Q4 2021 Pebblebrook Hotel Trust Earnings Call
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Greetings and welcome to the Pebble broke hotel trusts fourth quarter and yearend earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If he would like to ask a question. Please press star one on your telephone keypad, if anyone should require operator assistance during the call for.
Please press Star zero on your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Raymond Martz Chief Financial Officer. Thank you. Sir. Please go ahead.
Thank you Donna and good morning, everyone welcome to our fourth quarter 2021 earnings call and webcast. Joining me today is Jon Bortz, our chairman and Chief Executive Officer.
But before we start a reminder, that many of our comments today are considered forward looking statements under federal Securities laws. These statements are subject to numerous risks and uncertainties that are described in our 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 23, 2022, and we undertake no duty to update them later will discuss non-GAAP financial measures. During today's call. We provide reconciliations of these non-GAAP financial measures on our website at <unk> Dot com.
But 2021 was another challenging year for the hotel industry and Pebble Brook, you made significant progress on our road to recovery, we think our hotel teams and operating partners for their hard work sacrifices and creativity over the last two years.
Our portfolio continues to benefit from the tremendous efforts as we enter the recovery and growth phase following the pandemic.
For 2021, our same property hotel revenues increased by over $280 million, we're 65% versus 2020 with hotel EBITDA at a positive $132 1 million. This marked a tremendous improvement from 2020, when our hotel EBITDA was negative $27 5 million.
Our adjusted EBITDA finished at $88 3 million compared with negative $69 7 million in 2020 again considerable progress from a year ago.
And while we still have much work ahead, we believe we have considerable upside to come adjusted <unk> per share and 2021 at a negative 32.
A substantial improvement from 2020 at negative $1 46 per share.
And during the second half of 2021, we generated positive adjusted <unk> of 22 per share illustrating a trajectory of rapid improvement in growth that started this past summer.
On the investment side, where we're very active we completed over $270 million of asset sales comprising two hotels in San Francisco and one in Manhattan, We invested these proceeds and more into a $492 million of acquisitions across four leisure focus resorts with significant upside opportunities.
We are excited about the many operating re merchandising and redevelopment opportunities at all four of these properties.
On the capital side, we raised more than $740 million in 2021, increasing our liquidity and acquisition capacity, we replaced $250 million preferred equity with less expensive preferreds saving $1 8 million annually in preferred dividends.
In addition, we extended over $1 billion of debt maturities further enhancing our liquidity and eliminating any significant debt maturities until late 2023.
At year end 2021, we had $730 million of liquidity, including $92 million of cash on hand, and nothing drawn on our $650 million unsecured credit facility.
Turning briefly to our fourth quarter results same property total revenues of $245 4 million or 29% below the comparable period in 2019, marking our best quarter versus 2019 since the pandemic.
This strength was driven by continued robust demand at our resorts and further improvements in business travel both group and transient.
Total revenues at our resorts climbed to a level of 11% higher than 2019 fourth quarter, primarily due to dramatically higher room rates, which are up a whopping 43% to 2019.
Our urban hotels continue to show further improvement with same property revenues down 44% in the fourth quarter versus 2019, the best performing quarter since the pandemic.
Most encouraging where the trends we saw in December throughout the portfolio. Despite the negative impacts of Ami crime.
Same property total revenues in December were down just 18% compared with December 2019, the best monthly performance disciplined demick with same property ADR up 20% and our same property hotel EBITDA down just 9% compared to compared with December 2019.
ADR for our urban hotels recovered by the end of December 2021 to be ahead of 2019 December 2019 by one 9%.
Our monthly same property ADR exceeded the comparable month in 2019 four of the last six months in 2021, despite the disruption caused by the Delta and Omicron variance.
The highlights just highlights to increase the ability of our portfolio surpassed two surpassed 2019 as ADR throughout 2022 earlier than we thought possible just a few months ago.
And we are increasingly confident we will reach 2019 hotel EBITDA levels later in 2022. These.
These trends are encouraging however, these improved expectations assume no additional significant waves of the pandemic.
Our ADR gains in Q4, compared with Q4 2019 were impressive and many of our properties, but theres del Mar was up 70% or $273.
Marker key west was up 53% or $179.
Southern most key west was up 48% or $177 in.
And apply a beach resort Naples was up 38% or $143.
Each of these resorts had been renovated recently.
At our new acquisitions, ADR was up 42% or $110 and Margaritaville Hollywood Beach resort and up more than 36% were $77 at Jekyll Island clubs.
Even with these healthy increases in room rates and food and beverage pricing the feedback from customer views has improved at our properties, indicating a favorable price to value relationship.
Since the start of 2021, our portfolio wide Tripadvisor rankings have improved by an average of eight spots.
This demonstrates that despite higher prices our guests appreciate even more the enhanced quality and experiences from our renovations and the excellent service of our hotel level employees are providing.
We think our hotel teams and asset managers for this progress and what has been a challenging labor environment.
In the fourth quarter, our best performing properties included two of our recent acquisitions Margaritaville Hollywood Beach resort, which increased hotel EBITDA by over 225% versus 2019, and Jekyll Island club and creates hotel EBITDA by more than a 145% or.
Our recently transformed San Diego Mission Bay resort, and our recently renovated forebears del Mar both more than doubled their EBITDA compared with fourth quarter 2019.
In terms of markets, we continue to see healthy recoveries in Los Angeles, San Diego, Boston and Philly.
And our weakest markets continue to be San Francisco, Washington, D C. Seattle and Chicago. These trends are continuing into 2022.
On the operating expense side, despite the cost pressures most businesses are experiencing we remain encouraged that our new operating models I made our hotels more efficient and more profitable as we climbed back to pre pandemic levels of demand and revenues Les.
The labor challenges.
Only receded and many of our properties are now well situated from a staffing perspective.
The high quality nature of our properties affords the staff at our properties ability to earn market, leading wages and benefits, which gives our teams the ability to attract the best quality associates.
The combination of cross training technology, and clustering of our management teams in markets with multiple properties managed by the same operator has provided significant permanent cost savings on an ongoing basis.
And with an ability to raise prices, we feel like we're in good shape to offset future inflationary cost increases.
We remain confident that we have eliminated 100 to 200 basis points of expenses at our hotels from a wider array of operating improvements in our operating.
Shifting to Q1, 2022 operating and demand trends, we estimate that the omicron very insignificantly reduced revenues in January and February .
Due to group and transient cancellations and a material slowdown in new bookings, especially in January and early February and especially in business travel.
In late December the Jpmorgan Health care conference in San Francisco, which was to be held in early January was unfortunately canceled and when virtual costing our portfolio over $6 million in total revenues.
Unfortunately, the vast majority of city Wide's and group meeting schedule in Q1, they were canceled throughout our portfolio have been or are we booking into Q2 or later in 2022 and have done so at higher rates.
This indicates corporations and other businesses RT desire and need to hold their meetings in person.
January same property total Revpar was down an estimated 43, 8% versus January 2019. This was a very challenging month. However, we are encouraged about the rapid improvement we are seeing for February and March.
We think the same property total revpar for Q1 could come within one or two points of Q4 as compared to the same quarter in 2019, despite the significant impact from omicron in January and February .
We currently expect March to return to recovery trajectory that we were experiencing before omicron and we're already seeing a significant acceleration in business travel bookings for March and beyond.
This is expected to result in Q1 same property total revenue revpar down 30% to 35% to 2019 with same property hotel EBITDA between 25 and $35 million and.
And adjusted EBITDA between 14, and $19 million, we are forecasting a Q1 adjusted <unk> per diluted share loss of 11% to 15.
Which compares favorably to 2021 Q4, adjusted <unk> of negative <unk> 42 per share.
We expect the first quarter to be the only negative SFO quarter for the year as we expect to return to profitability again in Q2 and for the balance of 2022.
This is the first time since the pandemic that were confident enough to provide a quarterly outlook indicated our increased comfort level with the visibility and stability in near term operating trends of course in these assumptions assume no additional outbreaks from the pandemic.
Please note that starting in Q1, we will be adding back the amortization of noncash stock compensation to both our adjusted EBITDA and adjusted <unk> results for the current year and for the comparable period last year. We are making this change since most of the hotel rates and all of the hotels C. Corp's report their EBITDA and <unk> in this manner. So this change will make us more.
Bold with industry practice.
Shifting to our capital premium program. During 2021, we completed $83 8 million of capital investments in redevelopment projects. This includes six significant renovation and re re merchandising projects, representing a $53 4 million of the capital we invested in 2021.
Since 2018, we've invested approximately $350 million into redevelopment and transformation projects at 25 different properties. We expect these projects to generate 10% or better returns as demand returns and performance stabilizes over the next two to three years.
For 2022, we have $100 million to $120 million of capital investments planned of which 80 million accounts for the major redevelopment and smaller ROI projects and.
In 2022 will have eight significant renovation and redevelopment projects either underway or starting later this year, including the transformation of vitality to one hotel San Francisco Grafton on Sunset the hotels Ziggy our next unofficial Z collection hotel and so Omar to Margaritaville, San Diego Gaslamp District.
Major repositions at our newly acquired Jekyll Island Club resort and Estancia Hotel and Spa in La Jolla will start later this year as well long overdue major renovations and upgrading of the hotel Hilton Gaslamp quarter in the second and final phase a repositioning viceroy Santa Monica.
Finally, whenever governmental approvals come through the transformation of Paradise point resort and Spa to Paradise point, and Margarita Bill Island Resort San Diego.
We're very excited about these projects and expect that will drive significant EBITDA growth and value creation.
I would now like to turn the call over to John John .
Thanks Ray.
I'm going to try to be reasonably brief and pointed so that we can get to the Q&A.
Demand has firmed since the January pullback.
Business travel, which took a brief break in January from a material recovery in the fourth quarter is noticeably improving sit.
Citywide and larger business group meetings are happening.
Group lead volume site tours and bookings.
Increased substantially in the last few weeks.
Most groups that canceled for January and February have rebooked and done so at higher rates.
February is turning out to be much better than we expected just a few weeks ago, particularly.
Particularly the second half of the month.
We expect same property revenues to be down between 25 and 28% versus 2019.
Pick up in March has accelerated and just the last two weeks.
Both holiday weekends in February turned out well and Super Bowl in L. A for us added $3 million to $4 million as we achieved around 90% of occupancy of our <unk> hundred 86, West L. A rooms at a rate of around $800 per night for four nine.
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Our revenue management teams did a terrific job.
We're seeing a significant increase in business transient and group travel as omicron receipts and masking and vaccine mandates are relaxed or eliminated.
We believe there is significant pent up business demand.
To aid, our continuing robust level of leisure demand.
And there is currently little to no price sensitivity from either leisure or business customers.
We're very optimistic about an accelerating recovery in business travel over the next three to four months.
And we're already seeing it for March and April .
And we're extremely excited about the potential growth in occupancy and rate in particular over the next few years.
There will be limited new supply over the next three to four years in our industry.
Particularly in cities and resort markets and that will provide a great long runway for occupancy and rate growth.
Hotel starts are at low levels and will be for at least another year rooms under construction are declining and development costs have climbed dramatically in the last two years.
Any large new hotel development like urban high rise hotels or resorts are now taking 36 to 42 months to complete from shovel in the ground.
Replacement costs have climbed dramatically from pre pandemic levels up 25% to 35%.
And 20% plus in 2021 alone.
Urban and resort land costs have also climbed significantly.
After a great deal of research and effort, we estimate that our portfolio's replacement costs have increased to between 700 and $750000 per key.
When we look at performance in our portfolio.
Our resorts continued to lead the way.
Our resorts, particularly those in the southeast are on pace to far exceed their EBITDA in 2019.
For Q4 of those southeast resorts exceeded Q4, 2019 by $8 million or 61%.
And all 11 resorts combined are on pace to achieve a trailing 12 month same property EBITDA by the end of Q1 of approximately $150 million, that's up $32 million or 27% from 2019.
Combined EBITDA from all 11 resorts in Q4 exceeded Q4, 19 by $11 $2 million or 54%.
With ADR up $109 or 43%.
And revpar climbing $37 higher or 20%.
We continue to be very focused on taking advantage of pricing power and a lack of pricing resistance.
Just for rooms, but for F&B, banquets, and catering parking resort fees and service and administrative charges.
This will help us get back to 2019 bottomline numbers sooner that.
But we clearly still have a ways to go.
July 2021 was the first month, we exceeded 2019 rates.
Q4, 2021 was the first quarter, we exceeded 2019 rates.
And now we're increasingly confident 2022 will be the first full year will exceed 2019 rates.
Even as we regain occupancy from business travel throughout the year.
In Q1 January is estimated to have beat in 2019 same property ADR by over $25 and over 10%.
February ADR is on track to exceed 2019 by approximately $50 or 20% with about $16 or seven points of it due to Super Bowl.
March is looking like it could also exceed 2019 by 10% or more.
Our acquisitions have far exceeded our underwriting and the annualized 2021 returns were terrific.
A seven 2% NOI yield for Margaritaville, and 8% NOI yield for Jekyll Island club resort and three 4% for Astana, CLO Hoya, which we acquired on December one.
When we look at the trailing 12 months through Q1. This year were forecasting Margarita Villa at eight 4% Jack.
<unk> at 8% and our stance here at four 6%.
This is all before any physical improvements, but it does include benefits from operating changes, we've already implemented with our operators.
As Ray said, we've invested almost $350 million in transformational redevelopments.
And major renovations and 24 properties since 2018.
Including 16 properties acquired through the Lasalle transaction in late 2018.
This is a big deal and was a lot of work the increased performance from these projects will substantially increase our performance over the next few years.
And we're already seeing it at our resorts, where we've seen demand recover.
In addition to these major projects. We also have numerous smaller ROI projects throughout the portfolio.
Such as converting the pool on the rooftop of Revere in Boston, two additional indoor outdoor event space.
And adding a resort pool, the chaminade resort in Santa Cruz Mountains to continue the transformation of this former conference center to a more amenity focused leisure and group destination.
We're adding a new leased restaurant at Mondrian in West Hollywood.
Completing the property's recent $19 $5 million redevelopment to return it to its former glory on Sunset Boulevard.
And we're undertaking a comprehensive rooms renovation at viceroy, Santa Monica to complete a $115000 per key.
Our $19 $5 million repositioning of this iconic luxury urban resort.
We're also adding five keys at Le Meridien, Delfina, Santa Monica, creating them out of unused storage rooms and offices.
And then there are two major multi year projects, we've been working on now for several years.
And both involve the master planning of significant unused acreage at former conference centers.
Skamania Lodge in the Columbia River Gorge, and Chaminade resort in Santa Cruz.
With the incredible success of the outdoor pavilion and six Treehouses, we added at skamania in the last five years.
And the trend of consumers looking for increasingly experiential lodging alternatives.
We believe we have the potential to add as much as a couple of hundred units of alternative lodging at both properties, including Treehouses glamping spaces for luxury rvs cabins villas.
Farm houses and additional outdoor activities.
This year at Skamania as the first step in this master plan.
With a $10 million to $12 million investment.
We expect to commence adding three more treehouses five luxury glamping units are multi bedroom villa and.
And a large outdoor pavilion that we'll host additional business and social events adjacent to our recently completed and already very popular 18 hole putting course.
So I'm sure you can tell we're feeling some good vibrations.
So now we'd like to move to the Q&A portion of our call. So Donna you May now proceed.
Thank you ladies and gentlemen, the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we do ask that you. Please limit yourself to one question and one follow up again that is star one to register a question at this time. Our first question today is coming from Greg Miller of choice. Please go ahead.
Thanks, Good morning.
I want to start off asking about San Francisco as investors remain focused on your exposure there.
John I learned yesterday evening that year with park hotels CEO , Tom Ball also more meaning with city city leaders could you share your latest views on the hotel market and your portfolio there.
Sure Hey, Thanks, Greg.
So, yes, Tom Baltimore, and I went out to San Francisco in mid December .
For a meeting a range by the California Hotel and lodging Association.
And we met with the mayor and we met with the Chief of police and we met with the head of economic development for San Francisco and.
They had a lot of conversations both before and after that I.
I went into the meaning extremely skeptical.
With the concern that.
The focus the sort of rejuvenated focus by the mayor.
Related more to the the the issue of the smash and grabs.
That took place.
Sort of mass smash and grabs that took place in Union square in early December and and concern that they were not really focused on the issues that had been increasing over really the last five years or so.
Related to the quality of life on the streets in San Francisco.
And.
I would say that both Tom and I, but I won't speak for Tom, but I think we walked away all of US who were at the meeting thinking.
There is.
I guess, maybe a little like a AA.
Alcoholics anonymous that the first step in solving your problem is recognizing that you that you have a problem.
And I think we walked away not only thinking that they made the first step and that the mayor.
Was was highly focused on.
Fixing San Francisco and turning around the deterioration that had taken place in the last five years and the environment there.
But that they understood the issues.
And we're and have the courage to take some bold steps and.
I was particularly impressed.
That.
I would say the mayor kind of said she'd had enough and I think she got that message frankly from the local population where.
People were fed up and had enough in.
The city was.
Perhaps could be defined as maybe a little like Gotham city and in the Batman Comics and movies and and.
And so.
Two weeks later, she came out and announced the state of emergency for the Tenderloin District.
In order to.
Sort of.
Have a freer set of hands to make changes.
Both from from.
Mental health assistance.
To deal with the drug issues and to deal with the crime issues in policing so.
Her hands weren't tied.
Bye.
Werent tied by sort of local bureaucratic administrative rules.
And then two weeks later she came out with a supplemental budget request for additional police, which she had made in the original budget, but which had been reduced by.
By the board of Supervisors.
And so.
So I think she gets it and I think the police chief who is short handed.
Certainly gets it and has become even more active.
As a result of the state of emergency she announced in the tender line district, and I think the politics are changing in the market. So in the city I mean people really have had enough they're expressing that I think that hopefully leads to approval of those.
The additional funding for additional police by the board of Supervisors, which is a vote I think that comes up in the next few weeks.
Certainly we're advocating for that the business community is as well as the local population.
But you've seen a change and.
Sort of the politics, the beginning of a change in our politics, you had three progressive members of the board of Education, who were recalled in a vote in San Francisco.
Very very encouraging and then there were enough signatures gained.
To put the district attorney to vote on a recall in June .
So we're very encouraged by the change of attitude there are significant dollars out there.
That are in the budget for mental health for homelessness.
Additional dollars for policing will help and so it's going to take a while to get back to where we where it took a while to get the city for the city to get to where it is right now but.
But we think the underlying economy is so strong I mean there were.
There were almost 100 Ipos I think there were 95 ipos through direct listings ipos or specs in the Bay area last year, 10% of the Ipos in the country, where in the Bay area, I think 40% to 50% of the venture.
Capital money.
Went into the Bay area, including San Francisco last year so they.
The continuing growth of <unk>.
The technology industries, and all the industries that are incorporating technology.
And the ultimate beauty of the city and the weather really as I said last quarter makeup.
Make us feel like.
It's a great place to be long term provided they fix their issues, which we're encouraged about.
The direction at this point in the first steps in that direction. So I wouldn't bet against the city and I think we feel we feel very good about the recovery there which has started to happen.
In a more robust way, particularly as businesses go back to the office in the market and particularly as they've they've eliminated most of the restrictions from COVID-19 in the marketplace. So we're pretty encouraged but it's going to take a while and San Francisco will be a slow.
Sure to recover market as well a few of our other markets like Seattle and and.
And Chicago, and even DC, which of course has the strength of the federal government here, who in many cases is yet to come back to the office.
Hopefully that helps John Greg.
It does I think it was very.
Very very helpful for all of us to.
Get an update.
Switching gears for my follow up question.
I thought I thought to ask you about the.
Margin discussion that I was in your prepared remarks.
And related to ADR growth.
The significant room rate growth that you had spoken to you for several quarters is clearly materializing I did sense from the prepared remarks that the 100 to 200 basis point margin gains above pre pandemic levels.
Be driven more from operating savings.
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From the profit flow from room rate gains and maybe you could correct me if I'm wrong.
So for those of US who are trying to model the puts and takes.
Could you provide your latest insights and how we should balance out.
Top line growth, particularly from room rates.
With your long term profit expectations.
Sure so.
It's probably one of the most complicated questions. There is because of course, the whole idea of of talking about margins compared to <unk> 19.
It's a moving target right with a lot of variables that are moving around including inflationary increases and cost increases in wages.
And then the pricing.
Increases that we've been able to take.
In all different product and services, including in room rates at this point, but I think what what we're what we're trying to get across as it relates to cost because.
None of US know what the future is going to bring in and what kind of price increases we will ultimately achieve.
Over the next few years.
And what the cost increases are going to be over that period of time, but but what we do know is we took I think between 102 hundred basis points of costs permanently out of the operating models of our hotels.
So what does that means it means the.
Clustering that we did probably took 50 basis points.
Or more.
The sort of collecting the executive teams and in some cases, even middle management.
Across two or more properties managed by the same property in a market.
Have had big.
Big reductions I mean, if we one example in Boston.
We we've clustered if you will the Westin Copley and the W. In that market under one executive team.
And in many cases, one set of middle managers now.
And that's provide we believe it took out $1 million of costs permanently so long as we own the properties.
Out of operating those two properties on a combined basis and we have that throughout our portfolio.
Some of which we talked we started doing pre pandemic, but the annualized nature of those cost reductions had not yet been fully achieved so.
And we've gone deeper into the executive teams, because where we started was sort of gms and maybe directors of sales and marketing we've moved to revenue management Engineering Finance accounting HR.
Food and beverage in many of these markets and so.
It's allowed us to hire better quality people and it's allowed us to take costs permanently out of the operating structure.
Cross training that we've been doing.
Within the portfolio, which increases the skills of our staff allows them to climb the career ladder make more money over time and allows us to be more efficient in the staff that we hire at any particular moment or that we need particularly in seasonally.
Slow periods, where.
Where we have a much greater ability to flex now because we have more staff that's cross trained including managers in the portfolio. So you take the combination of that and you you include the benefits of technology the removal.
A lot of collateral materials.
The elimination of services that we've now look back on where we got fat when things were good and looked at him and said you know what there wasn't an ROI on this expenditure.
<unk> permanently eliminated it.
So that's what we mean by.
By improving the operating model by 100 to 200 basis points of revenues its cost taken out of the system.
Where margins go gosh.
In any given year.
<unk>.
I can't imagine how hard it is for you to model. It is very hard for us because it's very hard for us.
I would say.
Obviously, we know that that rate flows better than occupancy I mean, we think rate flows may be at 75% and occupancy flows at about 65% or or even 60% depending upon the property and frankly bigger rate flow flows even more right.
100 dollar increase as a percentage at the same percentage is way more valuable than the same percentage off or off a rate that's much lower.
Because it's just able to absorb more more cost increases so.
We've been modeling on a sequential basis, we've talked about this in the last couple of quarters.
And you can see in January where we went negative in hotel EBITDA that there is a certain level of fixed cost and.
And we've been bringing back costs as we've been anticipating this.
This acceleration in the recovery.
On a on a post omicron and Delta basis, So we've been bringing back those additional sales in banquet and catering people and managers and and conference service managers.
Within.
The the portfolio and that has a negative impact.
On a negative revenues like January but will ultimately have a very positive impact on our ability to drive revenues higher throughout the portfolio and ultimately better bottom line. So I can't really help you with.
With sort of overall margin margins as we move forward I do think if this is a reasonably.
A normal length of of macro economic growth cycle, we will peak at.
Both higher margins and more importantly, higher profit per key.
At the peak of this next cycle versus where we were in the last cycle, which also peaked higher then the cycle before which also peaked higher than a cycle before that.
And Greg just to add to John's comments, our focus is really more as you think about your modeling and not on the margin side, but the hotel EBITDA side, how do we grow EBITDA and ensure we are confident we can eliminate a 100 to 200 basis points from our operating model.
But that's from a bottom up build up approach versus a top down approach. So we really look at it more on the hotel you about how do we expand that.
Margins are a function of the revenues and expenses, that's not what's driving it it's how do we.
Grow that how do we re merchandise that underutilized space, what can we do to add additional rooms or other restaurants in there because that ultimately grows EBITDA, which is ultimately what's the biggest focus for us not the ultimate margin as a result of that.
But those aren't very first one for you Tom.
I appreciate the detailed responses, especially on these complex topics.
Okay. Thanks, Greg.
Yeah.
Thank you. Our next question is coming from Bill Crow of Raymond James. Please go ahead.
Hey, good morning, guys.
Got one for Ray and one for Tom.
Assuming tom's in the room right.
John earlier brought up the topic of resort fees and I'm just curious if you could tell us the total.
Resort fee income in 'twenty, 'twenty, one and how that compared to 2019.
Oh.
Think about the growth in resort fees going forward.
And I guess how important is.
Resort fees and the growth of resort fees and the margins of growth fees to you achieving that goal of 100 to 200 basis points of higher margins. This cycle.
Yes.
Right.
Two resort or guest amenity fees.
I have nothing to do with the 100 or 200 basis points that's separate.
Overall I'd say its.
Important part of overall revenue, but again.
A little bit different as you look at a lot of our properties, we have a host of other different amenities and services in that so that's part of what we look at the the guests many fees and driving all that side and their expenses.
Certainly associated with that as well.
So it was a host of different.
Areas, there, but we don't necessarily get into the specific details of providing that but I think what's positive is we're seeing the brands become more.
Two two this so.
Between Marriott and others, there being more open to having this so this is becoming more standard throughout the industry, which I think it will be a good sign as we enter this new cycle here and its become more accepted.
Perhaps grudgingly, but certainly more accepted by the customer so.
And the customers getting value I think look we can't speak for others, but at our properties.
We tried to create these in a way where there's four or five times worth of value for for every for every dollar of that guest amenity fee, whether it's in a resort market or it's an urban property.
Or sort of an urban resort property like properties, we havent, Santa Monica and in West L. A.
Where the pool complex is an important part of the amenities being provided.
But John as it was.
We're resort fees, 20% of your total.
Revenue last year.
Do you have in a number and maybe a comparison to 2019.
No no we don't split out the.
Those.
Revenues, just like we don't split out a lot of the different revenues, but it's an important component, but it is a relatively small percentage of overall revenues.
I think bill it it may be is in the three 4% range of revenues.
Okay.
Tom.
One of the comments, we get from investors is that there is.
Theres pretty good clarity on what's going on.
Sunbelt.
Resort market trades.
But very little activity, so far in the urban markets.
And.
Just wondering what youre seeing from a.
A prospective buyer perspective, I guess you'd be the prospective seller of urban assets.
And what's going on with with valuations and interest level.
Typical more typical divest itself.
Yes, well, thank you Bill and good morning, I think I.
I think clearly there is becoming a transition and a pivot from the Investor Universe, where obviously it was all about leisure destinations and resorts over the course of the last 12 to 18 months.
The conversations that I'm, having directly with investors and with brokers is that still remains.
A very critical piece for people, but obviously you are looking at kind of pelvic premium pricing for those assets and I think people are looking at where are the market supply demand dynamics in terms of the urban markets, where we can get in and there's kind of been kind of I don't want to say, it's necessarily a contrarian shift, but theres a lot of capital out there.
Thats chasing deals they're looking at it for where can they get the best risk adjusted returns and they are turning to the cities because I think that they think that maybe the worst is behind us and there's a little more optimism and there is maybe its not called distress, but there's certainly some opportunity in terms of a basis play from where.
The urban markets have been to where the potential upside is now and so we're seeing from a number of the private equity funds and a number of other high net whereas that transition.
Urban now.
Got enough data points, so I would say that conviction level is emerging but we will see more and more what I'll say pipeline in the urban markets coming through over the course of the year.
And bill where the urban markets are a little different than the resort in sunbelt markets are the urban markets is still a challenge to obtain that.
There is still much more difficult.
All of these urban CBD locations to get enough deep lending pool.
For helping the transaction so there's a lot of capital out there. So a lot of these P buyers, who maybe could be buying with all cash.
That's one thing, but if you need financing to get the transactions. It certainly works in the resort in Sunbelt states plenty of lenders out there.
To provide a bids there at a reasonable spreads, but once you start getting the urban side it sounds like pretty quickly and Youre left a lot of debt funds and those terms are our owners and it's a lot more expensive.
Okay.
The color guys. Thanks.
Thanks Bill.
Thank you. Our next question is coming from Smedes Rose of Citigroup. Please go ahead.
Hi, Thanks, I just wanted to ask you.
What you are seeing in Europe on the housekeeping side.
That's a fairly large piece of expenses there maybe you could talk about.
What are you doing non branded hotels and kind of what the message has been branded hotels.
It seems to me like it's got a little bit inconsistent on the branded side I was just wondering if you're seeing that or what you're hearing from that side.
Yes, I think generally.
First of all I think at our at our higher end properties.
Any of the luxury properties any of the resorts that are that that.
<unk>.
Have a pretty healthy rates.
We have full services back and in fact, they've been back for for quite a bit.
A customer who is paying.
$500 or $800, a $1000 or more is looking for that service, while they're there and we're providing it.
Things like interestingly.
Interestingly.
People talk about the demise of room service.
Room service came back with the pandemic at our properties.
Now it came back and slight in many cases in a different form it was a little bit more like a typical delivery, although again, even at the luxury properties like will apply.
We brought back in fact, I don't know that we ever eliminated regular room service. So.
What we've been trying to do Smedes as gear the services for what the customer wants and what they are willing to pay for and I think as.
I think the brands have some some standards that the brands are not all the same.
They've some have taken an opt in approach for service during your stay some have taken an opt out approach sometimes it varies by city.
End market as well and and I think.
It's not surprising it is perhaps a little bit more confusing when youre looking at the brand properties.
I think at our portfolio I think we've done a really good job of gearing the service towards the customer desires and I think it's evidenced by.
By the Tripadvisor reviews that we get and the fact that pretty consistently across our portfolio I think Ray mentioned, we've climbed eight eight spots in our portfolio, which is pretty significant on average with many properties climbing significantly more than that so.
It's it is a little bit all over the board.
Again, I think when we think back to the earlier question of of course and margins if you will.
We've not been under the impression that on a on an exhaustive basis those services wouldn't come back.
We fully expected them.
To come back in better quality properties and I think.
And sort of the mid scale and down.
I'm not sure. It does come back we don't really have properties in those categories.
And then in sort of the sort of between luxury and mid scale. So you get to upscale or upper upscale I think it's going to vary by.
By the market by rate and buy the property.
Okay. Okay.
Okay that was it from us. Thank you appreciate it alright.
Alright, Thanks Smedes.
Thank you. Our next question is coming from Michael Bellisario of Baird. Please go ahead.
Thanks, Good morning, everyone.
Morning.
And I guess sort of two part question. One I assume you are 30 to $35 per share NAV. That's still holds but my real question and follow up to that is.
Relative to replacement cost.
How do you triangulate that.
700 to $750000, a key number versus what's implied by your.
The estimate call it mid to high five hundreds kind of really what I'm asking is what is it replacing pumps until you and then how does that drives your view of value.
Sure. So so Mike as it relates to the NAV range.
Yes, Youll notice we didn't change it.
We do think.
It's probably a little light right now, particularly.
On the leisure oriented properties given.
Not only where the cash flows of move but where the transaction market has continued to move and followed that cash flow.
But two we'd like to get a little bit more to use your word triangulation a little more data on.
The urban market transactions of course, we've we've had we've had a few on our side, but we think the market has moved in.
In the last three to four months, particularly.
We think it will move even further over the next couple of months as we see this what we think will be a fairly.
Rapid acceleration.
And the recovery of business travel in particular over the next few months so.
So from that perspective, I think if anything we might be a little light but.
We hope, we'll be able to feel comfortable updating it next quarter.
As it relates to what is the replacement cost mean it.
Means what.
The way, we think about it is.
It has a lot to do with the protection from new supply in a particular market now keep in mind people don't have to provide the same properties in that market.
If you are providing select service into an urban market.
It's.
It's not relevant to giving your protection on the full service side because of those rooms will still be competitive on the other hand. The fact that these costs have gone up by 25% to 35%.
Interestingly in some markets the cost of select service is now equivalent to where full service was pre pandemic. So I think we think of it as a big positive.
For the space both in terms of protection of new supply and also ultimately the way people look at values in the transaction market compared to what.
What can I buy something for on a price per pound basis versus what does it cost to recreate.
That product if its worthy of being re created.
Yeah.
That's helpful. Thank you.
Thanks, Mike.
Thank you. Our next question is coming from Floris Van <unk> of Compass point. Please go ahead.
Thanks for taking my question guys.
Just getting back on the D V question, a little bit more.
Clearly there there's been a lot more comfort.
From investors on the resort side, and I guess from some private equity guys on the on the select service side, how sustainable is it.
The.
The rise in resorts values in your view and what can we expect.
To happen to the growth in values, there is that going to.
To plateau or is it will continue to go up it if you are able to continue to push the rates there.
Yeah, I mean, I think I think theres there God, there's so many things going on right fliers.
Even by the nature of your question.
There is a lot of variables that are moving around then and.
I mean, we'll give you our perspective, but again, it's only our perspective it certainly factors into how we view values in.
Our risk return risk adjusted return perspective.
How that drives what we buy and what we sell but I think from a from an underlying operating perspective, I think we feel that.
Certainly a significant part of.
The.
Growth in and recovery in cash flows and resorts and leisure focused properties. Some of it is a structural repricing.
Pricing doesn't outside of economic recessions, it doesn't often turned down and often and economic recessions. If it does turn down it doesn't turn down much.
So there are some unique variables here and it's really hard to measure.
Some of the compression that's happening because of a lack of alternatives or alternatives that have been eliminated for for some period of time, but there've been a lot of gains made in the leisure focused side the resort side related to.
When you look at our properties in terms of quality I mean, there is I think we said a third of our gains related to rate have been share gain in rate.
That is permanent that's a reflection of the investments that we've made over the last four years and the resorts every one of these resorts has been.
Materially renovated or in many cases repositioned up within the portfolio. So for US we think most of it sticks not all of it but we still have inflation, we still have growth that's happening.
When we look at this year, we didn't go into the year with a lot of a lot of sort of past generational rates on the books.
Which actually.
Caused the rates last year to be sort of below market. If you will sort of like retail would be we had non market rates on the books.
Going into the year and that really our rates would have been higher but for that given what the customers have been willing to pay is not the case for this year. We didn't have a lot of business on the books, but perhaps for a couple of properties, we bought like jackal.
And like our stance here, where there was significant group business on the books and even transient business on the books at sort of prior lower rates and will roll through that over the course of the year and we will still have significant increases moving into 'twenty three because we've we've.
Brought those rates, if you will up to market.
I think in.
The overall market in general.
I think values are going to follow cash flow, but I think what's happened is your cap rates are higher.
And then they were pre pandemic on those cash flows.
And they can be.
If these luxury resorts or we're trading at five to five and a half caps pre pandemic.
On forward numbers or even on trailing numbers, you're probably looking at something that's more in the six five to seven and a half range.
In the current market.
And I think that's a reflection of.
Sort of risk associated with some of this right.
Or perhaps the growth rate beyond 'twenty, two maybe to be more muted than some of the other segue.
Segments.
Our properties so.
I don't know Thats sort of the way we've been thinking about it I think the market probably seems to be thinking about it the same way and as Ray said certainly as it relates to private capital some of the values get influenced by the availability of financing.
Which is more heavily weighted to properties.
With cash flow versus those that.
Havent seen their cash flows recover significantly.
Thanks, John and maybe one quick follow up.
Does that mean that youre going to be allocating capital more capital towards the resorts you had been doing that and pivot more away from the urban markets or will you try to be sort of counter and potentially do the opposite how do you think about that.
Okay. So.
We have simplified sort of that thinking and because we're purely a risk return adjusted.
Investors. So we have our views of what risks are and what returns should be for those risks, but by type of property by market, what we focus on individual properties.
And so.
No different than when people look to buy stocks.
Values of those underlying assets have an impact on what we ultimately buy.
And so.
Let's wait and see how other people value those risks and returns do they have similar views of those risks.
The returns that are required and then as it relates to us Floris.
We've said this.
Consistently.
We tend to be more focused on properties, where we can change the property, where we can upgrade it we can reposition at both operationally and physically.
And and create value.
And sort of looking looking at things like a commodity.
Which are not the kind of assets, we buy anyway.
Thanks, John I appreciate it.
Thanks Lars.
Thank you. Our next question is coming from Shaun Kelley of Bank of America. Please go ahead.
Hey, everyone. Thanks for putting me on too.
John I, just wanted to ask a little bit about what.
What youre seeing on business rates versus leisure rates. So I think you commented been pretty clear on the broad rate environment, and what you've been able to get there but can you.
Can you just give us any color there about like what you're seeing maybe on forward pricing.
Relative to the other and how strong is the mix positive as you typically get business right back now or is it more I mean, I think we know it's about filling in the mid week gaps, but sort of trying to figure out what that pricing does to overall mix.
Yeah, that's a really good question and it's all a moving target right, but but what we're what we've been seeing Sean is we and we talked about this a little bit last quarter and the quarter before that we're seeing a recovery in all rates all segments.
Whether it's business transient whether it's group whether it's leisure.
When we look at our urban <unk>.
Properties.
We've seen rates continue to recover and I think as we might have mentioned in the call but to reiterate when we got to December which gets influenced by the last week of the year, but it was a really strong two weeks of business travel.
We saw our weekly urban rates.
And up at almost 2% higher than December of 2019 that was coming from in October which is a pretty good business month as well.
Even better than December which was down 11, 5% when we look at just weekday again, we're trying to isolate the best we can from the sort of the anecdotal stuff and look at the data when we look at week day ADR for our urban properties.
It went from down 15, 7% in October to down four 6% in December now again.
<unk> week days during the holiday week and that helps but.
But it's a pretty <unk>.
Continuous when we look at these by quarter every quarter as improved from a rate perspective in each of its markets.
Whether it's San Francisco or at South, Florida, They're just doing so at a different pace. So all the rates are climbing at this point, which is why we're so bullish if you will where we think pricing is going and frankly.
We've been saying this for over a year now as it relates to pricing. So we have even more confidence today as we see business transient.
Trends in pricing rise as we see group get rebooked and get booked at higher rates.
Then in 19 and then.
Versus last year and it's it's.
And we continue to see leisure rates increase as well.
That's perfect and then the follow up would be sort of same ilk would be over Presidents' day weekend Annie.
Any signs of let's call it rate fatigue on the part of the consumer I think your numbers have continued to be very consistently strong, but just anything at the very margin that suggests it wherever youre pushing isn't sticking or the <unk>.
Service levels are required to reach those rates are changing materially just sort of wanted to get a sense of.
The the vibe out there.
We know these rate increases have been substantial and obviously when youre getting the numbers that you talked about I mean, obviously, the Super Bowl, but the 800 $800 number sticks in my head there is a different customer in the building they were expecting a different level of service. So just.
What's your thought there coming out of present day.
Yes.
President's day was was a blowout.
From.
Really all perspectives.
Rate was up significantly I mean, we published the weekly numbers.
The weekend numbers were huge.
And it came with occupancy so.
So if we if we.
If you check back in those numbers I mean, we saw.
If theres, if theres fatigue shine.
There is still enough.
<unk>.
The well off willing to spend customer two to fill our hotels that are charging those rates and so.
I think we ran.
69, 9% for the whole portfolio.
Over Saturday Night, I think we ran in the sixties for both Friday and Sunday Night, and then the rates were.
Pretty strong not as strong as new year's.
And for President's day isn't traditionally.
As as strong as well.
But they were really healthy, particularly when you consider that sort of.
<unk> was still an impact on on demand.
As was Valentine's day.
Still being impacted by omicron demand the weekend before.
Which also means Sean if you haven't booked spring break yet you really.
A bunch of resorts you love to host you at.
Ryan I don't get a lot right in my life, but I booked spring break.
14 months ago, because I saw just yeah, well, you're one of those below market.
Customers that we're just we'll be just happy if you cancel you're waiting for me to cancel I get it.
Yes.
Thank you. Our next question is coming from rich Hightower of Evercore ISI. Please go ahead.
Hey, good morning, guys. Thanks for squeezing me in.
Just a quick one on the guidance and I commend you guys for putting a stake in the ground.
At least in terms of the first quarter, but you know just given if I look at if I look at adjusted EBITDA, you know, there's a $5 million range from top to bottom.
Small dollar amount, but large in percentage terms and stuff I think we've got you know.
Five or six weeks left in the quarter here, what what factors would cause you to hit.
Hit the low end versus the high end or even materially underperform a materially outperform the range that you've given just trying to understand I understand the landscape that we're all sort of you know.
Playing on here.
Yeah.
It's a really good question and I would say from a.
As we as we talk to our property teams.
Yeah.
It's really hard for them to manage the business right now because it's moving so much I mean and you go from a period, where he ran 30 33 or 34% in January to running close to 50% in February and maybe maybe in the upper <unk> to 60% in March and you get these weeks and <unk>.
Cans that are up and down pretty dramatically different than pre pandemic and so there's a lot of things going on we're adding staff back at our properties, we may or may not be able to hire those people. When we think we're going to hire them. So it impacts our cost we don't know how much spend is going to be.
We've got a lot of groups, we don't know how much they're going to spend how much more theyre going to spend how many people call out for COVID-19 , how much over time, we have to run.
It's a very very difficult environment to forecast.
The overall business I mean revenues are hard enough expenses or even harder right. Now so we're doing our best to estimate what we think flow is going to be and it sort of goes back to the comment rich I made earlier about I can't imagine how hard its even harder for you all.
And we know that's incredibly hard because it's really hard for us right now to forecast and.
Because there are just so many moving pieces.
Unpredictable pieces, even on a weekly basis so.
We're doing our best.
We took a shot at outlook, we gave a wide range just because we we have so many variables that are moving around then.
Honestly, we've never been through a pandemic before so we don't have any history to look back on.
Okay either way that's helpful. Thank you.
Yes.
Thank you. Our next question is coming from Anthony Powell of Barclays. Please go ahead.
Hi, guys. This is Allison on here for Anthony.
Urban transaction values and Sunbelt M resort, what are you seeing regarding trends for urban hotels in the sunbelt, we've seen more transactions in markets like Austin and you previously were in Atlanta, So could you build up more exposure here this year. Thanks.
Yes.
In the Sunbelt is certainly the flavor of the day I mean, I think when you look at some of the demographics.
Certainly the headlines I think that people have looked at markets like Charleston, like Savannah, like Austin, certainly a lot of that investment activity. I think there are also you also kind of follow what's happened just in terms of easing of restrictions and flexibility and businesses are open from that.
I think they will continue to be an attraction to those markets, but I also think that there's probably a feeling of is there a matching out of those markets and therefore, I think there's going to be a pivoting towards maybe some of the more traditional markets or other markets.
The Midwest or in the northeast are on the West Coast, where as we said before as it relates to replacement cost, maybe there's kind of a better feeling as it relates to a discount to replacement cost as opposed to potentially paying off in those markets given how competitive it's Ben.
And I think just so you understand how we think about it.
I mean, the sunbelt markets are certainly part of the group of markets that we're evaluating and looking at assets.
To potentially purchase.
Traditionally the challenge of some of those markets is there just aren't any supply constraints in those markets and so while you have continuing.
Population migration and business migration into the Sunbelt, which has been going on for.
Over 100 years at this point.
The challenge has always been that values don't rise as much in those markets and don't have the potential to go up as much because supply more quickly traditionally has come into those markets. So we look at that from a risk perspective, and that's part of the evaluation Allison and so.
Yes, we may end up buying in those markets, but it will be because we find an asset that probably we can do something with in terms of repositioning it and where we think there are some kind of supply constraints or protection. When we went into Nashville, and we bought the Union station Nashville Hotel, we felt like it has.
Some kind of a moat because it was an incredibly unique asset in that marketplace and while we subsequently sold it.
In the summer of 2020, I think it would be that kind of asset I think.
Where it's more unique than a typical.
Maybe a typical branded property in the market.
Thanks for the time.
Thanks, Jonathan.
Thank you our last question for today will be coming from Chris Darling of Green Street. Please go ahead.
Thanks. Good morning, just a quick one for me and going back to the ROI projects that you highlighted earlier, which they all sound very promising and I see that several are taking place at hotels subject to a ground lease so with that in mind I was hoping you could just help me understand how you think about allocating capital in those instances.
When it may or may not make sense to do so.
Sure so.
It depends how long the remaining ground lease.
Is the number of years left on it and also who the owner of the ground is so we have a lot of frankly most of our ground leases are with governmental authorities, whether it's the GSA, whether it's the city of San Diego, whether it's the National Park service.
At the Argonaut et cetera, and so traditionally what we've done.
Is.
Many of those are limited in terms of the term.
They can they can have at any point in time. So some of those markets. As an example are limited to 49 years.
So traditionally.
When those ground leases get to a point, where we feel like.
We're getting near a point, where a buyer couldn't finance them. We'll go back to the governmental authority typically alongside of our renovation.
And we will get an extension and that has happened at a number of the properties that we own that we own when I was at Lasalle that we continue to own and that's the history of properties like that in many of the markets. I gave you. An example, before we bought Jekyll Island.
Every property of every kind on Jekyll island is on a ground lease with the Jackal Island authority, which is owned by the state of Georgia.
They extended every ground lease in that market, whether it was for Jekyll Island club, whether it was for any of the other hotels on the island, whether it was for the retail whether it was for the restaurants or the residential units that are all on the island. They were all extended and they were all extended.
By the same amount of term.
So we're really conscious when we look at assets and then when we invest Additionally in those assets to buy assets, where we believe.
There is there is either a very extensive term so.
Going to get the value back.
<unk> for the investments that we make in the return.
On that value or two there is an extension that is highly likely to happen because that is the normal process.
With those ground leases.
Got it thank you.
Thanks, Chris. Thank you. Thanks, Kurt brings us to the end of our question and answer session I would like to turn the floor back over to Mr. Bortz for closing comments.
Hey, Jonathan Thanks, very much for for.
Overseeing our call and thanks, everybody for participating we look forward to updating you about our first quarter end.
That's just 60 days away and also we will continue to provide those monthly updates.
We established during the pandemic.
Ladies and gentlemen, thank you for your participation and interest in Pebble book Hotel you may disconnect. Your lines have log off the webcast at this time and enjoy the rest of your day.
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