Earnings Call Transcript - PEB Q2 2023

Operator, Operator

Greetings and welcome to the Pebblebrook Hotel Trust Second 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. You may begin.

Raymond Martz, Co-President and Chief Financial Officer

Thanks, Donna, and good morning, everyone. Welcome to our second 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. And for those of you who track these sorts of things, this is Jon's 100th earnings call, so congrats, Jon. To start, a reminder that comments today are effective for only today, July 28, 2023. Our comments may include forward-looking statements under federal securities laws. Actual results could differ materially from our comments. Please refer to our latest SEC filings for a detailed discussion of potential risk factors and our website for reconciliations of the non-GAAP financial measures referred to during our call. We are pleased to report that our adjusted EBITDA and adjusted FFO both exceeded the top end of our outlook. Operating expense reductions helped to offset lower-than-expected RevPAR growth, while greater-than-expected business interruption proceeds and interest and tax savings provided a further boost to our bottom-line financial results. We continue to see a gradual recovery in business travel as both improving group and transient demand benefited our urban properties. The recovery in San Francisco led the way, with occupancy climbing by over 13 points followed by Washington, D.C. up 11 points, Los Angeles increasing over 9 points, Chicago up 6 points, and Portland increasing almost 3 points. Our urban properties also benefited from recovering leisure travel to the cities with concerts, sporting events and festivals generating demand lost during the pandemic. A big thank you to Taylor Swift, and we love her, Dead & Company, and Morgan Wallen. And please keep scheduling those big contracts. Recovering business and leisure travel combined drove our same-property urban RevPAR growth ahead by 5% over last year's second quarter. This helped to offset the moderating room rates and normalizing demand for suite and premium room upgrades we're experiencing from the leisure segment, particularly at our resorts. Same-property total RevPAR posted a slight increase of 0.6%. Room revenue growth was flat, with non-room spending up 2.1%. During the quarter, we experienced some unexpected challenges such as unseasonably cold and wet weather on the West Coast, notably in Southern California and the Pacific Northwest, which negatively impacted leisure demand as well as slightly more significant than anticipated disruption from our redevelopments. And a negative impact to our West Los Angeles properties due to the writer strike that significantly reduced demand that emanates from the TV and film industries. Nevertheless, occupancy in our portfolio continued to recover as we regained over 300 basis points or a 4.6% improvement in occupancy. And despite an industry-wide softening in leisure demand, we also generated a promising rise in our Q2 weekend occupancy to 79%, a marked improvement from the 75.7% from the prior year. This encouraging trend of improving weekend demand was evident throughout our portfolio, including our resort and urban locations. Our hotels gained market share during the quarter and our TripAdvisor customer rankings are at the highest ever across our portfolio, indicating the desirable nature of our properties and the quality of the service provided by our various operators. These achievements are a testament to the success of our recent property redevelopments, which have made our hotels more attractive to both the leisure and business travelers. Disruptions from the five significant active redevelopment projects during the quarter decreased RevPAR by approximately 180 basis points, about 30 basis points more than we originally anticipated. The various issues, including delays in receiving and installing FF&E, that caused these disruptions have primarily impacted Hilton San Diego Gaslamp Quarter and Hotel Solamar. All the projects, except for Hotel Palomar's conversion to Margaritaville Hotel San Diego Gaslamp Quarter, have been successfully completed. We anticipate Solamar's transformation to be substantially complete by the middle of August, a slight delay from our original target. Despite these challenges, our same-property EBITDA of $110.7 million was in line with our Q2 outlook range. This was achieved through focused efforts to moderate operating expense increases and some continuing success in reducing property taxes. Furthermore, our energy cost increases were more moderate than in previous quarters, registering an 8.8% increase in Q2 versus the prior year and a decline from the 18.3% increase experienced in Q1. This reflects significant investments and efforts to reduce energy and water usage throughout our portfolio. On the property insurance side, we completed our annual renewal in June. Despite the very difficult market conditions, we were able to limit our property/casualty premium increase to 59%. We view this as a positive outcome given the current challenging nature of the property insurance markets, the fact that we largely maintained our prior coverage levels and terms, and the fact that there are many others out there who have experienced 100% increases or more. Turning to monthly RevPAR growth, April was flat, May rose by 1%, and June ended down 1% compared to the same months in 2022. Our adjusted EBITDA and FFO benefited from business interruption proceeds of $14 million for LaPlaya, exceeding our forecast of $10 million. Lower-than-expected G&A and interest expenses also contributed to our positive variances to our outlook. During Q2, we completed $52.5 million in capital reinvestments across the portfolio, mainly concentrated at our five major property redevelopments. And to date, we've invested over $75 million into the portfolio. The major disruptions from these redevelopments are largely behind us as we enter the second half of 2023. We are confident our repositioned properties will significantly increase our market share and cash flow in the upcoming months and years. To detail the operating performance impacts from our five major redevelopments to better isolate the performance of the non-impacted properties, if we look at the portfolio numbers excluding these five properties, which are Estancia La Jolla, Solamar, Hilton Gaslamp, Viceroy Santa Monica, and Jekyll Island, RevPAR growth for Q2 would have shown an increase of 1.8% versus the flat RevPAR we reported. Total revenue would have shown an increase of 2.8% versus the 0.7% we reported, and hotel EBITDA would have been down by 8.7% from last year's versus 12.9% reported, or over $6.5 million of impact to EBITDA in the second quarter and over $11 million year-to-date. We made substantial progress in the ongoing repair, restoration, and reopening of LaPlaya Beach Resort Club in Naples. The 40-room Bay Tower and 70-room Gulf Tower, which houses the resorts' lobby, restaurant and club, are now largely operational, with additional resort amenities being added each month. The 79-room Beach House is also progressing, and we expect the restoration of this building to be substantially complete and reopened by the end of the year. During Q2, despite not offering a complete resort experience plus the noise and disruption of ongoing construction, the 110 guest rooms available for sale at the two operational towers managed to sustain a 46% occupancy with a $452 average daily rate, an encouraging 19% increase of the average rate over 2019. It's worth mentioning, before the devastation caused by Hurricane Ian, we projected LaPlaya to generate more than $10 million of EBITDA for Q2 versus the $1.9 million loss that it incurred. Our Q3 outlook factors in an additional $10.5 million of BI insurance proceeds related to a portion of Q2 losses. And to date, we've recorded $22.1 million of business interruption through this year's second quarter. As part of our strategic capital reallocation efforts, we completed $97 million of property sales in the quarter, including Hotel Monaco Seattle and Hotel Vintage Seattle, bringing our total asset sales to $232.3 million since the start of the year. All the sales have been urban properties as we have sought to better balance the leisure and business demand segments of our portfolio to maximize our risk-adjusted returns. During the second quarter, we strategically utilized $50 million of the sales proceeds to repurchase our common shares at an average purchase price of $13.97 per share, bringing our common share purchases to $91 million since the beginning of the year. Adding in our purchases from the fourth quarter of 2022 when our efforts began, we have purchased $160.5 million of common shares or 8% of the shares outstanding at the time at a weighted average share price of $14.51 per share. We have purchased $16 million of our preferred equity at a $16 per share amount, a significant 36% discount to its par value of $25. And we estimate that our share repurchases have contributed over $2 per share in additional net asset value. This is based on our updated NAV table, which is available on our website. Turning to our balance sheet and liquidity, we have over $823 million of liquidity, far more than we had before the pandemic. It's comprised of $186 million in cash and $637 million available on our credit facility. Our weighted average cost of debt stands at 4.3% with 78% at fixed interest rates and 91% of our debt is unsecured. Our growing cash balance, the result of our successful property sales combined with our existing liquidity, will be available if needed to address our upcoming debt maturities over the next 12 to 18 months. And with that update, I'd like to turn the call over to Jon. Jon?

Jon Bortz, Chairman and Chief Executive Officer

Thanks, Ray. I thought I'd share some color about what we've been seeing in the industry and within our portfolio. In the second quarter, total industry demand for hotel rooms clearly flattened out. With weekdays as a good indicator of business travel's recovery continuing to improve, albeit at a more gradual pace, while the industry's weekend demand for rooms was down year-over-year in every month in the quarter, continuing a trend that began in March. We believe these slowing demand trends do not indicate an impact from macroeconomic issues or concerns, but rather, primarily reflect two major factors. First, we believe leisure travelers are now much more comfortable than last year with traveling abroad, especially to Europe, as well as cruising again, with cruise ships reportedly sailing at full capacity. We believe this represents the same sort of revenge travel that benefited the domestic hotel business last year. Second, we believe that the comparisons to last year's second quarter were more difficult because we're comparing to numbers that significantly benefited from Omicron-related re-bookings from the first quarter, thereby somewhat overstating the true underlying demand recovery in the second quarter of last year. While the revenge travel factor for outbound international travel and cruising will likely continue to impact this year's demand levels, we believe it's more likely to normalize late this year and next year. As it relates to the difficult comparison to last year's Omicron induced additional demand, we believe we're now mostly past that impact. We believe an easier comparison may already be beginning to show up in July with the most recent numbers STR reported showing occupancy for the industry ahead of last July month-to-date. If that trend holds for the entire month, it would be improved from last quarter when occupancy was down year-over-year in every month. Fortunately, supply is expected to continue to be benign, creating a strong positive tailwind for the industry for the rest of this year and for many years to come. In the second quarter, industry supply growth was just 0.3%, and we don't expect it to materially increase for quite some time. In fact, we don't see industry supply growth returning to even the 1% level until 2027 or later, given the challenges with the cost and availability of construction financing and the high cost of construction, particularly as compared to potential development yields and hotel values for existing properties. For Pebblebrook, business group continued to recover in the second quarter with group room nights up 2.7%, ADR ahead by 4.7%, and total group revenue up 7.5%, so well ahead of last year's second quarter. Transient revenue year-over-year was down 2.3%, while room nights still increased substantially with a lower average rate causing the decline in transient revenue. The ADR decline in transient rates occurred primarily at our resorts and was generally due to what we have called less splurge, which means fewer premium rooms such as suites and view rooms being sold, and those rooms that are sold achieve lower rates overall compared to last year's prices, which benefited from very strong domestic demand and a relatively price-insensitive consumer. The decline in ADR at our resorts was also caused by group weekday occupancy gains at lower rates than transient, which is typical to our resorts and some occupancy gains made through lower-rated channels such as wholesale or international. Year-to-date, our resort rates have declined by 10.4% or $45.30. Yet they remain at a very robust 40.4% premium to the first half of 2019 or a premium of $111.89. Doing the math, our resort ADR premium has regressed about 29% or so, but it's still slightly better than the one-third regression from peak rates we were expecting as demand normalized. We remain encouraged that our resort rates will ultimately grow from these much higher rates we've achieved in our resort portfolio since 2019. And some of this ADR and RevPAR gain is a direct result of competitive share gains due to the very significant strategic capital investments we've made over the last several years to reposition our resorts higher in their respective markets with more share gains to come. In fact, our total portfolio managed to gain RevPAR share in Q2, in this case 66 basis points, even with the approximate 180-basis point negative impact on our portfolio's RevPAR performance due to the five redevelopments in the quarter. As we look at the third quarter, we've not yet observed any meaningful increase in cancellations or attrition. This would be one of the first indicators of a slowdown in demand as a result of broader macroeconomic issues or concerns, and so far, so good. We're currently forecasting that occupancy for our portfolio in the third quarter will continue to increase over last year by as much as 2 to 3 occupancy points, but it's likely to do so at a similar decline in average rate as occurred in Q2 for all the reasons previously discussed. Total revenue pace for the third quarter is ahead of same time last year by 5.9%, with combined group and transient room nights ahead by 7.9% and ADR off by 1.9%. We believe this revenue pace advantage is likely to shrink over the course of the quarter as some transient and group have likely booked further out, potentially having less to book on a shorter-term basis. Our bookings in the quarter for the quarter in the second quarter were less than the prior year, but we're hoping some of this was due to the strong bookings out of Q1 into Q2 that took place last year as Omicron wound down in last year's first half. Fourth quarter pace on the books has been and continues to exhibit the strongest quarterly year-over-year growth. And should the economy continue to hold up, Q4 should be our strongest growth quarter of the year compared to last year outside of the first quarter with the easy Omicron comps last year. Currently, for the fourth quarter, our total revenue pace is ahead of the same time last year by 35%, with room nights ahead by over 25% and ADR up by almost 8%. Bolstering our optimism for the fourth quarter are very strong year-over-year convention calendars across a number of our cities with standout pace growth in San Francisco, San Diego, Boston, and Washington, D.C. Our group revenue pace for Q4 is ahead of the same time last year by over 42%. It's critical to remember, however, that these positive pace figures are indicators. They're not guarantees of realized business. Of course, it's better when they're up, and up by a lot is better than up by a little. In terms of July same-property RevPAR, we anticipate a slight dip of about 1% to 2% compared to the prior year, with all of it due to rate as occupancy in July is on pace to be up by around 4 points versus last year. Recent booking activity in July, the peak summer travel month, has been encouraging, particularly for short-term leisure. Our Q3 outlook projects same-property RevPAR compared with the prior year quarter to be in the range of minus 2% to up 1%, but it's still likely to be ahead of 2019. We expect gains in occupancy versus last year, slightly offset by declines in ADR. Our forecast incorporates the last of the disruption from the redevelopment of Solamar being converted into Margaritaville Hotel Gaslamp Quarter, San Diego, which is slated for substantial completion and reflagging in mid-August. Additionally, we factored in our best estimates concerning the potential negative impact of the ongoing writers' and actors' strikes in Los Angeles which we estimate to be as much as $1 million in revenues and $500,000 in EBITDA. Of course, we have no special insight into when these strikes might be resolved. Currently, we understand the two sides are not meeting. On the expense side, growth over last year should continue to come down in the second half, including in the third quarter, but the biggest year-over-year growth rate decline in expenses should come in the fourth quarter as a lot of positions at our hotels were filled from September through year-end, getting to more normalized levels that would be able to service the higher occupancies being achieved this year. As Ray indicated, we've made progress in our energy costs, and we continue to successfully reduce property tax assessments and property taxes. The challenge as it relates to property taxes is that the process for achieving reductions involves local and state governments. It could be a very long process, and sometimes litigation is required to achieve a fair assessment. As a result, the timing for settlements or results from litigation are unknown and very difficult to forecast. However, we believe that we'll continue to have further success over time in a number of our markets, particularly in our cities. This will reduce our real estate tax obligations and lower our costs in the future, including true-ups for prior years accrued and paid based on inflated values. The biggest headwind today in cost is coming as a result of increased premiums for our property and casualty insurance with our new policy beginning June 1 this year and running through the end of May next year. The 59% increase in our premium that Ray mentioned represents a $9.3 million annual increase in our cost. Moving to our redevelopments, disruption for this year is mostly behind us. We expect about $1 million of EBITDA impact in Q3 with the majority coming from completing the conversion of Solamar to Margaritaville in downtown San Diego. We just toured the property last week and it's looking fantastic, and we're very excited about a cut over to the Margaritaville brand that is currently slated for August 15. We also toured Hilton Gaslamp, which we visited at the beginning of Comic-Con, and the property was sold out, jammed with customer event activations, and had well-paying advertising wraps covering the exterior walls. The hotel now looks like a brand-new high-end lifestyle-focused Hilton. We should be able to gain significant share at both of these superbly located properties fairly quickly given the overall strength of the Downtown San Diego market. We also toured the Estancia La Jolla Resort, and in fact, had our Board meeting there last week, and it too has all new rooms and event lawns and is already having quick success recovering from its renovation and repositioning. The property team was proud to report that occupancy is on track to hit the upper 80s this month, and the resort should also achieve an all-time record in ADR and total revenues for July. Hats off to the Estancia team for doing such a great job ramping back up so quickly. Viceroy Santa Monica's $19.5 million two-phase redevelopment and Jekyll's approximate $21 million redevelopment were also substantially completed in the second quarter, and we're also very encouraged by the very positive customer reaction to both of these repositionings. With the completion of these projects, we're just about finished with the strategic redevelopment program within the portfolio that came out of the opportunistic acquisition of LaSalle and the several opportunistic resort acquisitions we've made in the last two years. We just have the redevelopment and repositioning of Newport Harbor Island Resort and the second and last phase of the Estancia La Jolla project remaining. Both are expected to commence midway through this year's fourth quarter and be complete in the first half of the second quarter of next year. The impact from these projects on operating performance should be small, with Estancia expected to have some minor impact due to the redevelopment of the lobby, coffee shop, pool, and main ballroom. And we expect no material impact from Newport Harbor, given the property typically has negative EBITDA every month from November through March, and we're likely to close the property during the redevelopment due to the scale and comprehensive nature of the project and the low demand levels during the redevelopment period. As a result, we'd expect our financial results to be clean of any material redevelopment disruptions over the next couple of years, while at the same time, we'd expect to be gaining share in our markets, given the recent repositioning of so many of our properties and the very strong overall physical condition of our portfolio. We'll have the added benefit of customers comparing our high-quality properties, which are in excellent condition, with others in our markets that continue to be starved of capital due to years of a challenging operating environment and today's very difficult debt capital markets. While we currently operate in a fairly uncertain economic environment, particularly in the near future, our fundamentals are very strong. We effectively have a newly redeveloped, repositioned, and remerchandised portfolio that should outperform its competition. We're in markets that still have significant upside recovering from the negative impact from the pandemic and will be in a highly supply-constrained environment for years to come. And we have a management team with tons of experience that is laser-focused on creating value for our shareholders through reallocating capital to the most attractive opportunities. Currently, creating shareholder value involves selling properties at today's market prices and using a significant portion of those proceeds to repurchase our common and preferred shares at very significant discounts to their current or par values. And then using the remaining portion to reduce our debt on a leverage-neutral or better basis. With that, I'd now like to turn the call back to our Operator so we can proceed with the question-and-answer portion of our call. Donna, you may proceed with the Q&A.

Operator, Operator

Today's first question is coming from Dori Kesten of Wells Fargo.

Dori Kesten, Analyst

Can you give us a sense of to what extent strong convention calendars for you have translated into outsized rate growth over time? Just to give us, I don't know, some guide on how we should be thinking of Q4's potential?

Jon Bortz, Chairman and Chief Executive Officer

Yes. I don't have any specific numbers for you right now, but I would point out that our convention rates generally tend to be higher than our average rates. When there is market compression, especially if it’s medium to large, we can usually achieve significant additional premiums on our transient side during that time. For those days, rates can often be 30% to 50% higher than typical. For major conventions, depending on how much of the group block we have versus outside business, it could reach a premium of 50% to 100%. I anticipate this will be a positive factor in Q4. In response to your question, I believe there will be less pressure on average rates in the portfolio in the fourth quarter due to a more favorable convention schedule.

Dori Kesten, Analyst

What is the run rate for a fully renovated portfolio?

Jon Bortz, Chairman and Chief Executive Officer

Run rate in terms of…

Dori Kesten, Analyst

In terms of CapEx.

Jon Bortz, Chairman and Chief Executive Officer

Oh, in terms of CapEx? Probably looking at something more like $50 million to $60 million.

Raymond Martz, Co-President and Chief Financial Officer

And Dori, our CapEx over the next couple of years should be a little bit lower than a typical run rate. Because, as Jon indicated and we detailed in the press release, the amount of capital we've invested in the portfolio has been pretty significant. The normal maintenance CapEx will be lower at least over the near term.

Dori Kesten, Analyst

Okay. And then just on the recent renovations, how should we think of the ramp-up over the next few years from maybe an EBITDA yield perspective?

Jon Bortz, Chairman and Chief Executive Officer

Yes. It really depends on the market and how quickly we can adjust pricing. On average, it takes about three years, or maybe four if the markets are slower, to transition from pre-renovation numbers to achieving an average cash yield of about 10% on the renovation and redevelopment dollars. The pace varies by market; in some cases, we can move faster because we aren't constrained by group rates booked for future years. For instance, Estancia is a good example where we don't handle convention-related business and most group bookings occur within 12 months of arrival, allowing us to increase rates more quickly compared to downtown San Diego, where we often have convention rates locked in for two or three years. We may manage to negotiate adjustments in those markets by approaching the convention authority and clients for increases based on the investments made in the properties, but that isn’t always feasible. Typically, the time frame is three to four years, and the easiest way to conceptualize this is as a fairly even progression over that period.

Operator, Operator

The next question is coming from Smedes Rose of Citi.

Smedes Rose, Analyst

I would like to know more about your thoughts on margins moving forward. It seems that the rate of cost increases is slowing down, but at the same time, RevPAR appears to be flat. However, with increasing occupancy and decreasing rates, it appears this could impact margins negatively. Could you share any rough insights on how this shift might affect margins if occupancy rises and rates fall?

Jon Bortz, Chairman and Chief Executive Officer

Well, I think we've seen what that does on margins as we brought our staffing levels up to full staffing towards the end of last year. And you've seen what that's done to margins over the first couple of quarters here, and we'll see more margin degradation on a year-over-year basis. In Q3, although it ought to be lower than the impact in Q2 because we started restaffing in really September of last year is when we started to have a lot of success at our properties filling those open positions. I think over time, it's obviously that would be a terrible long-term trend if that were to occur. We don't think that's necessarily the case. We think the resorts are really moving back to a more normalized level. And the good news is, as indicated by my numbers that I provided, I think we're stabilizing, we're likely to stabilize here at a far higher level, maybe 60% to 70% higher than where we were in '19 with rates. And the second thing we need to come back, which will help, is volume. Partly why the occupancy flow is better, it doesn't flow as well as rate, but it's going to flow well here as we're fully staffed outside of the marginal cost of adding temporary folks for banquets and catering. I do think as we get towards the fourth quarter, you'll see margin degradation shrink significantly. And as we move into next year, I think our cost basis will more normalize on a year-over-year basis. And we'll see what happens with rates next year. That will depend on the macro environment. And of course, that will depend upon what's going on from an overall demand perspective. But I think we feel good about demand continuing to recover next year, particularly in the urban markets. We think the outbound international demand that's on a sort of revenge travel basis as well as some cruising, we think that reverts back to being some of that being domestic. And that should help next year from a demand perspective. And then we have a lot of international inbound that's not yet fully recovered, and we think that will continue to recover next year. All of that should allow us to grow occupancies next year and volume. With group coming back more right now, our pace for '24 is in good shape. We're up over 11%, almost 12% in group room nights for next year. And it's that volume that we need that will flow well to the bottom line. Because we're not at a normalized pace, we really need that volume to come back to get to the higher levels to support the sort of level of fixed staff that we have at our properties.

Raymond Martz, Co-President and Chief Financial Officer

And Smedes, to add to that, I think there's a tendency to look at the current quarter's margins and assume that's a new run rate. And I think what you have to really carve out is, because of all the renovations we had in the quarter, that created a lot of disruption. Not just on RevPAR, but also in food and beverage. When you look at Solamar, Estancia, and Hilton Gaslamp during the renovations this quarter, you really can't have group meetings when you have the hotel under construction, or it's very difficult. That also causes impact. I wouldn't draw conclusions about for example food and beverage margins in Q2, and is that a new run rate. There is a lot of noise in there, as Jon indicated. As we stabilize and have our normal mix, and we're still about 13% down, occupancy points down to '19, as we gain those demand segments, that will also help margins given the fixed cost nature of a lot of our properties.

Smedes Rose, Analyst

Jon, could you elaborate on the fact that weekday urban business is gradually improving, particularly due to business transient? We've noticed this trend in the second quarter's nationwide numbers and heard similar feedback from other companies. Is there a specific reason for the slower-than-expected recovery in business transient? Do you believe it will simply take more time, or is it possible that some of that business has diminished? I'd appreciate your insights on this.

Jon Bortz, Chairman and Chief Executive Officer

No, I think it's probably all of the above. My comment about the slowdown in the rate of business recovery relates more to the industry than to us. Our urban market weekday occupancy was up 5.2% compared to last year, and we have seen an increase of over 5 points in occupancy, equating to a 7.6% growth in percentage terms. Some of the cities we operate in have been slower to recover business travel, but it is coming back. We are still uncertain about its ultimate trajectory due to various influencing factors. Companies are still adjusting their in-office requirements, with no standardization from three to five days in the office. We’ve noted that some companies, especially on the West Coast, that previously had no office requirement are now leasing space and requiring employees to return at least three days a week. It is still too early to determine the final outcome. People are just beginning to feel a sense of normalcy in travel again. While masks can still be seen occasionally, generally speaking, people are moving past the pandemic, which contributes to a return to normal travel patterns. We may have lost some elements of business travel permanently, potentially replaced by hybrid travel or "bleisure." One noticeable trend is that businesses are slower to book around holidays, likely because employees are taking longer holidays and have more flexibility since they haven't returned to the office fully. The overall outcome remains uncertain, but historically, business travel tends to align with GDP, and we believe this connection will eventually be re-established.

Operator, Operator

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

William Crow, Analyst

Jon, one for you, and then I'll turn to Ray for a second. But on the cap rates that you used in your NAV calculation, I was intrigued by the cap rates in the 2s I think in San Francisco and then what I thought were low cap rates in Portland and Washington, D.C. And I get it, there's not much NOI, and I also remember some, to put in rates terms, what, 45 or so conference calls ago when you were buying in San Francisco, the low 2s. My question I guess is, if you didn't have a desire to pay down debt, if you didn't have a desire to buy back stock, would you be buying assets at a 2 cap rate in San Francisco today?

Jon Bortz, Chairman and Chief Executive Officer

A couple of things. The cap rates reflect a more analytical decision made by buyers regarding their property purchases and desired total returns. We assess various factors such as five-year cash flows, five-year IRRs, price per key, and comparisons to replacement costs when underwriting. We do not use cap rates to make market decisions, nor do we believe buyers do. They focus on overall yields and their growth over time. Unlike some other property types, cap rates do not determine value. In response to your question about buying in certain markets, I think it has become more challenging in public markets, as shareholders have become more short-term oriented than when we launched Pebblebrook. They seem less inclined to consider long-term value creation in the asset portfolio than they were 13 years ago. This makes it harder for a public company like ours to make purchases in markets lacking yield. Therefore, I doubt we would be buying there as a company. Personally, if I had the opportunity and a long-term investment perspective, I believe it would be a great time to buy in these markets, which are incredibly cheap. The discounts to replacement costs, an indicator of when supply is justified, are considerably larger than they were back in 2010 and 2011 when we began purchasing. If someone has the right time horizon and can manage the burden of expensive debt in the short term with low yields, now would be a favorable buying opportunity. However, for us as a public company, it poses more challenges.

William Crow, Analyst

Yes. I appreciate that insight, Jon. Two quickies, I hope. Ray, I'd like to get your thoughts on BI. Third quarter was higher than we would have guessed from, in your guidance at least, from a seasonal perspective. And then so I'm wondering what the fourth quarter looks like, if you can give us an idea, and then what would be kind of thought to be left over for next year? And then the second quick question, hopefully, is, you're wrapping up this massive strategic repositioning program, but you are kind of seven years, almost seven years into it. I'm wondering if we're going to start to see a new cycle begin? Or do we actually have an extended period of time with no renovation disruptions?

Raymond Martz, Co-President and Chief Financial Officer

Well, first, on the BI, that's a result of the progress we make with our insurance carriers. We submit what we believe the hotel would have done without any sort of a storm, and we have to negotiate with our carriers. That's a result of that. It's hard to really say the exact number we'll get in future quarters here. In the second quarter we…

Jon Bortz, Chairman and Chief Executive Officer

It also depends upon how much we lost. I mean we've been losing money at LaPlaya while it's open, and we lost more money in the quarter as an example than we thought.

Raymond Martz, Co-President and Chief Financial Officer

Yes. It's a handful of factors that we go through. Ultimately, for example, in the second quarter, we were able to negotiate and agree to a higher amount of $14 million versus the $10 million we were expecting. That's not to think we're going to do the same in the third quarter, but we'll see our progress there. Fourth quarter, I would think it would be a lower number because these tend to be a quarter in arrears. What we booked for the second quarter here, $14 million, that's a result of the first quarter and so forth. And typically, at LaPlaya, it's seasonally weaker in the third quarter, the summer months. Down in Southern Florida, August, September tends to be pretty hot down there with hurricane risk, so that will be less BI number there. I wouldn't assume much for the fourth quarter. If it is, it's in the single millions kind of range-ish area. And then as we think about 2024, that will depend on the ramp-up of LaPlaya. As we noted, we think the hotel, the resort will be substantially completed by the end of this year. There will be a ramp-up component. It doesn't get all the way back to prior levels right when we start in the quarter. There may be some trailing BI we'll be able to get as a result of that. That will be less than we expected. We expected this year LaPlaya to be generating in the neighborhood of about $35 million of EBITDA, and that's the number we're targeting on the BI side. And how it trails off in 2024, it depends on the recovery and bounce back of LaPlaya. And then second question on the renovation area for the seven-year cycle or whatever that is, we look at each asset asset-by-asset with our asset management team and look at the capital there. Fortunately, when we look back at the renovations and redevelopments we do, we tend to do a very good job. These are not just cursory sort of refreshes in the guestrooms. These are really substantial renovations, good quality FF&E goods and those items that tend to do last longer, and with forward-thinking design. I wouldn't necessarily think that if a property wasn't renovated in seven years, we'd have to go through another major redevelopment project here. As Jon indicated, we do think for the next couple of years here, we're going to have very little any sort of disruption from any renovation activity. Here and there, we may do a refresh, but not really many redevelopment projects to be worried about as we think about '24 and beyond.

Jon Bortz, Chairman and Chief Executive Officer

And Bill, everything we acquire for our hotels is custom made. We don't purchase from IKEA or typical low-cost manufacturers. Additionally, we do not allow our properties to go without updates for extended periods. We are always refreshing; recovering sofas, replacing them, and buying new pillows. However, these updates do not have a significant effect. For instance, we are undertaking a meeting space refresh at the W Boston this summer. This will have minimal impact on the property's performance and is mainly focused on soft goods. The disruption is brief. In our portfolio, we are not undertaking renovations with these projects; rather, we are often rebuilding the interiors and sometimes addressing behind-the-wall work as well. Our ongoing maintenance efforts reflect our commitment to regular capital maintenance.

Operator, Operator

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

Duane Pfennigwerth, Analyst

Just to follow up on Bill's question on BI, when you think about kind of Naples and LaPlaya in its entirety and kind of the timing of BI that may fall into 2024 and the recovery of that property, how should we think about growth, EBITDA growth, inclusive of BI, inclusive of operations, kind of '24 over '23?

Jon Bortz, Chairman and Chief Executive Officer

Yes. Well, that's a nice crystal ball there. Fortunately, we went through this before with other properties and the rebuild. We have seen that Naples tends to rebound somewhat quicker than some other markets like say Key West as an example. We expect LaPlaya to bounce back quicker. But there are a lot of factors. I think net-net, I think maybe the more conservative way to think is that the overall EBITDA contributed by LaPlaya inclusive of BI would be less in '24 than it is in '23 because we're getting the full-fledged number, and there will be a ramp-up area there. But as we get forward and we get closer to the completion there and ultimately resolving with our insurance carriers what we're able to negotiate here, we'll be able to provide better color on that as we start the year. But there certainly will be a ramp up, and there's always unintended consequences. You start up a property, your chiller doesn't work quite that you thought would. There's a lot of things that will be these tail items that we'll be dealing with much like we did when we were dealing with Ian five years ago.

Duane Pfennigwerth, Analyst

And then just a distribution question. Can you talk a little bit about how you build awareness for the upgrades and the renovated hotels? Particularly for your independent hotels, how does this education process happen for customers? Any new thoughts on distribution for your operators?

Jon Bortz, Chairman and Chief Executive Officer

Sure. It's a comprehensive effort where our asset managers collaborate with the operating team and corporate marketing staff to create a plan for reintroducing a redeveloped property. This can involve renaming, reflagging, or simply upgrading the existing name. The strategy includes marketing, public relations, direct sales efforts, and utilizing digital media. We often offer promotions to encourage trials of the new product and conduct tours; we've already hosted numerous tours for a group at Margaritaville in Downtown San Diego. We share high-quality renderings and engage in extensive marketing efforts. While we don't typically favor large opening parties, we prefer multiple smaller events that bring in salespeople from various sectors. Our spending on these initiatives is significant, often reaching hundreds of thousands of dollars, and in the case of major projects like LaPlaya, we may invest even more to reignite interest after a property closure. This collaborative plan with our operators has a history of success.

Operator, Operator

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

Floris Gerbrand van Dijkum, Analyst

I have two questions. Could you discuss the balance sheet a bit, Ray? You are building a $175 million net cash cushion. You mentioned that there are no near-term maturities, but your longer-term debt is relatively short, with the weighted average maturity just over two years. Do you anticipate a comprehensive refinancing of that? Additionally, could you share your thoughts on the current borrowing costs? Investors were concerned when Blackstone refinanced and took on a lot of debt for Hotel Dell, borrowing at around 9.5%. Recently, Piedmont, an office company, issued a five-year note at 9.25%. Where do you think you would be able to secure unsecured borrowings today?

Raymond Martz, Co-President and Chief Financial Officer

Sure. Well, a couple of things. One, as it relates to our balance sheet, you're right, we have over $180 million of cash on our balance sheet. And fortunately, we have very minimal maturities this year. We have some term loans maturing in '24. Actually, our weighted average maturity is actually closer to 3 years not 2. But as we think about it, you should assume that the additional cash that we're building up here will be using to address some of these '24 maturities as well as having conversations with our bank groups with some of the term loans, with paying down some and perhaps maybe extending a portion of that out. It's a part of the overall plan that we have been thinking about actively, and we do it in concert with how we deploy our capital for stock buybacks and what we hold back for debt. And also note, we have ongoing conversations with all of our banks all the time. These are all done in a very good manner, and these are relationships that we've had for a long time. You should expect that we are planning and addressing those actively as we think about 2024. As it relates to new sort of debt, so first of all, right now, our spreads on our line is about 220. We have a completely unused credit facility that we can borrow at 220 over that's relatively low. New debt, if we originate a property sort of loan, if that's your question, somewhere it looks like the markets right now are somewhere SOFR plus 3.75 to 4.50 is probably the range of a lot of debt we're hearing. It obviously depends a lot on the market. If you're in a kind of resort sort of location or asset generating good cash flow, the spreads might be lower. If you're in an asset that's a little more, the market is more challenged, that spread probably could be wider. I can't speak to what Blackstone did or didn't, but something that's recently 5 to 4.25, even 4.50 over, is probably a like level for new borrowings. We'll look at that as we address overall our debt maturities, and we have a property loan maturing next May at Margaritaville, that asset is highly financeable and will garner a lot of interest. We'll look at our options there. Vis-a-vis as well, what's happening with our balance sheet and our growing cash reserves.

Floris Gerbrand van Dijkum, Analyst

Could you provide insights into the San Diego market, particularly regarding the recent renovations? I understand that Margaritaville is still in progress. What is your outlook for this market? I also note that the peak EBITDA for those assets was approximately $37 million, and you're currently tracking at $29 million. Do you believe this market has the potential to achieve $50 million in EBITDA? Additionally, could you discuss the upcoming convention calendar?

Jon Bortz, Chairman and Chief Executive Officer

Sure. I would say San Diego is currently the strongest market in our portfolio. By August, all four of our downtown properties will have undergone significant redevelopments. The Westin's renovation cost $18 million, and the Embassy Suites has a similar expenditure for a smaller property. These projects, totaling in the mid-20s millions, have all been repositioned to a higher market tier. Looking at our second quarter numbers for San Diego, we should remember that they include two downtown properties and Estancia, all of which were significantly affected during the quarter. Interestingly, it was a strong quarter for the non-renovated properties. The convention calendar looks promising for the second half of the year, particularly strong in the fourth quarter, and is projected to hit an all-time high in 2024 based on current bookings. It will be substantial, even when compared to this year, which was nearly an all-time record. There is no new supply in the market, and the weather remains favorable. If temperatures rise in other areas, it will likely enhance leisure travel to San Diego. It’s an extremely attractive market, which is why we’ve made such a significant investment there. We believe there’s substantial potential for EBITDA growth in the coming years.

Raymond Martz, Co-President and Chief Financial Officer

And Floris, just to put that perspective on the convention center side, for 2023 the market is projected to generate about 800,000 convention center room nights. In '24, that increases to 930,000. And even in '25, it's another strong year, it's 850,000, which will be one of the best years. These are as good as the previous best year back in 2016. Certainly, the next two years in San Diego look very good. And why we're encouraged and why we're glad we invested the capital in those assets in San Diego, which should benefit from the strength in that market.

Jon Bortz, Chairman and Chief Executive Officer

The city and the market faced some challenges when the football team relocated to Los Angeles. However, since then, they have made significant progress, recently being awarded an MLS franchise for soccer. The women’s soccer team has set attendance records compared to other teams nationwide. They are also drawing a variety of concerts and sporting events to the area. Additionally, the life sciences sector is growing rapidly, with San Diego being a leading hub in that field. Notably, Downtown has a unique opportunity; it has not experienced much corporate activity apart from a few defense contractors and the Navy, as well as potential Homeland Security presence due to its proximity to the border. There is a considerable amount of construction downtown focused on life science and lab space, and if they are successful in leasing that space, it could significantly boost demand in the area. It's an exciting market, and I appreciate your inquiry about it.

Floris Gerbrand van Dijkum, Analyst

If I could follow up briefly, how will your repositioned Margaritaville Gaslamp cater to the conventions? It's not a typical convention hotel. Do you believe it will benefit from the increased demand? Or do you think groups will actually choose to stay at that hotel?

Jon Bortz, Chairman and Chief Executive Officer

We'll get group into that hotel. We have some great event space that's been dramatically improved from what it was as the Solamar. And as you know, Margaritaville is a strong attraction for that lifestyle vibe that people love, whether they're convention goers or they're leisure customers. We think it will benefit from both segments in a material way.

Operator, Operator

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

Aryeh Klein, Analyst

Maybe just following up on San Francisco market, maybe a little bit less exciting than San Diego. You took your cap rate assumptions higher in the latest NAV, still quite a bit of exposure to the market, and some of your peers have largely thrown in the towel there. And it looks like the conference calendar next year is more challenged. Where do you think the market goes from here? And it seems like you do have long-term optimism, what kind of underlines that?

Jon Bortz, Chairman and Chief Executive Officer

Yes, we could discuss the various underlying demand and economic factors in detail, but I don't want to take up too much time. San Francisco and the Bay Area have one of the strongest economic foundations in the country, housing one of the largest and most robust life sciences markets as well as being the biggest venture capital hub. The rate of business creation in San Francisco surpasses that of almost the entire country. It's the epicenter of AI, which has significant growth potential that many are recognizing. We've already witnessed some of this growth, as companies are raising capital, hiring, and requiring office space. Additionally, we're seeing businesses relocating from outside to San Francisco to benefit from lower office and sublease rates. The city has a unique educational and technology ecosystem, coupled with a culture that embraces the idea of failing and starting anew, all playing a vital role. On a political front, there has been a noticeable shift toward the center, acknowledging the need to tackle fundamental issues such as safety and life sciences. I believe media narratives are about nine months behind the actual situation. In fact, San Francisco feels safer and cleaner than it did in 2019, and I expect these improvements to continue. We maintain our long-term belief in San Francisco, even though we have reduced our concentration there after it reached levels we considered too high.

Aryeh Klein, Analyst

Thanks. And then maybe just reflecting on the hold music, can you give us some color on what kind of benefit you saw from the Swift effect during the quarter and any way you can quantify the impact?

Jon Bortz, Chairman and Chief Executive Officer

It's notable that in Chicago, the weekend she was there coincided with the city's highest RevPAR day ever. This wasn't an isolated case; we also experienced one of our strongest weekends since before the pandemic in San Francisco when the Grateful Dead held their supposed final concerts. Additionally, in Los Angeles, Taylor Swift's six shows at SoFi Stadium in early August have already generated a significant increase in business for us, supported by various promotions tied to her performances. This type of demand is quite impactful in these markets. I recall a few years back when Garth Brooks sold out five consecutive shows in San Diego, leading us to sell out our hotels for those nights at premium prices. Big-name entertainers truly drive demand in these regions.

Raymond Martz, Co-President and Chief Financial Officer

Aryeh, when you think about Taylor Swift, just a visionary, she's a rolling Super Bowl. She goes in and she helps the market across. That's partly why musically it was a nod to her, and it's been great, so a big needle mover to us for sure.

Operator, Operator

The next question is coming from Mike Bellisario of Baird.

Michael Bellisario, Analyst

First question, I wanted to come back to the margin topic from earlier. Kind of big picture, high level, is there a sort of a normalized run rate for expenses that you're thinking about or that we should be thinking about, whether it's for your markets, your portfolio as we look out to '24 and '25?

Jon Bortz, Chairman and Chief Executive Officer

I wish it was that easy, Mike, but we're not in a normalized operating environment yet, and we're getting closer to it. I believe we're at normalized staffing levels, but we still need additional staffing related to the expected marginal occupancy recovery. However, I don't think that leads to any kind of stabilized margins at this point. There's a significant volume we need to recover that will improve things once we achieve that volume, whether it pertains to room bookings or food and beverage, especially from group recoveries. Unfortunately, we can't provide what you're looking for right now.

Raymond Martz, Co-President and Chief Financial Officer

But Mike, in general, we touched on this in our call, we are seeing more moderating expenses. The wage rates are, the growth rates are coming down versus where they were last year. So that's actually less of a headwind going forward. And then other, the supply cost with food and beverage, those input costs are also moderating versus where they were last year. Those should be improving factors in the margins there. Now headwinds that we'll have for the next 12 months are property taxes that we talked about, that increase is $9.3 million a year, that's 50 basis points or so of margins. Hopefully, that stabilizes at some point in time. And energy has also been somewhat of a headwind that's moderating. There's different inputs. You have to look at labor differently than you have to look at some of these other costs like energy and property insurance. And what should be a positive deflationary factor is some of the property tax reductions that we're successful on achieving and hopefully we'll have more to report on in the coming quarters.

Jon Bortz, Chairman and Chief Executive Officer

Mike, I would suggest, and we've always recommended this, that we do not forecast margins. Margins come from our forecasts of revenues and expenses. It's simpler to predict that expenses will grow by 3%, 4%, or 5% year-over-year based on volume levels than to forecast margins for each category. When building your models, we recommend using an expense growth rate and a revenue growth rate instead of starting with margins.

Michael Bellisario, Analyst

Thanks for that, figured I'd ask. And then just switching gears quickly, just on the transaction front, maybe over the last 90 days, what's changed? And are you seeing any buyer interest get better or worse in any particular markets where you're looking to sell hotels?

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

Yes, Mike, I don't think much has changed. I mean, I think you read about it in the press in terms of all property types with transaction volume being down, largely as a result of the availability of the debt or lower proceeds, high-cost debt. I would say that it remains challenging. I would say that certainly the deals that are getting done, it's high cash flowing deals that are either resorts or select service. I would say maybe the one pivot that we're seeing, and I think Jon mentioned it earlier, is that in some of these longer to recover markets, people are becoming a little more yield-focused. It's impacting in terms of their potential pricing because their pro forma and their underwriting is taking that much longer to get to peak, which is obviously impacting pricing. But I would say that there still remains a lot of investor interest. I think they're just trying to pick what is their level of conviction to move into a market.

Operator, Operator

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

Gregory Miller, Analyst

I'd also like to ask about 2024 for Southern Florida for the upcoming winter 2024 season and perhaps reflecting your commentary on revenge leisure travel normalizing. How are room rates trending next winter in markets like Key West and Hollywood Beach relative to 1Q 2023? How impactful do you expect your winter 2024 rates to be given a theoretical normalization of revenge leisure travel?

Jon Bortz, Chairman and Chief Executive Officer

Thank you for the question. It's a challenging one. I don't have the first quarter figures available regarding the Florida market. Generally, there isn't much business booked this far in advance for those locations. However, I believe there’s potential for normalization, and we still need to address demand and occupancy recovery in those areas, especially in Key West, which has experienced fluctuations. Currently, our occupancy rates are lower. But looking ahead to the latter half of this year, we seem to be approaching more normalized demand compared to 2019. Unfortunately, I don’t have specific information to share at this moment. We can certainly review the data further in a separate discussion to understand the rates better, but I advise against drawing conclusions just yet due to the limited business currently scheduled.

Raymond Martz, Co-President and Chief Financial Officer

Yes. And it would also be inaccurate to read too much into if we have 1,000 more room nights booked this time versus last time last year. It's not as much as what happens really closer in because we're outside of the booking window really.

Operator, Operator

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

Jon Bortz, Chairman and Chief Executive Officer

Yes. It seems like 2024 is shaping up to be a very promising year for hotel-related sectors as a whole, thanks to improving economic conditions, pent-up travel demand, and a steady convention calendar across many of our key markets, including San Diego and Washington, D.C. We're closely monitoring the recovery trajectory of domestic and international travel trends and remain optimistic about our market positioning moving into 2024.

Operator, Operator

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