategically in regards to your remaining exposure there. Do you think now might be the time to consider divesting some of your remaining assets? Or does it make more sense in your mind to sort of ride the recovery wave out over the next couple of years?

Well, I think from a general perspective, all of our hotels are available for a buyer, particularly strategic buyers because of the flexibility of our properties. All of our properties in San Francisco can be available without management and brand. So ultimately, there's a lot of flexibility there. I think where we are is, it will depend on pricing. I mean there's going to be a really strong growth. We believe in that strong growth. I mean we think we have assets that we think will double or triple their yields over the next 3 years in that market. And we believe you could easily see double-digit RevPAR growth for the next 3 to 5 years there, given the recovery that's needed in rates, the momentum that's going on with the underlying industries and growing confidence as occupancy gets rebuilt here in the market. So we've got great political leadership there. At this point, I think it will just depend upon pricing, whether we would sell in that market or not. We would just have to take into account what we believe the growth levels are going to be.

Mr. Bortz, we have no further questions at this time. I'd like to turn the floor back to you for closing comments.

Thanks, Christine. Thanks, everybody, for participating. Sorry, we ran long. We had a lot of thoughts we wanted to convey. We look forward to talking to you in February next year, but I'm sure we'll speak to many of you at NAREIT in Dallas next month. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.