Q4 2020 Pebblebrook Hotel Trust Earnings Call

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[music] and no.

Greetings and welcome to the Pebble of room Hotel Trust fourth quarter and full year.

2020 earnings call at.

At this time all participants are in a listen only mode of question and answer session will follow the formal presentation at.

If any at once you require operator assistance during the conference. Please press star zero on your telephone keypad at.

As a reminder of this conference is being recorded I would now like to turn the call over to your host Mr. Raymond Martz, Chief Financial Officer for Pebble broke Hotel Trust. Thank you you may begin.

Thank you Melissa and good morning, everyone welcome to our fourth quarter 2020 earnings call and webcast. Joining me today is Jon Bortz, our chairman and Chief Executive Officer, but before we started this morning, we wanted to acknowledge how sad we were to here.

The passing of Arnie Sorenson last week, he was an industry leader of true tightened, but more importantly of great person with high integrity, who we all perspective.

His passion for hospitality for his associates and guests were inspire and do all of US our thoughts go out to <unk> family and our operating partners at Marriott.

Hotel industry loss and icon and he will be missed.

Okay. So a quick remind today that many of our comments today are considered forward looking statements under federal Securities laws. These statements are subject to numerous risks and uncertainties as described on our 10-K for 2020, which we filed last night, our other SEC filings and future results could differ materially from those implied by our comments forward looking statements that we make today are effective.

Only as of today February 24th 2021, and we undertake no duty to update them later, our SEC reports and our earnings release contain reconciliations of the non-GAAP financial measures, we use which are available on our website at <unk> Dot com.

While 2020 was at unprecedented challenging year for the hotel industry and for a couple of Brook, we took many decisive actions to mitigate the pandemic impact on our shareholders and stakeholders. These steps will allow us to rebound along with the recovery and take advantage of the significant opportunities. We expect will develop in the months and years.

<unk> to come.

And mid March our decision to immediately suspend operations and most of our hotels one of the pandemic first it allowed us to reduce our cash burn and preserve precious liquidity when it was unclear how long this pandemic with last.

This also facilitated and protection and safety of our hotel level of employees and.

Yes.

Yes.

At the corporate level, we slashed expenses across the board, including a reduction of salary for all type of rock employees, including Jon who voluntarily gave up of salary from April through the end of the year.

All but eliminated our common dividend preserving and another $150 million of liquidity and reduce our capital expenditures by $15 million.

We also completed approximately $400 million of property sales at healthy evaluations and this difficult environment.

<unk> $331 million pre pandemic.

And we raised $763 million of capital to of convertible notes of <unk>.

First of its kind ever for lodging Reits.

Which increased our liquidity by over 300 million, while also paying down $377 million of near term debt maturities.

Our lender group also strongly supported US along the way agreed to waive our financial covenants during the pandemic, while also extending out $264 million of debt maturities to late 2022.

These collective actions and positioned us and a stronger position today versus one of the pandemic started.

Today, we have approximately $770 million of liquidity with no loans maturing until 2022.

We reduced our monthly cash burn from a range of $25 million to $30 million and Mei to roughly $20 million during the fourth quarter.

We expect this monthly cash burn to continue to decline and the second quarter as we enter spring and travel and hotel demand and recover.

This of course assumes of continuing progress on vaccinations, and further reductions and cases and hospitalizations.

We now have 38 hotels open which is down one property from our peak in late November but up one of the last two weeks.

And we expect to reopen additional hotel starting in March as demand continues to recover.

By the end of the second quarter, we would expect to have the vast majority of our portfolio of substantially open if not all of it.

Of course of this depends on the progress of vaccinations, and Covid cases, and cities reducing travel restrictions.

But we are all encouraged with of directional trends on the horizon, which are all pointing up.

Turning briefly to our fourth quarter results same property total revenue of $74 million for 79, 1% below the prior year period with hotel level of expenses of $93 9 million, which were reduced by 62, 7% from the prior year fourth quarter and 75% before of fixed expenses like property taxes and.

And insurance.

Our total property level expense reduction and was 79% of the revenue decline and 89% before of fixed expenses.

This highlights the tireless effort of our operating at and asset management teams to reduce expenses significantly given the unprecedented operating environment.

Our hotel teams were aggressive and creative and shrinking operating expenses at both the suspended hotels and open hotels.

On a same property revpar basis versus the comparable period in 2019 October was down 78% and both November and December were down 80%.

Preliminary same property Revpar results from the January were down 83%, primarily due to increased government restrictions and our urban markets and we expect February to be less bad and the first quarter to be down 80% to 81% of the first quarter 2019, just slightly worse and the fourth quarter.

Total property generated $31 7 million of revenue and October with 37 hotels opened $23 6 million in November with 39 hotels open and.

And at $18 8 million in December with 37 hotels open.

Preliminary results and January show, a total of $19 4 million of revenues also with 37 hotels open and February looks to be up meaningfully from January due to a solid presence day weekend and acceleration and demand that we've seen as a result of progress on the health side and loosening of restrictions began to occur and pretty much all cities and.

States.

For the fourth quarter same property hotel EBITDA was negative $19 9 million compared with a positive of $101 4 million from the prior year period.

However, and marks a significant improvement from the second quarter of 2020, when EBITDA was negative $40 8 million, while about and our lines of third quarter 2020, when it was negative $19 3 million.

By month same property hotel EBITDA was negative $2 8 million and October negative $8 2 million in November and negative $9 million in December.

We estimate January same property hotel EBITDA to be negative of 11 4 million, while February should improve 2 million or more compared with January.

Are your resorts have been consistent bright spot and a portfolio of weather summer fall or winter day generated a positive $7 $3 million of hotel EBITDA and the quarter. This resulted from an occupancy of 40% and and average daily rate of $302, which is more than $38 and at 14 eight.

Percent increase over the prior year period.

Results were negatively impacted by the tightening of the travel restrictions and California impacting of four of our resorts and November and December.

As a reminder, leisure transient portfolio wide has historically accounted for about 40% of our demand with corporate transient at 35% and group at 25%.

Our adjusted EBITDA was negative $27 $4 million and fourth quarter compared with a positive of $100 1 million and the prior year period.

Adjusted <unk> per share declined to a negative <unk> <unk> per share compared to a positive <unk> 54 per share and the prior year period.

Shifting to our capital improvements during 2020, we invested $125 million into our portfolio of completing major renovations at a number of our hotels and resorts.

'twenty 'twenty, one, we anticipate investing $70 million to $75 million and the portfolio, which Jon will speak about later.

Shifting to upcoming asset dispositions on February three we announced that we executed a contract to sell of the Sir Francis Drake Hotel in San Francisco.

We expect the sales to generate approximately $157 6 million of proceeds when it closes and the second quarter, we decided to sell at hotel because we have sold a significant number of assets outside of San Francisco and this allows us to reduce our otherwise increased concentration of this market while.

We can reallocate that capital elsewhere, and I'm coming opportunities and absorb the sizable tax of a game that <unk> sales generating with operating losses, and 2020 and 2021.

As a reminder, when we acquired this hotel and June 2010 for 90 million at was our second type of work investment and we bought it at a three cap and.

This hotel has been very successful for us at great investment for us and assuming the sale closes early in this next quarter, you'll have delivered at a 12% Unlevered IRR and are almost 11 year ownership period.

We expect the sale of generate a $60 million to $65 million taxable gain which will be absorbed by operating losses to extent, we decided not to utilize at 10 31 exchange with the proceeds and to a new investment later this year.

Turning to our balance sheet and liquidity, we've been very active we successfully completed at $500 million six year of convertible notes offering but at 175% coupon and mid December. These notes can be can be converted to common equity at $25 47 per share, which is up 35% from the common share price at the time.

We also purchase of call spread up 75% to $33 and <unk> per share to offset dilution from the expected future notes conversion and <unk>.

In February with our notes trading at a premium we decided to reopen the offering and raised an additional $263 8 million of proceeds on the same terms as our initial offering in December when we sold the notes at a five 5% premium to face value.

Proceeds from these offerings were used to pay off $377 million of near term debt maturities, while also increasing our liquidity by $310 million.

The combined economic interest rate on the $750 million of convertible notes is just under two 9% we view this as very favorable.

And with fewer restrictions and other capital alternatives and a market. The notes are unsecured and there are no covenants.

And we fully expect our common shares of trade above the $25 47 conversion price leading up to the conversion date and and just under six years, which will allow us to settle these notes from a payable with equity rather than cash so effectively we view this as a forward equity raise at a significant premium to our current share price with dilution protection up to at $33 and <unk>.

And last week, we also announced that we finalize our amendment to our debt agreements with our lending partners, we extended our financial Covenant waiver period out of 2022 with salt and covenants into 2023.

We also gain increased flexibility to make up to $500 million of new acquisitions and and.

And reinvest up to $500 million and the new.

<unk> from the sales of current assets, including the Drake the previously sold Union station, Nashville, and and monetize and tenant leases.

We also negotiated ability to retain a larger portion of any new debt equity or preferred equity raises which will further strengthen our liquidity.

As part of this extension two of our banks agreed to extend on November 2021, and debt maturities of $21 million to November 2022, which allows us to preserve this liquidity until next year.

And I'll have no meaningful debt maturities until late 2022.

So overall, we're very proud of the execution of our entire team and very appreciative of the collaboration and support of our hotel operating partners and of our banks and with that I would now like to call turn the call over to Jon Jon.

Thanks Ray.

And I thought I'd focus on what we're currently seeing and our business and how we think this year and 2022 are likely to play out now that it seems we have perhaps of more predictable path.

It's a path with quite a bit of uncertainty.

None of us has ever been through of pandemic so experience aside.

The big variables are of course, the progress we make against the virus.

And how governments individuals and businesses behave as the health issues and received.

And certainly very encouraged by the reduction and daily cases, hospitalizations and deaths.

Which are likely a result of the success of mitigation efforts across the country.

The increasing pace of vaccinations and.

And the significant number of people, who have already had the virus, presumably generating a level of immunity.

Like last year this year's recovery starts with the leisure traveler, which.

Which is the primary demand segment currently traveling.

And the segment that is likely to increase as the year progresses.

As people get vaccinated as government restrictions ease.

And as more and more people feel safe and comfortable traveling.

In fact, we've already seen we've already been seeing the Liza recovery pick up since the beginning of the year when it was at its low point.

Not only as of occupancy been picking up in February but overall bookings have consistently increased each week. So far this year.

For us demand has consistently increased and all of our markets as government restrictions have begun to EPS and more individuals feel safe and comfortable traveling.

For example revenue per day in February is averaging about 55% higher than in <unk>.

And I'm sorry revenue per day in February is averaging about 55% higher than in January and based upon our estimate for the month given what we've already achieved so far.

While the nominal numbers are still very low and the improvement and transient demand and occupancy are noticeable.

Overall, our total trends and bookings of increased week over week, just about every week this year.

We're also encouraged that we're starting to see forward tranche and bookings pickup as well as the leisure customer starts to book vacations and laser trips further out than they have been doing so far during the pandemic.

For example, our two resorts and key west and our luxury resort and Naples and.

Seen such strong bookings and the last month or so that all three are now ahead and transient bookings for the rest of the year and two of them are now ahead for the entire year.

As restrictions and other parts of the country recede, assuming progress against the virus continues.

We would expect our other markets and properties to see similar activity and improvement with leisure travel recovering and so much pent up demand from leisure customers.

This will particularly be the case at our four west coast drive to resorts, and California, our resort and the Pacific Northwest and our West coast cities that attract significant leisure travel, especially San Diego and Los Angeles.

We also believe as we enter the spring and the weather warms, our leisure focused properties and the rest of our cities, including Seattle, Portland, San Francisco Boston.

Philadelphia, and Chicago will experience significant demand from leisure travelers as they have already begun to do.

Yes.

When we think about the rest of the year, we expect of leisure customer to remain domestic and many of them will remain local or regional.

We expect rooms at our resorts to be in short supply during prime vacation season.

And with rates and general above 2019 rates.

Our California resorts achieved higher transient rates last summer versus 2019, and our Florida properties are all running ahead of 2019 transient rates with La Playa enables as an example, achieving average transient rate $100 to $200 higher.

And in 2019.

Some of the significant improvement at La Playa represents the benefits from the dramatic renovation, we did at the property a couple of years ago.

But some of it is due to the pricing power of high quality resort properties.

Average rates are also benefiting from leisure customers purchasing or buying up to suites and higher price view rooms, and more often than in the past.

Many of our leisure focused urban hotels are benefiting from this trend as well.

During September and October we saw the beginnings of a modest recovery in business travel.

However, with the rise of the virus's spread increased government restrictions and the arrival of winter.

Transient business travel slowed.

We've seen a little bit of business travel and a few areas TV and movie production and La <unk>.

Consultants and it related project travelers and various markets, including Boston.

And some health care and government travel as well, but at all remains very modest.

We don't expect to see any significant pick up in business transient travel until the second half of the year.

We think it will be led by travel from small and medium sized businesses, especially private businesses.

We believe major corporate demand will be the last of business traffic trends and to pick up and.

And we believe it will be heavily influenced by the virus first but then dependent upon when those corporations returned to the office.

We have hosted some group at our properties, but its primarily related to social events like weddings sports teams and media related to sporting events and government.

And the fourth quarter group accounted for 4% of our total room revenues.

And this 4% does not include the University student business at both the W. Boston and Westin Copley.

Bookings and re bookings of weddings into the second half of 2021, and 2022 have been very strong and we're seeing re bookings of group into the second half of 2021, and all of 2022 as well.

We're very encouraged about how well group of shaping up for 2022 at this point.

So yes, we've begun to look at our group pace again.

While 2022 pace is significantly behind same time last year for 2021.

In fact, that's down 21% and room Nights Act.

Activity has begun to pick up as meeting planners become more confident there is more clarity and optimism on success against the virus.

And a lot of business from 2020, and 2021 is being rebooked into 2022.

Equally encouraging is that rate is holding as well our group rate for 2022 is currently ahead by one 4% versus pre pandemic same time last year for 2021 and.

And for 2022, it's ahead by over 5% versus same time 2018 for 2019.

Which was our last normal pre pandemic year.

When we look at 2021 were definitely much more cautious about group.

And trying to forecast when businesses will move forward and meet in person again.

Our group pace for the second half of 2021 is down around 32%.

With ADR slightly positive which of course is very encouraging.

Group rates are generally held up or been rolled forward from previous bookings.

And some of even increased if they've been move from a seasonally lower rate and time of year two of seasonally stronger time of year.

We certainly hope group will begin to pick up as the year moves along and progress continues against the virus.

However, we are concerned that businesses will be more cautious about meeting this year, particularly and the third quarter or before labor day.

And we continue to expect that most major city wides and large groups scheduled for this year will either be canceled or postponed as we move closer to the book to meeting dates.

And if they are held the arrive with substantially lower attendance.

And if of course, we make more rapid and exhaustive progress against the virus. This sentiment can change rapidly and we believe that's why many groups are waiting until closer to their dates before making their decisions.

Strategically we will be pursuing leisure very aggressively for this year with the idea that leisure travel is likely to be very strong later this year and much of this group thats on the books will probably not materialize.

And if it does materialize, we will be and a great position to take advantage of it.

In addition, we've been bringing sales resources back this year at our properties as leads and bookings have begun to pick up. So we can take advantage of the upcoming recovery and group business whenever it begins.

We're focused strategically on 2022.

Being a very strong recovery year overall.

And for group being strong as well due to what we believe is a great deal of pent up demand and also all of the meetings being rebooked from 2020 and 2021.

This means we do not expect significant rate discounting in 2022.

And again this is with the obvious caveat that we get.

And get to relatively normal behavior by the end of this year and.

And it remains relatively normal next year.

We believe we're in a great position to take advantage of this recovery and 2022.

Our hotels and resorts are in great condition we've.

We have completed major renovations and transformations at well more than half of our properties over just the last few years.

28 of our properties and fact and they've significantly and they have significant share to continue to be gained as the recovery takes hold and we compete against many properties that will have been and will continue to be starved of capital.

In 2020 alone, we completed Redevelopments and major renovations at Westin Gaslamp quarter San Diego.

Embassy suite, San Diego downtown San.

San Diego Mission Bay resort and its conversion from of Hilton.

We're parks suite hotel and West Hollywood.

Viceroy, Santa Monica, Chaminade resort and Santa Cruz <unk>.

<unk> key West Harbor resort.

Viceroy, Washington D C and its conversion from Kimpton Mason and rock.

And hotel Zena, Washington, DC, and unofficial Z collection hotel and its conversion from Kimpton Donovan Hotel.

We also completed a number of additional upgrades and the portfolio in 2020.

Including a brand new lobby at Westin Copley.

Renovated public areas meeting space and quarters at the Liberty of luxury collection hotel in Boston.

All new bathrooms, including tub to shower conversions at Hyatt Boston Harbor and.

And a completely new lobby and bar at Harbor Court and San Francisco.

We're also redeveloped and low bears resort and del Mar, California, as we speak.

It's our highest ADR property and the portfolio.

And it achieved of $403 average rate in 2019.

The redevelopment focus for low bears is to dramatically improve and expand the revenue generating public areas meeting and event areas and restaurant and bar activities at the resort.

Not only do we expect to achieve a significant increase and ADR, but.

But we expect to dramatically increase the other revenues at the property as meetings events and gatherings return.

All of the improvements should can be should be completed next quarter.

This resort is a true icon and del Mar.

As it sits in the center of this high end Beach town and has done so for three decades now.

We're also moving forward with a complete renovation of all of the southern most resorts' rooms, including guest room bathrooms.

This very special and popular resort is made up of numerous different buildings with different sized rooms renovated at different times with different designs over the years.

The most recent room renovations were completed 10 to 12 years ago. So we're forecasting of 20 to $30 improvement rate at this 262 room resort.

That is our third highest ADR property at over $377 at the last two years.

This rate improvement should deliver a 10% of greater cash yield at stabilization on our $15 million investment.

And construction work will start in July during the seasonally slow summer and.

And is forecasted to be completed and the fourth quarter before private season of the gifts.

Upgrades and our portfolio that we have been moving forward with include upgrades to the lobby rooms, and rooftop pool at both Montrose and Chamberlain and West Hollywood, which are both all suite hotels.

Our renovation and trend of and of transformation of Grafton on Sunset and West Hollywood.

Which we're going to rebrand as an unofficial Z collection hotel upon completion late this year or early next year.

Also of complete redevelopment of the golf course, and backyard at Skamania Lodge and the Columbia River Gorge.

Which will add a spectacular nine haul short course.

And an 18 hole, putting course to our ZIP lines aerial adventure park and external event venues as we continue the transformation of this conference resort.

Two and experiential and vet adventure resort.

And finally, we will be adding a second and larger pool pool bar and other amenities and activities at Chaminade resort as soon as we receive approvals from the county.

As we transform this resort into and attractive luxury laser leisure destination, just 45 minutes from Silicon Valley.

As it relates to the remaining projects, we deferred due to the pandemic.

We're continuing to complete plans and permitting and will and we'll pull the trigger on these projects when we have more clarity on the recovery and progress against the virus.

All of these completed Redevelopments and transformations and all of the upcoming projects and improvements we.

We will provide significant upside for our portfolio over the next few years as the recovery takes hold and rolls forward and importantly, the vast majority of the dollars for these projects have already been invested.

As a result of all of these projects and the fantastic condition of our overall portfolio, we would expect our hotels to outperform their specific markets.

Similar to what they did over the years, we were building pebble Brock and the last cycle's recovery.

As we look at the silver lining of potential upside from this crisis.

We expect there will be significant opportunities over the next few years to acquire properties in distress.

Due to a large number of cash strapped and over Levered owners.

And many properties that will go back to lenders.

As you know.

Our team has been through two prior crisis driven opportunistic periods.

Including one that resulted and the creation of pebble Brooke and late 2009 during the tail end of the great recession.

Following that crisis.

We were able with our conviction.

And to fairly quickly and aggressively assemble of unique portfolio of high quality hotels and resorts.

At very attractive prices.

That also has substantial upside opportunities.

Given our ability to operate our properties more efficiently than the vast majority of buyers.

The additional cost benefits from the additional economies of scale from curator.

Our unique strength and redevelopments and transformations as well as with independent or small brand lifestyle hotels.

Our vast number of operator relationships and our high profile and positive reputation and the industry.

We believe we will have significant competitive advantages.

And as opportunities arise over the next few years.

We continue to be confident that our teams experience reputation foresight creativity.

Work ethic and track record.

Combined with our strong corporate liquidity and a fantastic portfolio.

We will allow us to not only grind through the current challenges, but thrive during the recovery and this next upcycle.

And with that.

We'd now like to move on to your questions. So Melissa you May proceed with the Q&A.

Thank you if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from Mchugh from participants using speaker equipment at may be necessary to pick up your handset before pressing the star keys.

First question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your question.

Hey, good morning, everybody.

Hey, rich.

So a couple of questions Jon I wanted to.

I wanted to get your opinion on San Francisco.

And kind of where we sit today and even going forward and.

And just maybe the longer term outlook given.

Heightened political risks and that market and.

Got it.

Looking from other sort of real estate lenses.

To be a pretty steady stream of corporate relocations away from the Bay area just wood.

How do we measure of the sort of moving parts there.

Yes, so I think it's a fundamental analysis and I think we start with.

The key advantages that San Francisco has that arent going to go out and aren't going to go away.

The.

The proximity to Asia.

And the political the gateway International Gateway aspect of the city.

The incredible strength of the underlying economy with its.

With its incredible cluster of companies that are focused on the high growth industries and our country the creative industries.

And that are impacting all of our businesses and the country.

I think.

On the weather is beneficial to San Francisco the.

The attractive nature of the city is very attractive.

And the venture capital and that continues to be.

Heavy influence on the growth.

The creation and growth of new businesses, and San Francisco I think well.

What we what we were seeing pre pandemic and what we continue to see is an evolution and our country that involves.

On creative industries, and venture capital expanding beyond the core creative markets like San Francisco and Boston.

Into other markets and.

We've expected that to happen the pandemic, probably accelerates some of that.

But our view on San Francisco continues to be positive I mean, the educational institutions are not going to go away. The venture capital is not going to go away.

I think the city.

Probably because.

And there are plenty of angry companies that would like a more business friendly government.

Our more than apt to announce when they expand beyond San Francisco.

But at most cases doesn't mean, they're abandoning the markets.

And most cases, frankly, it's and expansion and once you don't read about is the huge growth of companies that get created and San Francisco I mean, we obviously are aware of it.

There continues to be huge growth.

By a lot of the big players like Google and Facebook and Apple.

In the market as an example.

But there's also a huge increase and the creation of new businesses that grow. So I think we are still strong believers in the market.

Supply is extremely difficult to add in the city.

We'll see some reduction in supply.

And we have already through the sale of some hotels that will be used for affordable housing, which.

We expect to see some more of that in the marketplace and yet it's at.

Probably the most protected.

City, and the United States from from new supply growth. So.

Overall, we still have a very positive view on San Francisco as noted by our comments about the sale of the drag and wed like to have come down to the level that we were at before we.

And we sold all of these properties outside of San Francisco and terms of our concentration and we will continue to work with others.

With government and other businesses with government and the community on on I'm trying to help the <unk>.

City solve its issues, but San Francisco of course is not alone.

And its issues related to homelessness and and.

And and crime and and other issues.

Of that vernacular so whether it's San Francisco.

The core keenness of Portland, and the issues there Seattle downtown L. A downtown San Diego, Austin, and New York and you can go through a long list of cities.

That have issues and San Francisco is definitely towards the top of that list.

Okay I appreciate all of the other color there Jon one more if I may just in terms of the balance sheet.

Given given the success of the.

Convertibles issuances last quarter and I guess.

Earlier this year and.

Some of the added flexibility and the credit facility and how big of a priority today versus say 90 days ago would be sourcing.

I guess alternative equity capital and joint venture capital or something along those lines at how important is that where we sit today.

Okay.

Yes, I don't at all.

I think it's really changed where we are with <unk>.

Sourcing alternative capital.

To take advantage of some of the opportunities.

And in this recovery.

Yeah.

Hi.

Do think.

There is no change and our view of of sourcing equity at.

At these of value levels and of course.

The convertible bonds are.

Our low cost way to of raised equity.

For the company.

And with its conversion down the road over the next six years so.

I think as we look at how we take advantage of the opportunities and there'll be initially two different ways one is.

From the sale of the drag and and.

And Union station, Nashville, and and the monetization of the antennas and any other potential sales over the course of this year will certainly be reallocating that capital and.

The opportunities that we think will be highly attractive and in this next recovery cycle, but right now we do continue to pursue and off balance sheet strategy again early for the early part of the cycle.

And with third party equity capital that can dramatically multiply the capital we will be investing.

Great. Thanks, Jon.

Thanks Rich.

Thank you. Our next question comes from the line of Smedes Rose with Citi. Please proceed with your question.

Hi, Thanks.

And I just wanted to follow up on that a little bit the.

The covenants that you just.

And that gave you some low incremental flexibility there to.

And do the sales of the Drake proceeds go and do the size of on doing it that's you're allowed to sort.

Sort of put towards it.

Recycled capital and it's at.

Is that earmarked for anything beyond that and that's just.

Sort of debt reduction.

Yes services needs.

Yes.

Any proceeds from the Drake and and sales we've had.

And this summer so union station in Nashville.

Nashville was the intent of leases so all of that capital goes into that kind of $500 million kind of investment basket.

We choose and find opportunities to invest we can do so freely.

Within our balance sheet.

Yes.

At those dollars are non mark for that they're not mark for debt reduction.

Okay, Okay, and then Jon you mentioned.

And your comments about supply coming out of San Francisco and U K.

Do you guys expect.

Pace of supply to decline, besides San Francisco, where what other markets, where you operate would you expect to see sort of a net reduction.

Well, we expect to see a net reduction in New York and and Chicago.

And we've seen a small reduction and San Diego already at.

As well and.

And.

On minor reduction out and the west side and in La.

<unk>.

I think thats, probably the primary markets.

We expect reductions.

Okay.

Okay. Thank you.

And Hey, Smedes, just one clarification, so theres two $500 million buckets.

One relates to reuse of sale proceeds and the other are additional investments so.

We have the we have the ability to do both of those and.

And we have a third basket, which is of $100 million of other investments so plenty of access which the read throughs of that as the banks of China and very supportive of and in some of your very accommodative and flexible as they look through to the end.

Ending of this pandemic, which is a very encouraging sign.

Great. Okay. Thank you.

Thank you. Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.

Hi, good morning, everybody on.

I just wanted to get your thoughts on how we should kind of think about flow throughs from revenue improvement on the on the way back out of the cycle I think we're all reminded that Jon and some of your comments specifically about rate that this.

This recovery is shaping up a little differently and what we've seen in the past and I just wanted to kind of on.

And get your thoughts on this I mean, historically, we've seen net.

Occupancy probably gets up towards 70%.

And not tend to see.

The big acceleration and flow throughs, because obviously you need to be more rate driven but I'm kind of curious do you think that that equation will be different and then more importantly, how do you think about that equation for <unk> given some of the cost.

The measures that you've taken.

Yes. Thanks, Thanks, Sean So I do think it's.

It's going to be materially different this time from a recovery standpoint.

One as you highlight.

We don't think theres going to be much.

Rate discounting.

Certainly what we've seen on corporate accounts is the vast majority of those of rolled over.

19% to 20 without without changes.

1% to 21, and we expect 'twenty, one to 'twenty two to be a similar situation and and.

As you heard from my comments on on rate on our group pace and I think you've probably heard something similar from from others. We're not seeing discounting at all on on group in the future. If you are and you come by with a big group today at at.

At a city property.

You can you can negotiate a good deal there's tons of capacity.

But we're not seeing much of that business, so, but I think on flow throughs as we look at the recovery.

We're building back our teams very slowly and so we think.

And because of the way we've changed how we do business.

The things that we no longer are purchasing and we don't think we will be buying.

The use of technology, the cross training that the flow throughs are going to be pretty good and this recovery and.

And.

And so and again in that regard I think it'll be more attractive and.

And likely much quicker.

Than prior cycles.

Thank you and then you kind of alluded to this just a moment ago, but and the other question I had was on on.

Citywide versus in House group. So I think you said overall for Pebble Brook, roughly 20% of the portfolio.

I guess, probably more appropriately was at group.

So at that bounces back.

How much for pebble broke of that 'twenty is citywide compression and obviously San Francisco is probably a key market for that versus what youre able to kind of deliver in house, because im thinking net.

Probably the in house stuff and I think we talked yesterday, a little bit about weddings, the wedding business being really a track of for instance, and Ian how stuff may bounce back of the citywide compression may be a little bit further delayed just given again might might be very different city by city.

Yes.

I think if there is any if there is any pricing pressure and it'll be and some of the some of the higher price conventions and.

Some of the markets.

Depending upon the approach they take and how much sympathy they have trained and industry that's been devastated.

And in this pandemic.

I think at our portfolio.

We don't we don't I don't have the numbers off hand, we don't track it that closely between.

And citywide convention business and other group.

But it wouldn't surprise me if it was.

<unk>.

In total and.

Keep in mind, our resorts generally don't have any citywide business.

So all of the group they do of 100% of it is going to be.

And is going to be in house group and a lot of our small.

A lot of our small properties that don't have much meeting space.

They're either doing.

Group that doesn't need meeting space.

Or do on citywide business so.

Or it's group and a major house somewhere else and the city. So it's probably a greater percentage and a smaller properties at.

And at zero and the Big property, So it's probably about a third Sean.

Give or take five or 10% frankly.

Thank you very much.

Thank you.

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

Good morning, everyone.

Good morning morning.

Two questions from me first.

Just on your underlying assumptions for your hotel level.

Breakeven expectation for at the midpoint of the year can you just give us some high level thoughts on what you're assuming to get there.

Yes so.

If we go back to the fall and we look at where we were our open hotels and October as an example of generated a couple of million dollars positive EBITDA at a 38% of occupancy and.

And rate that was down about 30%.

From 19.

So we sent and Revpar was down 69%. So so we think.

Breakeven for the portfolio, probably around the 35% of occupancy level at.

Similar.

Impacted ADR, which which would relate to about 70.

Maybe 73%.

Our range for.

Revpar declines from 2019, we want to keep using 19 as the base because thats the last normal year, 'twenty isn't really going to give us at.

Much from a comparative perspective, so we think it's and it's in that range for the hotel portfolio.

And for Corporately, we think it's and the 50 to.

53%.

Ah down range in terms of Revpar.

To get to breakeven on a corporate basis, so that probably will mean something.

<unk> 50, and 55% of occupancy across the portfolio.

And Mike as you think about the timing on that.

And we think the hotel breakeven is really as we get to mid year. So as we get to late second quarter into the third so of summertime is the demand improves.

Given the trends right now and that's what we would generally expect and then corporately.

Really the second half the year of the back half of its going to the third quarter. As we continue to build that will be the timing I know some of the folks have.

Early spring things, improving but we think it's more of at mid year for hotel at breakeven and then as we get and the second half of the corporate side and end to be clear, Mike. That's just our base case viewpoint, assuming things continue to get better.

From a health perspective because.

The business is going to follow the virus.

And if the virus, if we get a resurgence of any kind of we get big bumps along the way we've seen this three times already.

And where.

The virus has had a resurgence and.

And we've we've had to lower.

Our viewpoint for the coming months so.

And.

So it comes with that Humongous qualification.

Okay understood.

Understood and then second question from me more on on the.

The top end of NAV.

And kind of conceptual perspective here and can.

Can you maybe give us a sense of how youre thinking about and what you've heard.

And from people that Youre talking to on on the asset sale for and just discounts at pre COVID-19 pricing and maybe break that up and to.

Naples, and maybe your San Diego Resorts, and one bucket, and then Chicago and Boston and the other and then.

And secondarily.

Pass that youre thinking about or the trajectory to get back to what you think or maybe what other states is at a stabilized value.

Yeah, well that's it.

That's it.

Short question that would otherwise come of a really long answer, but I'll try to shorten at I mean, we start with we don't know theres not enough activity, yet and the markets to know what the market is for any specific type of asset I think the <unk>.

Higher quality assets and I mean, if you had a resort out there and it could trade for no discount pre pandemic.

10, 10% I don't know I mean, I think are on.

Our properties and Naples, and the keys would probably be towards the zero.

Given the progress they continue to make and the capital that's been invested.

And those assets that didnt achieve.

All of the improvement based upon the capital.

I think as you move away from quality and.

And you move away from the most attractive.

Institutional markets Youre going to see lower discounts I mean, youre going to see higher discounts.

And clearly one of the challenges is there's a limited amount of pretty expensive debt out there on the market and thats impacting that's going to impact values at.

As well and we think there'll be.

Of.

Occasion, and the credit markets for some time.

Given the C MBS market doesn't work very well for properties that have no EBITDA.

Or little EBITDA so.

It's going to take time, obviously values of get back to where we were before operating results due because of <unk>.

People buy based upon the future and we.

We will be at the beginning of of cycle and as <unk> seen historically certainly.

Values are higher and cap rates would typically be lower.

On.

And in the early part of of cycle.

Thank you.

Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Hey, good morning, Thanks, Jon.

At the recent call. They spent a decent amount of time talking about the future of groups and talking about hybrid meetings.

I'm just curious if the concept of hybrid meetings.

Might permanently reduced the number of.

Compression nights at least.

Bill and you still there yes.

Okay. So.

Sorry, it sounded like you faded off there.

So I think for interestingly.

I think hybrid meetings will will dramatically increase revenue.

For the folks who are offering the meetings and I think they will change.

The nature of meetings in terms of.

The panels.

The speech is the <unk>.

<unk> introductions and ways, probably we can't even imagine right now and I don't really think of it reduces the level of participants.

Because as folks who have already done hybrid meetings have found it doesn't work very well for those who are not in attendance now there may be.

There may be some folks who.

And companies.

Companies might say well, you're not going to go you can get whatever value you get out of that convention by doing it on a virtual basis, but.

Look we all we all know that there is so much that goes on at a conference at has nothing to do with the agenda and.

And at and we take younger people and and lower position people to conferences, because it's a way for them to grow personally.

To learn more about the business to develop relationships.

And that they wouldn't otherwise develop and that they can't develop on a virtual basis. So I don't really think it will have an impact in total.

On on attendance and compression for our industry and in fact, we think group meetings are likely to be increased after the pandemic on a more permanent basis as workforces are more distributed and have a need to get together more often which they won't be doing and the oi.

Office and if we do go down a path.

And where we're focused shrink the amount of office space they have.

And again, it likely means theyre going to have a need for more meetings to build culture to train to plan.

And that they want and otherwise be able to do on their own offices.

Okay. Thanks.

Jon you've had some pretty eye popping and ADR of numbers.

And last summer this summer of this winter et cetera.

And as have others and I'm just thinking as demand.

Mix.

Broadens.

Should we expect ADR of numbers to actually.

Go down sequentially.

Yes, they are.

Bill they might they might go down some at certain properties and they may go up at other they will go up at other properties and it's really going to depend upon.

What's been lost and what's at.

What returns.

The resort the resort markets might see some reduction.

And as some of the lower rated business comes back I don't think it'll be initially because I think the leisure demand, particularly high end is going to be pretty overwhelming.

For the next 12 to 18 months.

But I think and the urban markets.

What was lost was all of the higher rated business and and.

And so as of <unk>.

Some of that business begins to come back on the second half of the year and into next year I think we regain.

And in those city markets and maybe we give up some in the resort markets, but I'm not so sure that's next year.

Okay.

Thanks for the time.

Thanks Bill.

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning.

I wanted to dig into 'twenty and 'twenty, two a bit more.

You mentioned a few times that you don't expect.

And second discounting, particularly on group at 2022.

And you think about group of volume in 2022, you have pent up demand and more people booking into 2022, but you also have.

And maybe more hybrid meetings, maybe some hesitancy for some citywide zone can volumes in 'twenty to be similar to 18, and 19 or is that too much to ask for the industry.

I think it's possible Anthony and I think theres a lot of pent up demand. So I think when you.

Think about.

Businesses.

In terms of folks we talk to they have a desperate need to get their groups together and they haven't been together for a.

A year now haven't seen people in many cases for a year Havent havent met new employees and their organization. So while I think there'll be conventions and large meetings that may have lower attendance.

Because of the hybrid nature initially.

There'll be replaced likely by other meetings from all of this pent up demand and business that will of re booked from 2020 to 2021. So.

I think we're pretty positive Anthony about the way 2022 could play out and as I indicated earlier I think it could be of pretty dramatically quick recovery, depending upon if we get back to normal and Thats really.

Again, that's a that's a monster qualification.

Because none of us know.

But if thats the case and folks are behaving normally and businesses are behaving normally it's not as if businesses are suffering.

Overall, the economy is strong the leisure customer has a humongous amount of money and the bank there is huge fiscal stimulus and the system and more coming.

<unk> has been pumping capital and.

And to the market.

So business earnings are really really strong.

For all of the industries that have that of actually benefited or not been impacted right. It's really a few industries that have been impacted and unfortunately, we're one of them but.

I think when you think about of typical recovery and businesses.

<unk> years to rebuild the earnings that were lost and the downturn as demand comes back gradually and we.

Don't have that and the economy now we have a lot of really strong companies from an earnings perspective.

Got it and I guess on that point do you think I guess improved mix and strong leisure can at least in 'twenty and 'twenty to offset any feedback.

Theoretical structural.

Decline in business transient travel for that year.

Yes, I think.

It certainly Ken and I think leisure travel will be much stronger than <unk>.

Probably normal in 2022.

Again with that same monstrous caveat about health, but.

We also arent believers and any structural impact of business travel so.

And we think travel is going to follow GDP.

And and where we're at maybe lost and one area, we will get picked up and other areas that again.

Either way either.

Come out of this pandemic and in terms of change of behavior.

Z to see changes and what we know it's always harder to understand the positive things that we haven't experienced before so.

We're a believer that and general business travel is going to continue to follow GDP and that there isn't any kind of structural impact.

Or secular.

Impact.

So it's safe to say at you seem like you are more bullish.

And then the I guess the consensus that we'll get back to prior peak Revpar in 2024, roughly yet you seem to be more positive and that is at a fair a fair takeaway.

There's a there's a there's a healthy a possibility that we could get back quicker yes.

Alright. Thank you. Thank you.

Thanks Anthony.

Thank you. Our next question comes from the line of Ari Klein with BMO capital markets. Please proceed with your question.

Thank you and and good morning.

Just on the margin side, given all of the things you have done on the cost side and upon a return to normalized environment. How are you thinking about the margins longer term relative to where they were at pre pandemic.

Yes.

I think the way we've been evaluating at Ari and Theres, probably somewhere between 102 hundred basis points of benefit.

And all else equal.

If we were back in 2019 and operating our hotels.

The way, where we're operating them now and the way, we anticipate operating them and the future, but we do have to keep in mind theres other variables.

And that will impact first time.

Some costs just will go up and time on a per unit basis.

And offset some of that perhaps but we're pretty optimistic as has happened and every cycle. We have achieved savings on and on an operating basis greater efficiencies.

Much of every year.

Every year our properties are operated with with fewer people per dollar of revenue.

And then the year before so we think that will continue we think it's a healthy level of.

Of improvement and.

And that should help in terms of recovery of values quickly as well.

Thanks, and maybe maybe at the follow up you have a lot of hotels in San Francisco maintenance and maybe this isn't quite as impactful, but what would be the impact from from the higher minimum wage.

On expenses.

Yeah, it's pretty small I mean, we have $15.

Minimum wage and a lot of our locations already.

And where we don't.

Most of the cities are well above that I mean are.

I'll give you an example, I think our housekeepers make 'twenty six.

$2006, an hour plus and San Francisco.

As an example, so.

I think where we've had the biggest impact as states or cities have implemented at.

If they implemented without a tip credit or a lower minimum wage for tipped employees thats.

And there is a little more impact in those areas it could be.

It could be 100 200000 hours of property.

On average if that were to happen and markets, where we haven't already experienced that so.

Yes and are there.

The legislation at least right now from buy and that does not have at the tip credit and of course.

And of course at a lot could happen between now and then and then the other side at the.

And the urban areas, where largely well above the minimum wage so really no impact there is some of the resorts.

Would have some impact and places like Florida and.

And which we have some properties of the servers and then clearly impacts markets like Texas.

And those low cost area. So it is a.

We've we've seen up and we'll do our best to.

And I think it's a way bigger impact if it were to pass on the way.

They're suggesting without a regional.

Without regional.

Rates at different levels.

It would have a much bigger impact on secondary markets tertiary markets and then it went on our portfolio.

Got it thanks for that and just a quick one on reopening of kicking yourself update us on the pace, there and the remaining quarters lines.

By the way and in response to your question on minimum wage I mean, we have historically been able to replace that cost with our revenues through guest amenity fees through through.

Add on charges at our restaurants.

And our food and beverage so historically, we've been able to recoup it from the customer.

Sorry, what was the second question there are.

Alright on the pace of reopening if you can update us there.

Yes, so as we said in our and our comments I mean, we.

We currently have what 515 hotels.

That are currently suspended.

Those will come back as of the demand recovers and we have some plans in place as early as March and we did reopen of.

Hotel and all of all places and Chicago two weeks ago. So.

So as demand recovers, we will be back and I think rate as we said.

We should we should have all of them opened by mid year.

I appreciate all of the color. Thanks.

Thanks, Larry.

Thank you. Our next question comes from the line of Gregory Miller with Truth Securities. Please proceed with your question.

Thanks, very much good morning.

I wanted to ask a question on and Curating.

And you seem to be growing the employee count fairly quickly and my view.

And my ignorance take is that you're preparing for a fairly larger collection of him coming properties.

And I can be very wrong about this.

And I appreciate you're not providing guidance at this point, but could you share any high level thoughts about how you see carried or by say year end 2021 and.

<unk> if you expect your rate of revenues to be meaningful to your earnings by the end of the year.

Yes. So on the latter question. The answer is no. We don't think it'll have any.

Material impact on our earnings this year.

As it relates to the high level.

So we launched it publicly and in November.

The week after the election. The response has been huge.

And the hotel community from interested parties and we had developed a long list of outreach.

For once we launched and we've yet to get to that list because we've been working with.

The folks who have contacted us.

Following the launch and at.

And so youll see curated will have a fairly.

Active.

Our press release program with announcements of.

Additional.

Our founding members additional.

On.

Remember hotels and.

Additional vendor partners and preferred vendors over the course of of the entire year and so I would say.

And for that activity.

We are we.

We do continue to add people to the staff and.

And in order to provide a high level of service to expand.

The program offerings and to accommodate more member hotel. So you are correct from monitoring linked and that we've we've been adding team members, we have more to do and.

And we have a lot of work to do to prove out the value proposition for <unk>.

Our members, but we feel really positive about not only the response, but we feel really positive about the value proposition because we've lived at.

And.

The curator of benefits and savings will be much broader and and more extensive than what we were able to achieve with our 31 property portfolio previously.

And also and Greg just to be clear.

I think I saw your note last night, we didn't add six or seven new employees to curator.

Some of that was current employees that we reallocated to focus on curators of couple of other individuals were focus on a portfolio wide initiatives, which has been very successful and really allowed us to really launch period or so we allocated them full times of curator and we brought on three individuals.

<unk>.

Our new employees and we're looking for a couple of more but just to be clear we are watching that and we had some capacity there from some of the sales we had and reallocating.

Women, who are running at sort of Gen Barnwell.

She was an asset manager and she is leading <unk>, so and I was just a reallocation of people internally.

And.

Yes, I appreciate that and I apologize for the confusion there right.

I want to switch gears on my second question and I enjoy here on your Crystal balls on on how you see trends and the industry and I'm curious to get your perspective on what may be a growing number of of <unk>.

Flow and people that may end up.

Working remotely full time after the pandemic is over.

And that people, who may lack of full time residents.

As you know there are emerging and VC funded companies that are targeting this demand.

And I might assume that you have few hotels that would naturally care or to higher rated extended stay and may not be core to your business, but I'm curious if you think this customer base may be material and if so how you might target segment.

Yes.

Got it.

I don't know whether its going to be material.

It doesn't mean, it's not of demand source, obviously, but I don't know that.

For some period of time.

If it grows to be a material obviously, we can develop.

On a product and services that are geared towards the group, but I think what it does do is it is going to increase travel back to the corporate office.

And increase the demand.

And four rooms in markets, where those individuals' need to travel to.

Because they're not in the home market right at the you have a meeting and the home market with it with.

With your <unk>.

Your superiors or with a group that you collaborate with.

Youre not going to book, a hotel room, because you're already live there, but if you live somewhere else. When you go back there, which you will.

Presumably you need to do.

Youre going to need of hotel room, and I think that that bodes well.

Well for folks who choose to move further away from their offices because they are only working.

And their offices, one or two or three days of week.

It is two or three and there's a reasonable chance that they'll book of room, one night, a week or two nights a week. So that they don't do a three hour commute each way because they'd move further away. So kind of goes back to my comments earlier, Greg and what you raised certainly as a potential demand source down the road, but.

I think the bigger demand source is going to be people who.

Who arent and the office all the time.

Who maybe move further away that now need to go back to the office.

And bulk hotel rooms, while theyre doing it.

I appreciate the perspectives thanks, everyone.

Thanks, Craig Thanks, Greg.

Thank you. Our next question comes from the line of Floris Van Dyke and with Compass point. Please proceed with your question.

Hey, guys. Thanks for taking my question.

Jon I just wanted to get your thoughts on that.

The current environment for specs and and your and the.

Potential for pebble broke two potentially.

<unk>.

Raise of spec, obviously SPG did one.

Recently.

That could be and option for you to two.

As J.

<unk> capital, but it could also potentially do things for your Z collection or for curator.

Are these things that.

And that you look at actively and how interesting is that for you as you think about allocating capital and access to capital.

Yes, so we've looked at specs, they're hard to do in a format where you're.

You are trying to accumulate of portfolio versus the need really to buy a company.

And so I'm not sure at really works for.

Where we see the opportunity on the property side and I think as it relates to Z collection or.

Our curator.

And then.

Net effect could be and exit at some point down the road, but it seems a little premature today.

Thanks Thats it from me.

Alright, Thanks Lars.

Thank you, ladies and gentlemen that concludes our question and answer session and I'll now turn the floor back to Mr. Bortz for any final comments.

Hey, Thanks, Melissa thanks, everybody for participating.

And you're hanging in there for the length of Q&A and we look forward to things continuing to improve.

We will continue R. R.

Interim updates of of.

The performance of our properties and at which which should make our again our earnings releases for the next quarter.

<unk>.

Meaning less given we will have provided all of the information on a monthly basis. So, but we do look forward to updating you and talking about the trends next quarter.

Thank you ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

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