Earnings Call Transcript - PEB Q4 2023

Raymond Martz, Co-President and Chief Financial Officer

Thank you, Donna, and good morning, everyone. Welcome to our fourth 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 for only February 22, 2024. Our comments 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 a reconciliation of non-GAAP financial measures referred to during this call. In 2023, our portfolio continued to recover from the negative impact of the pandemic. This is a testament to the dedication, innovation, and resilience of our hotel teams and operating partners. Their exceptional contributions were instrumental in propelling our portfolio's growth and recovery in 2023, and we thank them for their support and hard work. We are delighted to report favorable operating and financial results for 2023. Our adjusted EBITDA reached $356.4 million, exceeding the top end of our outlook by $6.5 million in the fourth quarter as adjusted EBITDA increased to $63.3 million. Our adjusted funds from operations per share also surpassed our outlook, ending the year at $1.60 per share, with the fourth quarter at $0.21, beating the top end of our Q4 outlook by $0.07 per share. This better-than-expected performance in the fourth quarter was fueled by our urban hotels, which continued to experience a healthy recovery in corporate transient and group demand, including from improving convention calendars and recovering leisure travel in the cities, driven by concerts and sporting events. San Francisco, Washington, D.C., Boston, and Los Angeles led our urban strength. Focusing on our 2023 hotel operating results, occupancy rates increased 4.6 percentage points to 67.7%. However, this level is still well below our pre-pandemic occupancy of 81% in 2019 and our peak occupancy of 85% in 2016. This gap highlights our portfolio's significant remaining growth potential, particularly at our urban properties, which are on a promising recovery path. In 2023, our urban hotels achieved an occupancy rate of 68.4%, marking a 5.5 percentage point increase from the previous year, yet it is still 15 percentage points below 2019 levels. Washington, D.C. led the recovery with a significant 15-point rise to 64%, up from 49% in 2022. San Francisco also showed substantial improvement with occupancy climbing to 61% from 47% in 2022. Our Los Angeles portfolio also managed to achieve significant occupancy growth in '23, increasing from 64% to 73% despite facing challenges from entertainment industry strikes and adverse weather conditions that significantly affected demand. Our Boston portfolio, our largest urban market by EBITDA, achieved 78% occupancy, similar to last year, and Boston represents the market with the highest occupancy levels in our urban markets, yet it remains well below the 88% level achieved in 2019. During the fourth quarter, at our urban hotels, weekday occupancy rates rose by 4 percentage points to 64%, while weekend occupancies increased by more than 2 percentage points to 69%. This demonstrates that the uptick in demand was powered by both business and leisure travel. These are positive indicators heading into 2024. For 2023, our resorts maintained their strong performance with occupancy rates rising by approximately 2 percentage points to 65.8%, despite the negative impact of significant disruptive redevelopments at Estancia La Jolla, Jekyll Island Club Resort, and Southernmost Resort Key West during the year. Like our urban hotels, our resorts also had substantial opportunity to regain lost occupancy from 2019 as occupancy was 74.4% in 2019, 8.5 points above 2023. In the fourth quarter, our resorts benefited from increased business group demand as evidenced by the 1 percentage point rise in weekday resort occupancies over the comparable prior year period and weekend resort rates surged by 7 points to 74.6%, highlighting the enduring appeal of leisure travel and the attractiveness of our redeveloped and repositioned resorts. Despite a 9.3% decrease in average rates during 2023, there was a trend towards rate stabilization with a more modest 4.9% decline in the fourth quarter. Even with this normalization, our resort run rates in 2023 remain 40% or $108 higher on average than in 2019. Across the portfolio, same-property RevPAR for 2023 saw a 4.2% year-over-year increase, while the same-property total RevPAR grew by 5.9%, indicating continued strong non-room revenue growth along with substantial occupancy improvements. This progress was achieved despite an approximate 113 basis point negative impact from renovations, showcasing our portfolio's robustness and potential for future growth. Our urban properties experienced a significant uplift in 2023 with a 9.3% increase in RevPAR and an 11.3% rise in total RevPAR. Our resort RevPAR declined by 6.5% from 2022, but total RevPAR decreased by just 2.8% as healthy non-room spending and occupancy gains helped mitigate the room rate decline. For Q4, total RevPAR increased by 5.7% with our urban properties realizing an 8.8% gain and resorts flattish with a 0.4% decline. For 2023, same-property EBITDA came in at $350.9 million with Q4 at $66.6 million, exceeding the top end of our outlook by $3.6 million, thanks again to better-than-expected urban demand recovery in Q4. During 2023, our hotel EBITDA experienced several challenges that impacted our performance, including renovation disruptions, which we estimate had a negative impact of $12.7 million. Additionally, severe adverse weather events and the L.A. active strikes contributed to an estimated negative $3.5 million impact. However, these negative effects were significantly offset by approximately $12 million worth of real estate tax credits and general liability insurance savings. Consequently, the net negative impact of these one-time items on hotel EBITDA totaled approximately $5.5 million. We expect significant additional real estate tax credits as we achieve successful tax assessment appeals over the next few years. However, this was primarily focused across 6 major redevelopment projects, including Margaritaville San Diego Gaslamp, Hilton Gaslamp, Estancia La Jolla, Jekyll Island Club Resort, Southernmost Key West, and Newport Harbor Island Resort. Looking ahead to 2024, we are poised to complete 3 pivotal projects: the comprehensive $49 million transformation and upscaling of Newport Harbor Island Resort, the $26 million luxury repositioning of Estancia La Jolla Hotel and Spa, and the $20 million first phase of the additional alternative lodging camping units, cabins, villas, and infrastructure at Skamania Lodge. We anticipate completing all of these projects in the second quarter, marking a significant milestone in our comprehensive $540 million multiyear strategic capital reinvestment program. It's important to note that the vast majority of the returns on these recent investments have not yet been realized, but we anticipate significant improvements in market share and cash flow as they ramp up and stabilize. And as Diana Ross beautifully sang in our opening song today, our properties are coming out in 2024. These major redevelopment disruptions are behind us, and the benefits of these major investment dollars are to come. Also, our CapEx requirements are set to decrease markedly to between $85 million and $90 million in 2024. Shifting focus to Opal Beach Resort and Club in Naples, we're happy to report that the restoration of the 79-room beach house and pool complex is expected to be substantially complete in the next week or two. This is the last of the rebuilding efforts following the extensive damage from Hurricane Ian. The resort and club look great, and it's better than ever, and reports to ramp up quickly with our restored product. As noted in last night's earnings release, we anticipate recognizing $11 million in business interruption proceeds in 2024 from Opal's lost income for the second half of 2023 and early 2024. This has been incorporated into our 2024 outlook. The BI will impact adjusted EBITDA and adjusted FFO but not same-property EBITDA. This compares to the $33 million of BI recognized in 2023. Our disposition strategy in 2023 was successfully executed with 7 property sales generating over $330 million in gross proceeds. The aggregate sales proceeds reflected a 20.2x EBITDA multiple and a 4.2% NOI cap rate. Proceeds from our property sales were used to pay down over $179 million in debt and for accretive repurchases of common and preferred shares. From the start of 2023 through the end of January 2024, we repurchased approximately 6.8 million common shares at an average price of $14.07, including over 318,000 common shares recently purchased in January at an average price of $15.69. We also purchased 2 million shares of our Series H preferred equity shares at an average price of $15.90 per share, which is a 36% discount to the par value of the series, with 1 million shares repurchased at the end of 2022 at $16, a 30% discount to the par value, and 1 million of these shares repurchased in Q4 '23 at $15.79, a 37% discount. Following our debt paydowns and the extension of $357 million of bank term loans out to 2028, our next meaningful debt maturity is a $410 million bank term loan maturing in October 2025. You should anticipate that this maturity will be reduced and addressed from free cash flow and potentially proceeds from additional property sales, additional debt market activities, or from our $659 million undrawn unsecured credit facility. And with that comprehensive update, I'd like to turn the call over to Jon. Jon?

Jon Bortz, Chairman and Chief Executive Officer

Thanks, Ray. And good morning, everybody. I'm going to focus my comments on two topics. First, what we've seen in the industry most recently and what we expect for this year in terms of the industry performance; and second, how that translates into the assumptions behind our company's outlook for Q1 and for the full year 2024. As to the hotel industry, I believe the industry's reported performance in the second half of 2023, and so far in 2024, clearly evidences a softening in overall demand, primarily in the mid- to lower segments. Perhaps indicating financial sensitivities in the middle to lower socioeconomic demand segments, likely resulting from the impacts of inflation, the reduction or elimination of extra savings from pandemic-era government transfer payments, and the dramatic increase in consumer credit rates. Perhaps it's just difficult comps for the middle to lower price point hotels, as others have suggested. But total industry demand hasn't exceeded restricted supply growth since March of last year, and it's been negative 7 out of the last 10 months. This weaker overall industry performance has occurred at the same time that convention, group, business transient, particularly larger corporations, and international inbound travel all continue to recover, and while leisure travel remains healthy. The top 25 markets have outperformed the other markets by a wide margin, and the urban markets, which have previously been slower to recover, have performed by far the best. And while the softening demand has been almost completely focused on the mid- to lower segment so far, we are not so naive to think that there can't be an impact in the higher segments at some point. We are humble and we recognize we've never been through a pandemic and recovery before, let alone one where the Fed continues to work aggressively to slow down the economy to bring inflation down to its target. So far, so good, as the economy has held up and everyone who wants a job seems to have one. Yet we remain wary, though still cautiously optimistic about 2024. It's extremely difficult to forecast how these conflicting economic waves will impact each other as we move forward in 2024, just as it was in 2023. All we can do is plan for different scenarios and monitor all the macro and micro indicators very closely, and we'll let you know when we see the trends changing. As a result of this ongoing uncertainty, we plan to continue to provide monthly operating updates. Given the weak overall trends over the last 10 months, including January and also for February so far this year, we expect industry RevPAR for 2024 to be flat to up 2%. This forecast also assumes a so-called soft landing for the economy. We believe the Fed will remain diligent in its inflation-lowering mission this year, and with expectations for rate cuts recently pushed later into the year with fewer overall cuts now expected, we believe forecasts by the institutional prognosticators in our industry now seem a little optimistic, at least they do to us. We do believe that business travel, both group and transient, along with international inbound travel will continue to recover, and these demand segments will continue to benefit the upper upscale segment and the urban markets primarily, and thus the top 25 markets versus the weaker other markets. I also want to point out that overall industry performance in 2023 and so far in 2024 has substantially benefited from the very strong performance of Las Vegas, a large, volatile and influential market affecting the total industry numbers. Excluding Las Vegas, the rest of the industry's performance was softer in 2023. And by our calculations, that weaker performance equated to 48 basis points or just shy of 0.5%. And remember, the public lodging REIT and other institutional lodging investors generally don't own in Las Vegas. We would urge STR to publish industry numbers on a weekly, monthly, and annual basis that excludes Las Vegas, so we can all get a clear picture of the overall industry in which we live and invest. Las Vegas, until recently, was never included in the industry data and reports, so this is a new issue. Given our forecast for the industry's performance for 2024, we expect to do substantially better than the industry due to our 60% or so concentration in major urban markets, including slower to recover markets, which have been accelerating. And we expect to do better due to the lack of material disruption from renovations and repositionings in '24, which will soon be complete, and from gaining RevPAR share from our many completed major repositionings and redevelopments over the last several years. Given our industry outlook for RevPAR growth of 0% to 2%, we're forecasting our same-property RevPAR to increase 200 basis points more, so in the range of 2% to 4%. We expect most or all of it will come in occupancy gains. We're forecasting that our total same-property revenue will increase in the range of 3% to 4.6%. And as a reminder, LaPlaya is not included in the same property numbers for 2023 or 2024. However, if we were to include it, the LaPlaya would add about 50 basis points of RevPAR growth to our outlook. Encouragingly, our group pace is looking good for '24. As of the beginning of February, group room night pace for this year was ahead of the same time last year by 12.5%, with ADR pacing 2% ahead of last year for a total group revenue pace advantage of 14.7%. Transient room nights are also pacing ahead of 2023 by 9.4%, with rates lower by 1.9%. Total group and transient pace for '24 was ahead by 11% in room nights and total revenues, with ADR flat year-over-year as we continue to recover significant occupancy. While total pace is strong, we caution that booking trends have lengthened and continued to normalize, so these percentages will naturally decline as more businesses put on the books. Not surprisingly, our urban pace is stronger than our resort pace, but both are significantly ahead of last year. Right now, Q3 has the strongest pace advantage, followed by Q4, then Q2, and then Q1. We expect group will represent roughly 28% or 29% of our overall mix, which is up slightly from last year. Given a slower Q1 pace, our forecast for Q1 is for our same-property RevPAR to be flat to up 2%, with total same-property revenues higher by 0.8% to 2.8%. Whether on the West Coast and in South Florida has not been favorable so far this year, particularly in February. So even as we gained ground from not having much comparative negative impact from our major renovations and redevelopments in Q1, our resorts have suffered from softer leisure demand due to the weather. While January RevPAR growth increased a healthy 5.1%, February is on track to be roughly flat. Unfortunately, March's performance will be negatively impacted by the last week of the month due to the earlier arrival of the Easter holiday this year. But April, on the other hand, should benefit from this shift. For 2024, we expect same-property total revenue growth to exceed same-property RevPAR growth as it did in '23 due to strong food and beverage and other revenue growth, some of which is a result of the continuing recovery in group and some as a result of the significant remerchandising we've done at so many of our properties where we've added more meeting space, event venues and bar outlets, improved some of our outdoor event and restaurant venues to increase the length of their outdoor operating seasons, and reconfigured and reconcepted restaurants to focus on increasing banquet and catering business and driving higher revenues and profits. For the year, we're forecasting same-property expense growth in the range of 4.7% at the low end of our total revenue growth range to 5.3% at the higher end of the range. However, if we exclude the impact of $9 million of real estate tax credits in 2023 to get a better view of the underlying expense growth rate, it's about 100 basis points lower, implying an increase of 3.8% to 4.3%. Keep in mind that all of our RevPAR growth will likely come from occupancy growth, and food and beverage growth should outpace RevPAR growth due to increases in group business and total occupancy, both of which come with significant marginal expenses. Our expense growth assumptions are based on an expectation that combined wages and benefits will increase in the 4% range, give or take. Most other expenses will increase at a lower rate. Energy and insurance will grow at a much faster rate, and real estate taxes will show a much greater increase due to the $9 million of tax true-ups in 2023. We expect the combination of LaPlaya's operating performance and BI accruals will likely be roughly equal between 2023 and 2024, so no big headwind as we had previously feared. We're extremely excited about the pending full completion and reopening of LaPlaya Beach Resort, and the rebuild property looks fantastic. We'll be having a tour of both LaPlaya and the hotel on Fifth in Naples for investors and sell-side analysts on the Wednesday afternoon following City's re-conference in Hollywood, Florida. So feel free to let us know if you'd like to join us, as we'll be transporting folks from the Diplomat. LaPlaya was on track to deliver the highest EBITDA in our portfolio in 2022 before the hurricane hit. So it's quite important to our future growth. Not only are we excited about LaPlaya's operations getting back to normal, but we're also very excited about the significant upside throughout our portfolio following our $0.5 billion plus investment program over the last few years. Whenever we get over this macroeconomic hurdle related to the Fed's efforts to drive down inflation to its 2% target, we expect to experience significant upside in our markets over a multiyear period that will be powered by little to no supply growth in our markets, while economic growth drives up travel demand. If we look back to the beginning of the last cycle, and you can see these results in our investor presentation, total EBITDA for today's current portfolio doubled between 2010 and 2015. So in this next cycle, we expect urban and resort supply will be more restricted and slower to be added than in the last cycle. We also believe demand will grow in a healthy and profitable way due to strong economic growth, driven by significant technological and medical developments, a massive onshoring effort in various industries, growth coming from the green energy transition, and positive secular trends related to travel. These positive fundamentals in totality, coupled with a moderating inflation outlook and significant benefits from the completion of our strategic redevelopment program should lead to very strong bottom line performance for us over an extended number of years. We just need to get over this macro hurdle. That completes our remarks. We'd now be happy to answer your questions. So Donna, you may proceed with the Q&A.

Duane Pfennigwerth, Analyst

I'll repeat the question, and I know you might be somewhat less affected by it. Regarding the group segment, do you approach group dynamics differently now compared to before the pandemic, considering the changes in underlying seasonality? Jon, how would you describe the situation as we enter 2024 in terms of visibility? How does this forecasting environment compare to what you would consider a 'normal' period before the pandemic?

Jon Bortz, Chairman and Chief Executive Officer

The approach to leveraging the group segment this year compared to last year or even pre-pandemic really depends on the specific circumstances of each property and its respective market. For instance, in San Francisco, with a weaker convention calendar this year, we are relying more on other segments, including our in-house group, than we would in a year with higher convention activity. Conversely, in a market like San Diego where convention activity is significantly up, we may depend on group less than in previous years and instead focus on boosting rates for transient customers to capitalize on the increased demand. There's no overarching philosophy that has changed for 2024; rather, each market and property will perform somewhat differently. Regarding the setup, demand is currently robust, and we expect to see an increase in the group mix within our portfolio due to stronger convention and in-house group performance compared to last year. As we move through the year, the challenge will be predicting the short-term group situation, both monthly and quarterly. While we might have slightly less group booked compared to others, we had around 60% to 62% of our projected group planned by early February, which is an improvement over last year based on current pace. Overall, the setup for the year looks positive, but forecasting remains difficult as we adjust our understanding of these trends and consider how much of the group was booked further in advance. Last year, we saw months where short-term pickups were weaker than expected, making predictions challenging.

Smedes Rose, Analyst

I just wanted to ask a little bit, maybe just what you're seeing on the transaction side of the market. It seems like that market's been a little bit challenging. But coming out of ALIS, there was a lot of talk about how this year would improve significantly. And maybe how you're thinking about potentially moving forward with additional asset sales? Or are you fairly happy with where the portfolio is now?

Thomas C. Fisher, Co-President and Chief Investment Officer

Tom Fisher here. I agree that the sentiment from the ALIS Conference was quite positive. From my perspective, 2024 may serve as a transition year. Last year, there was significant interest but limited conviction. This year, we seem to be shifting towards increased interest along with building conviction. I believe investors feel that the worst in terms of debt costs is behind them, allowing them to underwrite assets and debt costs more effectively, which likely will improve. Overall, the market is improving, particularly in financing for cash flow and yield assets with solid sponsorship. I expect to see a trend toward smaller deals, a characteristic we observed in 2023, and transactions in recovering markets rather than those still lagging. From both lenders' and investors' viewpoints, the focus is on cash flow and debt yield now. Regarding our portfolio, we are satisfied with our progress and will consider opportunities for additional dispositions if they align with our goals. Our interest in selling assets primarily hinges on generating proceeds that enable us to repurchase our stock at significant discounts. If the public-private arbitrage opportunity diminishes, so too will our interest in selling assets.

Michael Bellisario, Analyst

Jon, just first quick question on CapEx and returns. Are you seeing any change in sort of the ramp-up of performance post renovation, post repositioning? And then for the projects that have been completed already, is there any updated view on timing or the timeline of when you think those projects will reach stabilized returns?

Jon Bortz, Chairman and Chief Executive Officer

The main factor affecting the ramp-up has been the pandemic, particularly for projects finished just before it began. Some projects were completed during the pandemic, and a few are now wrapping up in what we consider the post-pandemic period. Generally, it takes about 3 to 5 years to reach full stabilization, depending on the structural changes made to repositioned properties. For instance, the Hilton Gaslamp is in an excellent location in downtown San Diego but had not received any capital investment for nearly 15 years. We undertook a comprehensive repositioning of that property, which includes unique features like a separate building with suites. We're already seeing quicker ramp-up results in the first quarter. In contrast, properties like Jekyll Island, which is independent and has been repositioned, will take longer to stabilize. However, the repositioning is expected to yield significantly higher returns since independent properties do not face the same average daily rate limitations as branded ones. Generally, the repositioning of independent properties takes longer compared to branded ones. Additionally, market strength plays a crucial role; it's easier to gain market share in a strong market, as seen with the Solamar conversion to Margaritaville, where demand is rising. While some older projects from one to two years before the pandemic may not achieve our target share gains and double-digit returns, we expect them to reach mid-single-digit returns on a cash-on-cash basis. Newer projects with rising demand should see even higher returns.

Michael Bellisario, Analyst

Got it. And then just one quick housekeeping item. Just on the real estate taxes. I think you mentioned $12 million of real estate credits last year as a one-time item. But then when you were talking about margins, you mentioned $9 million of impact. Can you square those two for us?

Jon Bortz, Chairman and Chief Executive Officer

Yes, there was GL. And there's GL in the $12 million that was mentioned in the script, but you might have just missed it.

Raymond Martz, Co-President and Chief Financial Officer

Combined the two. But really focused on are the real estate tax credits of $9 million and that we would suggest pulling that out to try to get the run rate in your models because that's more of a run rate because the credits tend to be lumpy and could represent multiple years. So by taking that out, which is what we discussed in the call, that reduces our run rate of operating expenses by about 100 basis points lower than what was provided in the 2024 outlook.

Jon Bortz, Chairman and Chief Executive Officer

And Mike, in addition to the previous comments, we feel quite optimistic about significant future assessment reductions and true-ups, particularly in the West Coast markets, though to a lesser degree in areas like D.C. on the East Coast. However, this process takes time. Sometimes the credits can be substantial because they reflect a multiyear true-up of an assessment that we over-accrued and overpaid until we achieve success in the assessment. It's clear that values have decreased significantly in many West Coast markets, and this is a lengthy process intended to favor the government. Therefore, being persistent ultimately leads to favorable outcomes.

William Crow, Analyst

Two quick questions for me. Jon, you talked about your expectation that the inbound outbound travel, international travel deficit will narrow. And I'm curious whether that applies to inbound travel from Asia as well, which seems like it will be much more impactful to the West Coast markets.

Jon Bortz, Chairman and Chief Executive Officer

Yes, Bill, actually, we do think it does. And if you look at the data, I think what it shows is you have a significant increase in Asia inbound. It's coming from Korea. It's coming from India, and it's coming from Japan. And those are all 3 markets that are later to begin the recovery as compared to the markets in Europe. In a market like India, many are forecasting will ultimately replace China from a size perspective given the growth in the economic base and the large population in India. And obviously, the better relationship the U.S. has with India versus with China. We have seen a significant increase in China. It's just off a very low base right now. So while it used to be clearly in the top 5, it's not there right now. But the other markets seem to be picking up much of the slack, but not all of the slack.

William Crow, Analyst

That's helpful. Jon, given all the changes to your portfolio, I know the order of importance or contribution to EBITDA has changed pretty dramatically over the last couple of years. Key West is now, I think, a top 5 market. I think if you looked at Florida, your assets there, and maybe throw Jekyll in Georgia into that. It seems like a lot of exposure to hurricane-prone markets. Are you comfortable with the exposure that you have to that region?

Jon Bortz, Chairman and Chief Executive Officer

We are comfortable. It's interesting as we analyze weather impacts and weather risk on a corporate basis through looking at the individual properties, what we find is there is just weather risk everywhere. There are just different kinds. And some get more media attention than others. But heavy rains and flooding on the East Coast, in the Midwest, have been pretty consistent over the last few years compared to where they used to be. Fires on the West Coast, although being helped last year and this year with the heavy rains. But heavy rains on the West Coast, there are risks from those. We had a tropical storm warning in Southern California, we haven't had in 85 years. We had an earthquake in Washington, D.C. There just seem to be weather risks everywhere. And so we're comfortable with what we have in Florida. We think we bought the right properties in Florida. I think the rebuilding of LaPlaya will help mitigate any future damage based upon the way it's been rebuilt in the effort to mitigate through strengthening the real estate. But I’d say today, yes, we're comfortable with where we stand in Florida.

Dori Kesten, Analyst

As you wind down your ROI projects midyear, what's a good run rate for CapEx? And how long would you expect to be able to maintain at those lower levels?

Jon Bortz, Chairman and Chief Executive Officer

We have significantly redeveloped and renovated most of our portfolio, and we estimate the annual run rate to be between $50 million and $60 million. Our planned capital for non-major projects in 2024 is approximately $40 million, which is somewhat lower due to the recent completion of numerous projects. Additionally, we have been postponing some smaller return on investment projects to preserve capital, allowing us to buy back our stock at a substantial discount since those returns are higher. We anticipate a gradual increase in these investments over time compared to this year's capital allocations. For the next two years, aside from the timing of the conversion of Paradise Point to Margaritaville, we expect our capital expenditures to remain within the $50 million to $60 million range.

Dori Kesten, Analyst

Okay. And have you said what your expectation is for the EBITDA trajectory over the next several years?

Jon Bortz, Chairman and Chief Executive Officer

We haven't made that forecast yet. For this year, it's quite challenging to predict a rebound since we were closed. We are projecting about $22 million of EBITDA as our outlook for this year. This figure is above where we were in 2019, but considerably below the $35 million target we aimed for in 2022 before the hurricane struck at the end of September.

Dori Kesten, Analyst

Okay. Do you have an expectation of when you might return to that $35 million?

Jon Bortz, Chairman and Chief Executive Officer

We believe it will largely depend on the market and how other properties price and perform in that environment. The good news is that, overall, our resorts are not at the 2022 levels; they have slightly decreased from there. If Naples Opal were operating at a stabilized level today, we would expect it to follow a similar trend. However, there is certainly a possibility that within the next two years, we can return to the same level or something close to it.

Raymond Martz, Co-President and Chief Financial Officer

Yes, Dori, when you look back to Irma, when that hit South Florida, Naples came back as a market quicker than Key Westins just an indication, which is different demand drivers and customer base in Naples versus Key West. So that's another way to... A lot more annual return is because of the base population there.

Jay Kornreich, Analyst

In the fourth quarter, you generally saw a rebound in the urban markets, and I believe you commented on the occupancy gap to 2019 closing at 15%. So I'm just curious if this rebound is coming more from transient customers or group customers? And how much growth do you foresee in your urban markets in '24 versus 2023?

Jon Bortz, Chairman and Chief Executive Officer

Yes. So actually, the rebound is coming from 3 segments. It's coming from business transient. Corporations are getting back to the office. You're seeing, obviously, significant growth and activity around AI, which is headquartered in San Francisco. The group side is recovering as well. We're going to have a down year on a convention basis in '24 from prior year cancellations when things were may be viewed a little more challenging from a quality of life perspective, but that's improved dramatically, I'd say, at or better than pre-pandemic levels in terms of quality of life and continuing advances in the politics there. So group has been improving, including in-house group, and leisure is coming back to the market, both from a domestic perspective and from an international inbound perspective. And I'd say the market segment probably furthest behind continues to be that international inbound, because a lot of it came from China, in particular, given the population base in San Francisco and the attractiveness of that city from an Asian perspective. So it's really all the segments. We do expect it to continue in 2024 in all segments except for the drop in convention. And we think these other segments should do well to offset that drop in convention. And hopefully, we continue to have an up year on a RevPAR basis in San Francisco. But we do think urban will lead the pack on a RevPAR basis in our portfolio again in 2024.

Raymond Martz, Co-President and Chief Financial Officer

And Jay, regarding San Francisco, there has been a lot of discussion about the convention calendar in 2024 compared to 2023, which is seeing a decline, especially in the fourth quarter. However, the first half of 2024 shows a year-over-year increase. Additionally, we are not fully capturing the numbers for all the self-contained groups, such as the JPMorgan event that took place in January; that is a self-contained group contributing to the year-over-year growth. This aspect is improving alongside the return of other business transient groups to the city. Therefore, when considering these elements, it’s not solely about convention demand.

Dany Asad, Analyst

John and Ray, can you elaborate on the Boston market? You mentioned it in your prepared remarks, but can you help us understand the 10 points of occupancy gap compared to 2019 in Boston? What needs to recover, perhaps broken down by day of the week? Additionally, what will contribute to the incremental occupancy points in Boston moving forward? I'm curious if you're noticing that trend flattening out or how it has been progressing.

Jon Bortz, Chairman and Chief Executive Officer

Sure, I can provide some general comments and we can follow up with more specific details about the segmentation in Boston later. Overall, I would say there are two main segments: business transient, especially on the large corporate side, including consulting and financial services, which are likely experiencing the most decline in that market. These areas are continuing to recover, and you would probably hear similar observations from the major brands, not just in Boston but across the country. This decline, along with some group bookings, is a significant aspect of the market. Major conventions are performing similarly to some of the strongest years we’ve seen in the past, although the Hynes Convention Center has seen a drop in activity. This downturn was influenced by discussions surrounding the previous governor's plans to shut it down and repurpose it, but those plans are no longer moving forward. The Hynes Convention Center is now actively seeking new business, which will enhance activity, particularly in the Back Bay area and our properties like the Westin, which is connected to the convention center, as well as the Revere and the W, which are close by. Our in-house group at the Westin, for example, is still slightly below our 2019 levels, and there’s room for growth there. This trend reflects Marriott's standing in the market and highlights opportunities for other properties as well. In terms of leisure travel, it has been quite strong, although there is still some inbound international travel that needs to be accounted for, but it's not a major part of the overall picture.

Gregory Miller, Analyst

I'm hoping you can provide some context on the NAV revisions that you've released for February relative to November, given estimated value declines from most of your markets?

Raymond Martz, Co-President and Chief Financial Officer

Yes. So Greg, when you look at the gross enterprise value change, it went down about $200 million from our last update. And about half of that, $100 million are from property sales. That's the sale of Zoe in San Francisco and some retail space in Chicago. And then the other half of the $100 million, that's reflective of the asset-by-asset value estimates that we do internally here based upon what we're seeing in the market. Tom is very close to the transactions in other parts in each market to understand where that is taking into consideration the debt markets and so forth. So that's how we adjusted the $200 million decline. So again, half of it was from asset sales, half was the change in value. And then the balance of it is just really a reflection of the debt paydowns and then buying the preferred at a big discount changing that for the NAV. So overall, the NAV change moved to dollar, but a big portion of that was really just timing there and some of the adjustments there with the values.

Jon Bortz, Chairman and Chief Executive Officer

And Greg, I think when you look at where the values were down, it was primarily markets that were slower to recover, where the debt markets are having a bigger impact on values because those markets lack strong yield, and many of the buyers are primarily all equity buyers. So I think as the operations continue to recover and yields continue to grow, not only will the values go up because of that, but they'll also increase due to the lack of yield penalty being imposed on values by the debt side.

Floris Van Dijkum, Analyst

You guys still have this giant gap in profitability, particularly in your urban markets. I calculate something like $96 million shortfall relative to 2019 levels. Maybe, Ray, I mean, I know you've invested in your portfolio, you're going to get some return on that capital. But is there a risk this cycle that your urban markets never fully get back to 2019? Or how do you see that playing out over the next 2 to 3 years?

Raymond Martz, Co-President and Chief Financial Officer

There are a few factors to consider. First, as we've mentioned before, we will continue to monitor the changes in business chains and groups, which are trending positively. This relates to the growth of RevPAR this year, so that's encouraging. Secondly, the impact of international inbound travel is significant. We currently have 10 million fewer international travelers than we did before COVID. These travelers tend to frequent coastal and gateway markets, where we have a strong presence. Unfortunately, many urban markets we operate in were the hardest hit during the pandemic. However, we are now seeing a rebound in growth levels. Different markets are recovering at varying rates; for instance, Boston has bounced back more quickly due to its unique industry advantages and the influx of European travelers, unlike some West Coast urban markets that are lagging. Moreover, with more companies in Boston returning to the office, there is an increase in travel related to those industries. In contrast, the tech sector on the West Coast is expected to recover more slowly. Overall, we are optimistic about the next few years. Some markets like Boston and San Diego may return to pre-2019 levels sooner than others, but typically, travel trends align with GDP growth. We are currently experiencing distortions from the pandemic, but as these factors normalize, we believe conditions will improve.

Jon Bortz, Chairman and Chief Executive Officer

The one thing I'd add is, regarding markets like San Francisco and Portland, we likely won't see the bottom lines return to 2019 levels in the next two to three years. That expectation seems very unrealistic. However, we do believe we will significantly reduce the $96 million EBITDA difference in that timeframe due to the recovery of those markets combined with considerable operating leverage. Additionally, stronger markets like Boston and San Diego are expected to surpass 2019 levels with robust operating leverage as well. All of these markets will have occupancy opportunities to capitalize on as well.

Floris Van Dijkum, Analyst

Actually, that leads me to a connected question regarding the potential for occupancy improvement. You mentioned in your prepared remarks that there is about a 15% gap in your urban markets, while the overall portfolio shows a 13% gap. You expressed positive sentiments towards Boston and San Diego in particular. Do you believe that to return to 2019 levels, you won’t necessarily need to recover all of that occupancy due to the growth in average daily rates? Do you think you can achieve occupancy levels in Boston and markets like San Diego similar to those in 2019 over the next year or two?

Jon Bortz, Chairman and Chief Executive Officer

I’m not sure if we will reach that in the next year or two, but I do believe we can significantly reduce that gap in those specific markets. In fact, we might not want to reach that point and may choose to focus more on adjusting rates and changing our strategy. Achieving 88% occupancy in markets like Boston is feasible, but we prefer to target around 85%. Sometimes you have to accept that achieving occupancy may not always translate into higher rates. I do think we will make considerable progress in narrowing that gap. However, the outlook depends on the broader economic conditions over the next two to three years. If we can overcome the current challenges this year, I believe we will be well positioned to improve both occupancy and rates.

Chris Darling, Analyst

I want to return to the conversation about your NAV estimate. I'm curious if the lower values in some of these urban markets make you more inclined to hold onto these assets rather than selling them to avoid declines, especially since you're anticipating some fundamental improvement in the near term. I'm just wondering about your thoughts on that.

Jon Bortz, Chairman and Chief Executive Officer

I think selling in those markets would likely bring our growth rate down a little bit on a marginal basis, but the investment of the proceeds from them into are the rest of our portfolio through buying back our stock. As long as that remains exceedingly attractive, I think it does still make sense. As you know, I mean, the public markets tend to not look 3 or 4 years out as it relates to lodging rates or, frankly, most companies. Value is not the popular form of investing. It's really growth. And while that would impact our growth rate a little bit, I don't think it's as attractive to hold as it is to sell and buy our stock back. I mean where we've been selling has generally been the slower to recover markets and the lower-quality assets in those markets. So we've been improving the overall quality of the portfolio. At the same time, we've been buying the remaining part of the portfolio back at a big discount. So I don't think it would change our view of where we've been focused. Sure. Skamania spans 200 acres. We previously had a golf course that occupied about 100 acres, which we closed several years ago. We've since developed a sustainable 9-hole par 3 course and an 18-hole putting course next to it. We've also cleared around 70 acres for future development along with additional land. This $20 million investment includes a $2.5 million Pavilion built next to the putting course for events and weddings. We added 3 more treehouses to the 6 we already had, bringing the total to 9. Additionally, we're working on new alternative products, including 5 luxury glamping units, a 3-bedroom villa, and 2 two-bedroom cabins that will offer longer stays, possibly weekly or even monthly. The treehouses will continue to operate on a nightly basis like the rest of the lodge. To support this development, we have installed utilities, roads, and infrastructure for about one-third of the extra acres, allowing us to significantly expand our alternative lodging options. We're exploring various concepts like a luxury RV park and a Farmhouse Inn with vineyards and fruit fields. Currently, we’re experimenting to determine customer interest and pricing in this market, similar to our initial treehouse project. We expect significant operating efficiencies as we add these new units without significantly increasing staffing, although new concepts may require different teams. The profit margin for these new units is expected to be over twice that of the average lodge rate, indicating strong profitability on a per-key and per-bedroom basis. However, this is still an initial phase with only a limited number of units as we gather data.

Raymond Martz, Co-President and Chief Financial Officer

And Chris, to give you an idea about the Skamania development, we really appreciate it because of the extra amenities we can incorporate. It's more than just a lodge; there are numerous activities available. When we purchased that hotel, it had approximately $4.4 million in EBITDA. By the end of 2023, that number reached nearly $13 million. Currently, occupancy rates are still lower than they were before the pandemic. This demonstrates that by adding more services, we believe there's still plenty of room for growth. With additional units, including glamping and other options, we see significant growth potential. It's been a valuable investment for us, and we are excited about the future.

Jon Bortz, Chairman and Chief Executive Officer

Thank you all for joining us. We look forward to seeing many of you in Florida for our Naples tour. We'll be in contact again in April to discuss our first quarter results. Thank you very much.

Operator, Operator

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.