Q2 2022 Pebblebrook Hotel Trust Earnings Call
Greetings and welcome to the Pebble broke hotel trusts second quarter earnings Conference call. At this time, all participants on 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 conference.
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. Please go ahead.
Thank you Donna and good morning, everyone welcome to our second quarter 2022 earnings call webcast. Joining me today are Jon Bortz, our chairman and Chief Executive Officer, and Tom Fischer, Our Chief investment officer, but before I start a reminder, that many of our comments today are considered forward looking statements under federal Securities laws. These statements are subject.
Numerous risks and uncertainties as described in our SEC filings and future results could differ materially from those implied by our comments today forward looking statements. We make today are effective for today July 27, 2022, and we undertake no duty to update them later.
Discuss our non-GAAP financial measures on today's call can we provide reconciliations of these non-GAAP financial measures on our website.
<unk> hotels dot com.
Last night, we reported very favorable Q2 results faster growth than we expected and business travel both group and transient coupled with continuing robust leisure demand allowed us to significantly exceed our expectations from 90 days ago.
Our urban properties led the upside.
Second quarter adjusted funds from operations at <unk> 72 per share was <unk> <unk> above the top end of our outlook and 83% of Q2 2019.
This represents a dramatic improvement to both last year. When we had negative <unk> 10 per share in Q1, which was just 23% of Q1 in 2019.
This strong performance was driven by the hard and intelligent work of our hotel operating teams management companies and asset managers.
We thank each of them for their great efforts and achievements in the quarter.
On the revenue side same property Revpar came within 5% of Q2 2019, even though occupancy was down 20% showing the sizable demand recovery opportunity we still have ahead.
Average daily rate rate climbed to very strong 18, 7% compared to Q2 2019 non.
Non room revenue per occupied room room rose, an even stronger at 25, 1%.
And total revenue per occupied room increased by.
28%.
All representing an acceleration from Q1's growth rates.
These revenue increases demonstrate our sustainability to take room and non room price increases across the portfolio, which are offsetting operating cost increases.
Same property revenues recovered to 96, 9% of 2019 levels. Despite occupancy of 69, 4% versus 86, 7% in Q2 2019.
Same property hotel EBITDA recovered to 94, 7% of Q2 2019.
Which marks our best quarter compared to 2019 since the pandemic.
Even more encouraging with a rapidly improving demand trends as the quarter progressed throughout our urban markets from both a business and leisure demand segments.
In Q1, our urban hotels ran in occupancy of 45%.
In April and May we experienced a rapid improvement in demand in both business and leisure demand from both group and transient driving occupancy is up to 65% for both months with another significant step up in occupancy in June to 72%.
For July were forecasting occupancy at 7% or more for urban hotels.
Down slightly the June as business travel has historically been slower during the heavy summer vacation season in July and August .
And it does appear that historical seasonal demand patterns, including weekday versus weekend demand are returning as business travel recovers. For example, we are now experiencing slightly softer occupancy levels, especially from business travel around and during the weeks of major three day holidays like Memorial day and July 4th.
This is a reversal from last year when the three day holidays, where the more substantial periods of hotel demand given the lackluster level of weekday business travel last year.
Driving into the occupancy improvement from Q1 to Q2, Boston improved from 68% in Q1 to 87% in Q2.
San Diego from 61% to 78%.
Philadelphia from 46% to 72%.
Chicago from 28% to 66%.
Seattle, and a 31% to 64%.
D C from 27% to 63%.
In San Francisco for 24% to 50%.
Weekday occupancy at our urban hotels, which is a good proxy for business demand increased to 66, 9% in Q2, representing a dramatic improvement from Q1's 43, 4%.
It's still down about 20 percentage points in 2019, which represents a significant opportunity for further recovery as we head into the prime business travel season in the fall.
Weekend occupancy at our urban hotels rose to 73, 3% in Q2, compared with 54, 4% in Q1.
Again, a very encouraging sequential improvement quarter to quarter and representative of the domestic and international leisure customers beginning to return to the major cities.
At our resorts, we continue to experience robust demand with occupancy at 71% for Q2 compared with 78% in Q2 2019, so down just seven percentage points due to normal seasonality.
This is a significant sequential improvement from Q1, when we were down 13 percentage points.
Our same property.
Property room rates at our urban hotels increased rapidly during the second quarter growing 22, 2% from $234 in Q1 to $286 in Q2.
ADR for urban markets in total exceeded Q2, 2019 by $19 or seven 2% and many of our urban markets ADR exceeded Q2, 2019, including Miami La <unk>.
Boston.
San Diego D C and San Francisco, which is a market that probably surprises some of our investors.
<unk> de ADR at our urban hotels is $279.
Lately exceeding Q2, 2019, and their first quarter that urban weekday ADR exceeded the comparable quarter in 2019.
Weekend, ADR was $281, surpassing 2019 by over $40 were 17, 4%.
Overall increase in demand and pricing continues to be extremely encouraging.
Especially since our urban markets still have a lot of demand yet to recover which we expect will continue throughout the year.
At our resorts, despite more difficult year over year comparisons in several resort markets, such as South, Florida, Q2, ADR was $427, which was up 54% to Q2 2019, and a substantial 16% over Q2 last year.
These powerful pricing trends are continuing into July , which historically is one of the strongest leisure demand months of the year.
Same property hotel EBITDA for Q2 was $138 8 million down just five 3% to Q2 2019, despite occupancy about 20 points below 2019.
<unk> same property hotel EBITDA margins for Q2 were down just 83 basis points compared with Q2 2019, mainly due to increased fixed expenses, including property taxes, and insurance, which increased 12% negatively impacting margins by about 100 basis points excluding.
Excluding these fixed expenses hotel EBITDA margins actually increased by 20 basis points compared with the second quarter of 2019 were.
We're pleased with these results given the occupancy is still only 80% recovered to 2019 levels.
The ability to expand our same property EBITDA profit margins as occupancy recovers highlights the significant upside going forward as more business travel returns with favorable operating leverage yet to be realized in portfolio.
This also underscores the revised business model is at our hotels.
Our properties are more operationally or technologically efficient mitigating operating cost increases in this inflationary environment.
As a result of these much garnering forecasted hotel operating results are adjusted EBITDA climbed to $128 8 million 83, 8% recovered versus Q2, 2019, and $10 3 million above the top end of our Q2 outlook.
As we look forward to the third quarter, the improving business travel demand trends are continuing.
Seems to be plenty of pent up demand for meetings.
Group bookings lead and site visits remain healthy.
Closely monitoring overall business and leisure consumer behavior, and yet to see any pullback in demand future booking pace, our room rates, so very encouraging.
We continue to expect ADR to be far higher than 2010.
For all of 2022 led by our resorts, but with an increasing number of urban markets climbing above 2019 as the year progresses.
Based on current trends and the increasing the visibility of business on the books. Our current outlook for Q3 versus 2019, it's where revpar to be down just 5% to 8% and up $32 five to 36, 8% to Q3 2021.
Given the economic indicators.
Showing signs of slowing.
And while we haven't seen any indications of a slowdown in the travel recovery, we're being suitably responsible for our Q3 outlook.
Adjusted EBITDA is expected to be down just 12% to 19% of Q3, 2019 and up 93% to 110% to Q3 2021.
Outlook is better than we expected 90 days ago, revealing the improving how we drove demand and overall travel environment. Despite heightened concerns about the economic slowdown.
Our Q3 outlook for Revpar same property hotel EBITDA, adjusted EBITDA and adjusted <unk> removed. The three properties. We currently have under contract as we assume these hotels are sold during the quarter.
Shifting to our capital improvement program, we remain on track to invest $100 million to $120 million in the portfolio in 2022 with approximately $80 million of a targeted for a number of ROI redevelopment projects, which we expect will generate cash and cash returns of 10% or higher when these transform and remerchandise hotels and resorts.
Stabilize over the next two to three years.
John will provide additional color into some of these projects later on our call.
On the investment side on May 11th we acquired the luxurious and unsafe in downtown Naples, Florida for $156 million and on.
June 23rd we acquired journeys Newport resort in Marina for $174 million.
Both of these resorts of healthy trailing 12 months NOI yields with the end of the fifth at 7% and journeys Newport seven 1%.
Looking at our 2021 acquisitions, they are all exceeding our underwriting and more importantly, they are already generating robust trailing 12 month NOI yields.
Margaritaville Hotel Beach resort is at nine 8% Jekyll Island is at eight 5%.
<unk> at seven 4% and the key west <unk> at 10% plus.
We also made significant progress with our disposition plan on June 28, we completed the sale of the marker San Francisco for $77 million.
We have also executed three separate purchase and sale agreements, which include hard money deposits, which separate buyers for three of our urban hotels totaling $183 9 million of additional gross sales proceeds.
We expect these sales to be completed during the third quarter and we have additional properties on the market for sale.
Transaction market is gotten bumpier due to the debt markets and some deals are taking longer to close to quality assets like ours continue to be desired by the vast amount of equity looking to invest in the hotel industry.
Turning to our balance sheet, we have no meaningful debt maturities until November of 2023 and as of June 30, we had approximately $560 million liquidity and 75% of our debt was locked in with fixed interest rates limiting the impact of rising interest rates on our cash flow.
Finally.
Given the current improving demand trends, we have exited our covenant waiver paired with our bank group. This marks another significant milestone in our road to recovery and substantially enhances our balance sheet and operating flexibility.
Now that positive note I would like to turn the call over to John John .
Thanks Ray.
As Ray indicated the trends are very positive coming out of the second quarter and heading into the third quarter.
For Pebble Brook, we're almost back to 2019 levels for both revenues and hotel EBITDA.
This recovery in the prior recoveries following the great financial recession, the 2001 recession and the events of 911, the great real estate collapse of the early nineties and the fed induced recession in the early eighties have clearly demonstrated the incredible resilience of the hotel industry.
After each recession recoveries have led to record highs in hotel revenues and profits.
This industry, while obviously much more volatile than other real estate sectors always balances back sets New records relatively quickly and due to its one day leases and secular demand growth has forever, followed inflation and replacement costs higher.
We see no reason for any different outcome. This time and this years recovery firmly demonstrates our industry has incredible resilience.
With replacement cost for our portfolio currently estimated in the $750000 per key range and with supply growth severely restricted by the pandemic very limited availability of construction financing and generally challenging economics for new builds.
Our industry and company have a very long runway to not only fully recover but to again grow and hit new revenue and Bottomline Records.
We expect the supply constrained environment to last four or five years.
And whether we soon have an economic slowdown or recession. It's just a matter of time before we hit these new records given the supply restricted fundamentals.
In addition.
Our performance is and will be further bolstered by the benefits coming from the significant investments we've made in our portfolio in the last several years, where we redeveloped transformed and repositioned properties, mostly from the Lasalle portfolio to higher quality levels with higher average rate.
And ultimately higher bottom lines. This is already being demonstrated by our overall ADR share growth in the portfolio, particularly at our resorts were recovered demand levels have allowed us to price our repositioned properties substantially higher for.
For example year to date, our resorts have gained on average over 17 100 basis points of ADR share over their market competitors, representing $57 more in rate or roughly one third of the massive $171 ADR gains at our resort.
Since 2019.
Gaining this extremely large amount of rate is obviously, a big part of the reason for the large bottomline growth at our resorts over 2019 levels.
And it has already resulted in a very significant return our investments and repositioning and transforming these resorts over the last few years.
Year to date, our resorts, excluding gurney's and in on fifth have gained $30 million more in EBITDA than the first half of 2019.
And they are on pace to game between 50 and $60 million for the entire year.
Our investments to redevelop reposition and upgrade these properties, along with adding amenities and transforming and re concept in restaurants and bars re merchandising indoor and outdoor space totaled approximately $120 million.
So our return on these investments has already been very attractive and there's more to come as these resorts have not yet stabilized.
At La Playa for example, where we invested $20 million to dramatically upgrade this property to.
Its current luxury positioning.
Our EBITDA has grown from $16 $5 million for full year 2018.
To $33 $5 million on a trailing 12 month basis through June 2022.
The improvement in bottom line results at La Playa like our other properties comes not only from gaining significant rate share in the case of apply its over 2800 basis points versus 2019 or $129 of ADR.
But the EBITDA increase also comes as a result of the improvements we made throughout the resort.
This includes the restaurants, including <unk>, which is the main restaurant and bar, which now goes over $17 million in revenues on an annual basis.
And the Tiki bar and the retail outlet and Spa and the club restaurant and improvements to the meeting spaces and other venues.
Non room revenues at La Playa.
We have grown from $24 7 million for full year 2018.
To $36 $7 million on a trailing 12 month basis through June 2022.
Clearly this is almost 50% this almost 50% increase in non room revenues is contributing substantially to the almost doubling of EBITDA. This property since 2018.
Even though we only just completed the full redevelopment last summer.
Or consider mission Bay resort, where in the second quarter of 2020.
We completed the repositioning of this former Hilton to a luxury independent resort through a two phase $32 million redevelopment.
As this property is just beginning to kick into gear. This year, we've gained 680 basis points of rate share versus 2019.
And we're building momentum as group returns in a big way.
And with the dramatic improvements in the public areas and additional outlets to drive increased non room revenues.
San Diego Mission Bay Resort grew non room revenues by 49% in the second quarter from the same quarter of 2019.
The rate improvement combined with a huge growth in non room revenues led to a 124% increase in EBITDA in the second quarter versus 2019.
At low bears del Mar, where we recently completed a dramatic $11 $7 million repositioning of the small luxury resort in the second quarter of 2021.
We've gained over 3100 basis points of ADR share versus our luxury competitors or $115. So far this year as compared to first half 2019.
Combined with our substantial improvements to our public areas and the addition, and re concept thing of all restaurant and bar outlets, which have also substantially increased our non room revenues.
EBITDA in Q2 grew by 76% compared to the second quarter of 2019.
Take shaman odd, where we just completed a $3 million resort pool, which we added to our existing pool and follows 2000, twenty's dramatic repositioning of the resorts public areas meeting space restaurant and bar outdoor event spaces and wedding venues into our luxury product.
<unk>.
<unk> has already gained 920 basis points of rate share year to date.
In food and beverage revenues have grown 49% so far this year.
All together delivering growth of 107% and EBITDA versus the first half of 2019.
As this property begins to ramp up from its repositioning over the next few years. It is a huge opportunity for growth.
Every one of our resorts with the exception of then on fifth and Gurney's, Newport, which we just acquired.
All of them have gained significant rate share so far in 2022 and.
And all I've done so as a result of our significant investments, we've made transforming and upgrading that.
Even Jackal Island club resort.
Where we haven't yet started our redevelopment has gained significant share due to a repositioning opportunity, we and noble house recognized when we were acquiring this very unique property.
And Theres a lot more upside to come as we commenced our redevelopment this winter.
You have to property investments, we've made to drive upside in our Bottomline haven't been limited to our resorts.
In 2020, we completely renovated both the embassy suites and Westin Gaslamp in downtown San Diego through $34 million in total upgrades between the two properties and were just beginning to see significant benefits at both of these properties as citywide and group meetings return in a meaningful way.
We expect again 700 to 1000 basis points of rate chair upon stabilization.
In the second quarter of 2020, we also completed the $12 $5 million transformation and upgrading of Le Parc suites in West Hollywood.
One of our three all Sweet West Hollywood hotels.
Year to date rate is up 23% or $57 versus 2019 at.
At $307 for the first six months and we're gaining ground on our competitors.
For the first quarter since the redevelopment was completed.
That being the second quarter, where parks Q2, EBITDA exceeded Q2 2019 in this case by 10%.
Also in West Hollywood in late March we completed a $6 million transformation of the 108 room Grafton on Sunset to hotels Ziggy the newest member of our unofficial Z collection.
While we're really just getting going the reviews and customer response at this unique music focused hotel in venue have been off the charts so to speak.
In our first quarter since the completion and conversion.
Our ADR has already climbed $45 or 22% compared to 2019.
In the second quarter of 2020, we also completed $43 $5 million worth of major Redevelopments at Viceroy, Santa Monica and what are now hotel Zena D C and Viceroy D C.
These three hotels are still in the early stage of their ramp up.
But the new products have been very well received and all have significant upside as demand returns to these markets and we have an opportunity to push rates and gained share.
Santa Monica is faster market recovery is allowing us to achieve significant improvement at the viceroy Santa Monica as its rate is up 22% or $82 in the first half of this year as compared to 2019.
And most recently, we completed the $28 million redevelopment transformation and conversion of hotel vitale into the luxury and eco focused one hotel San Francisco.
We reopened the hotel on June 1st.
The hotel is ramping quite rapidly with occupancy growing from 28% in June to the low to mid forties here in July with further increases expected through August September and the rest of the year.
Most impressive and encouraging has been the rate growth we've already we're already achieving.
So far average rates are over $100 higher than in 2019.
As we're now competing head to head with the luxury sat in San Francisco.
As demand continues to recover we feel confident that this hotel will achieve an outstanding return on our $28 million investment.
Yeah.
In addition to the future upside from the 20 plus properties, we've transformed and repositioned higher in the last several years as these properties ramp up to stabilization.
We have significant additional upside from the major upcoming Redevelopments of some of our recent acquisitions, including Jekyll Island club resort in Georgia.
<unk> CLO Hoya hotel and Spa Margarita Villa Hollywood resort.
And Gurney's, Newport, Marina and Spa in Newport, Rhode Island, as well as properties obtained all of these properties sorry were obtained through the Lasalle acquisition.
Including.
The upcoming conversion I'm sorry.
These are additional to those properties from the Lasalle acquisition and they include the upcoming conversion of hotel <unk> to Margaritaville Gaslamp district the.
The second and final phase of the Viceroy Santa Monica redevelopment.
The lifestyle transformation of arguably the best located hotel in downtown San Diego.
Hilton Gaslamp District hotel.
The conversion of Paradise point resort in mission Bay, San Diego to a Margaritaville resort once our plans are approved.
And the future addition of potentially hundreds of alternative lodging units and other facilities and amenities at both skamania and shaman odd.
In addition to the very significant upside from these major past current and future Redevelopments and repositioning.
As the recovery continues and we move to the growth phase of the economic cycle, whether next year or the year. After there is very significant operating leverage in our portfolio from the more efficient property level operating models developed by our operating teams during the pandemic.
We've also spent the last almost four years transforming our portfolio to a more balanced leisure and business customer mix.
Achieving a 50 50 balance through the past and upcoming sales in our urban markets and the acquisition of a number of more leisure focused resorts.
Our portfolio transformation has been ongoing since we acquired Lasalle and sold roughly $1 $6 billion of urban hotels from that portfolio.
And finally.
The acquisitions, we've made this year are being financed by sales, including the recent sale of the marker San Francisco for $77 million. The three properties currently under separate contracts to be sold for $183 $9 million, which we announced yesterday and additional properties.
Is that are on the market.
And we also funded half of the fifth acquisition with $77 million of preferred units.
We also expect to bring additional properties to market for sale later this year.
At this point in time, we expect to be a net seller for the year.
We're very optimistic about the future of our business.
We've been very busy hard at work, creating value, which we believe we're doing successfully.
And we're confident the investment community and the market will recognize the very large disconnect between the current public market value of our company.
Which seems to have already more than discounted moving into the potential danger zone of a recession.
And the underlying private market value of our company based upon property values determined by real current transactions.
Now, we'd love to move to the question and answer portion of our call. So Donna you May 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 that your line is in the question queue. You May Press Star two if you 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.
Darkies.
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Our first question today is coming from Dori Kesten of Wells Fargo. Please go ahead.
Thanks, Good morning, guys.
Are you thinking about.
Dividend that 'twenty three debt maturities in share repurchases as you consider a range of recession or slowdown scenarios over the next year.
And in addition.
He has talked about.
Sure.
Well first as we think about the dividend Thats more of a 2023 story than something this year.
We had some net operating losses that were carrying forward the last couple of years.
Which we have the opportunity to burn out to that.
So that's one of the thing about the dividend so thinking about that more of a 2023.
It also depends on the outlook of the economy at that point in time in other sales as.
As well on our debt maturities and we look at this.
On a long term basis.
Not just our 'twenty three maturities, but maturities beyond that.
We feel very confident it will we'll be extending all of those.
Great relationships with our with our banking group.
Extended out a $1 billion of our debt during the pandemic.
So you should expect that we'll do the same as we have historically.
And many of these bank relationships we've had for decades. So that's also showing a positive and certainly right now in the world.
The bank's sentiment right now towards the hotel space is very positive it's much better than it was 12 months ago.
So we have no concerns about those sort of any.
Any of those debt maturities upcoming now were in 2024.
And just the last piece of that share repurchases.
Sure.
As we go through it as John noted you should expect us to be funding.
The acquisitions that we completed this year with our dispositions.
So in addition to the marker in the three coming up we may have some additional sales. So that's funding the acquisitions and beyond that we'll use that to reduce debt and evaluate share purchases again, depending on what the environment is and how our share price is.
At the time, we have about 150 about $150 million share buyback.
<unk> been authorized by the board and we'll evaluate that but similar to what we did in 2016 and 2017 when we.
Sales with debt Paydowns <unk> stock repurchases.
Expect some similar.
Procedures this year.
Okay.
Great.
Yeah.
Thank you. The next question is coming from Gregory Miller of truly Securities. Please go ahead.
Yeah.
Good morning.
Hi ask about 2023 for what you can share.
I know it's early.
But I was curious about peak season winter 2023 for some of your warm weather leisure markets.
You have benefited from considerable room rate growth post pandemic.
And thinking about South Florida in particular.
Based on the current macro today do you anticipate room rates in these leisure market.
Will rise at or above inflationary levels or operating cost levels in this upcoming winter.
Hey, Thanks, Greg So it's interesting when we look at.
When we look at what's on the books already in Q1 for South Florida.
Rates are up significantly.
On both the transient and the group side now we don't have a huge amount of business on the books, but we do have a healthy amount of business in the first quarter of <unk>.
A lot of people, who go to South Florida that go to La Playa.
That go to the end on fifth kind of re book is as soon as they leave for the following year and so certainly.
It's very encouraging what we're seeing are ready.
In terms of rates in South, Florida, and frankly for the whole portfolio next year and one of the things. We noted in the last call, but it's worth emphasizing again, because the the group rates for next year continue to increase.
Particularly at the resorts, we've had a very.
Wide gap created.
In the last year between transit rates and group rates and what that's led to is.
Pretty pretty confident meaningful increases.
In group rates as we look into next year.
Those properties. So so we do feel pretty confident that at that rate increases are going to continue.
Well into next year, if not all of next year.
And we do have we do think that's going to happen in the in the southeast as well.
Thanks, Sean.
Thanks Courtney.
Thank you. The next question is coming from Bill Crow of Raymond James. Please go ahead.
Hey, good morning, Thanks, Hey.
Hey, John I think in the hindsight, it's pretty easy to see that e-commerce spiked during the pandemic.
It is now in the process of normalizing that kind of a painful normalization I guess.
It was largely in going through the same thing or are we just having to post pandemic spiked it is going to normalize.
Whether it's 2023 or 2024.
Well there is.
Yes.
You mean is that a pull forward of yeah.
Fair enough.
I'll spend and lodging yes.
Spending on lodging.
In particular on the rate front, but.
Or are we just getting more than our fair share.
As a part of the economy, and we're going to give that back to more normalized.
Travel spending as we are.
Part of the overall economy going forward.
Yeah, I don't think so bill I think in fact.
You know what were what were partly dealing with right now is as pent up demand from people who haven't traveled.
But if you look at the overall demand levels, they're not at 19 levels yet.
In fact, we're nowhere near 19 levels on both the business travel side and the international travel side. So I think I think actually we will be normalizing over the next year.
Year to 18 months.
But we think it's more normalizing to higher demand levels, which will actually continue to put pressure on rates.
And pricing.
Particularly as you look at this environment.
Not only over the next two years, but the point I was trying to make in my comments, we have a pretty long runway of opportunity to grow rates.
In this industry to a severely supply constrained environment over that period of time.
And the more difficult the debt markets have gotten more difficult it's gotten to get construction financing to start anything new even if one can make sense out of out of those economics with these much higher development cost today, So I don't think.
It's the same.
But we'd love to have the same boom over the next 18 months that they had on.
On the e-commerce side over the last 18 months.
Yeah Okay.
Just follow up with a question for Ray I think Ray in your prepared remarks, you talked about responsible guidance for the third quarter I guess given the macro.
Clouds up there.
I think that's what you said.
Just curious you've got July pretty much in the books.
I'll just seems like it should be.
Leisure driven pretty good months. So is it really September which is the biggest contributor I believe to the third quarter that the.
It causes you consternation or.
How much how much conservatism is there in your <unk> outlook.
Sure Yes.
As we get to August as you know down in Florida, you guys are going to school in early August . These days, so it's a <unk>.
Flipping same at the same on the West Coast West Coast to its early so theres a lot of there's a transition from a leisure focus heavy in the first half.
Of all of July and half of August to and transitioning to back to business travel back to school and those things. So that's where our August we expect will give up a couple points of occupancy three to four versus where we are where I think we will be out for July but then we'll come back with the September .
Coming back into the late Labor day this year.
But what we're seeing right now in business travel is very encouraging so far as this is just to be youre right be conservative in an environment that there is uncertainty again, we're not seeing any change in booking behavior or pullback on pricing. So again, it's encouraging for what it's worth realized we have a pretty short booking window here, where most of its inside of.
Related 30, and 60 days.
But given what we're seeing right now you should not infer that because of our our outlook there our revpar outlook of 5% to eight that were expecting any decline in overall demand trends is just a transition of seasonality as we get into the good fall season, Hey, Bill the other thing I'd add in.
Totally appropriate question.
I am sure others might have asked it.
Is July benefits from five weekends this year compared to 19, when it had four and the weekends are clearly stronger than they were particularly stronger in July which is the strongest leisure months and then we moved to August as Ray said, we're moving back to normal season.
Patterns both.
From a seasonality perspective and from a weekday pattern perspective, and so August flips. The other way, we actually had five weekends and 19 in August and we only have four.
In August of this year. So so the double flip kind of hurts on a comparative basis a little bit.
The other thing is September has a.
Slightly late Labor day, which historically has hurt business travel return.
And as we've indicated we've gone back to these normal patterns where the.
The weeks around holidays are actually softer because of the impact on business travel, which was typical pre pandemic.
And so the holiday doesn't help September and then we have a Jewish holiday in September which was not the case back in 19, when we had two of them in October . So we're just being prudent as it relates to how the comparisons work to 19.
And in October would benefit from that holiday shift so outside of Halloween. If you want a technically called out of holiday, which it is because it impacts business travel October .
October should be better than should be better than 19, and our view of the fourth quarter that we've indicated before is we do think in the fourth quarter that we will exceed 2019 numbers, both topline and bottomline.
Okay.
Great color I appreciate it thank you.
Thank you. The next question is coming from Neil Malkin with capital One Securities. Please go ahead.
Hey, everyone. Good morning, Thank you.
Mike My question is on the capital allocation decisions specifically.
The urban hotels, you mentioned you were selling obviously, you've been you've been cycling significantly into resorts exclusively and then selling herbs.
Urban hotels.
You talked about three additional hotels coming up.
Excuse me.
It looks like the Spiro I saw some news about that one being one of them.
I was wondering if you can give any color on the sorts of hotels and markets that the other two are going to be in and you mentioned potentially another that later in the year.
Can you just maybe talk about that and then.
What is that saying John about your view on irvin either recovery or a longer term.
Operating dynamic.
Versus sort of domestic leisure just based on where you've been putting your money.
Sure.
So.
Can't provide you any additional color on the on the either the markets or the individual properties that constitute the three that are under contract.
Or what else is on the market right now when when we will provide you that color along with that with with the math in the financials.
When those transactions actually close so we're we're trying to be sensitive to the buyers.
And our responsibilities under our agreements in these particular cases.
But we will give you all that detail soon soon enough when those transactions.
Ultimately close.
I think the overall capital allocation question.
Brings us really to.
What we've been talking about trying to trying to find a more even balance between business travel overall and leisure travel overall, which.
Both of which we believe will continue to grow over the long term.
But when you think about the resorts that we bought it's not that they are all leisure focused they're not in fact, many of them do a very large amount of group business.
Of which a significant part.
Is business travel so it's not as if we're assuming properties that cater to business customers. It's not the case, but we are trying to get more to a 50 50 balance.
Segmentation within our portfolio, because we think on a risk basis, the portfolio will perform better through the ups and downs of the cycles.
Okay. So.
That's about a call on a specific market or or the drivers within those markets are the fundamentals that would support travel pre versus post COVID-19 and more.
That that mix is being at the top of the list of rash.
Rationale for the decision.
Yes is that fair.
<unk>, Okay, yes, yes.
Yes, that's fair to say.
Okay alright, thank you.
Thanks Neil.
Thank you. The next question is coming from Ari Klein of BMO capital markets. Please go ahead.
Thank you.
Yeah.
Maybe just following up on that last question. If you can talk a little bit about whats happening with pricing in the transaction market.
You could tie that into the same cap rate, which remained unchanged.
Unchanged overall, even if there are some markets that that changed a little bit here or there.
Sure Tom you want to handle the first part of that yes.
I think as it relates to pricing I mean, I think you've got to be careful to talk just in general terms I mean, everything right now theres a lot of capital available in the system, it's a very market by market asset by asset focus.
I think.
When you look at it for example, John Ray and I spent a lot of time on our NAV.
We made adjustments to that we made adjustments downward in markets that are kind of later to recover including San Francisco and DC, while we made some minor increases in markets like San Diego, which is probably one of the most attractive investment market today I think given the fact that.
The debt markets are challenging.
Obviously, what youre seeing as many lenders out there.
More of the debt funds and maybe lower proceeds.
Higher debt costs higher coupon cost, but what youre seeing is more conviction in the operating recovery. So there's that friction where I think people are having.
Our feeling better about the future and they're they're factoring in more normalized financing moving forward as it relates to their underwriting I think generally though if there is an impact on pricing.
Not really seen it on select service or resorts you might seen in some of the urban markets, but it's anywhere from quite frankly, very nominal nominal from 1% to maybe a max of 5%.
Yes, so it's a headwind and a tailwind.
The tailwind from <unk>.
Consistently improving performance, particularly big jumps in the urban markets.
Against a more a more expensive debt market until it stabilizes so.
And it's still likely to stabilize at a more expensive level than where it was 12 months ago.
Okay. Thanks, and then just real estate taxes.
We.
Expected what kind of outlet.
They're moving forward.
Yes, we have a lot of funding some of these cities in places like Chicago.
Where they actually have that values go up in the middle of the pandemic, which it makes absolutely no sense, but we're going to we're going to be very aggressive in each of these that we get some of these silly tax Bill is we're going to appeal then.
And but look a lot of cities have been using this.
The pandemic has an opportunity to.
Funds or other losses through that so it's going to be choppy in some of the areas that typically have had tax challenges like Chicago will continue to.
Pillows and battle those.
Less of an issue in markets like California, because of prop 13.
Keep in mind.
But we'll watch that so it's a little.
All spiky here and there, but hopefully we'll get some progress on some.
Appeals on this as we in the coming quarters.
Appreciate it thanks.
Thank you. The next question is coming from Smedes Rose of Citi. Please go ahead.
Hi, Thanks, I, just wanted to ask a little bit about sort.
Margin expectation since next year and I'm just looking specifically you broke out April may and June results.
And it looks like.
As occupancy continues to normalize its sort of outstripping rate growth in the June .
Hotel implied hotel margin declined a little bit from April .
I want to get into like a monthly modeling, but I'm just.
Thinking into next year do you expect sort of more that the revpar growth would be just more driven by occupancies versus rate and so maybe that has some kind of margin implications or maybe you can just kind of talk to that a little bit.
Yes.
Youre going to see.
I mean.
We haven't provided an outlook for the fourth quarter and and.
Our views going forward or.
A little more challenge than a normal environment obviously.
But I think in general Smedes, what I'd say is.
You are more likely to see.
Both the recovery and occupancy further recovery in demand and occupancy, particularly in.
In the urban markets, though we still have a little ways to recover in the resorts as well, but I think we will continue to see significant rate increases.
At the level that we're seeing this year necessarily but I, certainly think they're likely to be.
Fairly significant next year end.
Like previous recoveries, particularly when supply ultimately becomes constrained I think over the next few years, you're going to you'll see margins continue to improve.
And get to record levels pretty rapidly, particularly as likely compared to prior prior recoveries.
Also smedes this is.
We caution you to look too much month to month data because there's a lot of factors that could go on we could have a property tax appeal. That's in one of those months influences margins on the bottom line. So a lot of factors, but overall the trend. We felt good. Other side is you also have to look at the revenue and how that's being driven we talk about a lot of the non room spend was.
A very healthy, 20%, 25% plus in the quarter actually our food and beverage revenue in the second quarter was above second quarter of 2019, and Thats, where 20 points less occupancy so food and beverage as you know lower profit margins in rooms.
But it does flow through the bottom line so.
The margins are an indicator that we look at overall, but ultimately its hotel EBITDA, which we're trying to drive and it's very encouraging that we're having not just the increases in the room side, but the non room spend less profitable that contribute to EBITDA growth and a significant just to add to that I mean.
As discussed in my remarks.
The redevelopments.
Often include components that relate to re merchandising, both indoor and outdoor spaces and trying to create more revenue per square foot.
At our property and.
Again, it doesn't come necessarily at a higher margin.
Level, particularly if it's food and beverage focus, but it does drive more EBITDA per key so as Ray said, that's really what we're focused on margins are a result, obviously of all of these things happening.
Okay. That's great and then I just wanted to quickly ask you are you could you just maybe touch on what Youre seeing in terms of.
Just sort of wages and benefits pressure at the property level.
Yeah, I mean again it varies by market.
You are I would say our greatest increases are in the hourly categories.
At our properties and within the hour like categories there.
More intense in housekeeping and in the kitchen, and Theyre less intense and other jobs throughout the property.
And I would say overall were probably seeing.
Probably something on the order of about 5%.
Give or take and wage increases.
Smaller in the cities, where really either in contract or following the contracts in the market.
Okay. Thanks, a lot.
Thank you. The next question is coming from Shaun Kelley of Bank of America. Please go ahead.
Hey, good morning, everyone.
Maybe just a high level question you know we've covered a lot of a lot of ground already but as.
As we think about pebble Brooks mix overall, and obviously, it's been shifting between resort in urban areas.
Could you just talk a little bit about sort of the remaining recovery. That's left in urban and how much are or would that be enough to be able to offset some normalization in leisure. So some of the leisure pricing that we've seen because I think one thing we hear a lot from investors is concerns around lapping.
Lapping some extraordinary comps and what we've seen on some of the resort markets and we know you put a lot of capital into that so there are reasons that you're seeing the rate gains that you've achieved but even if that normalize a little bit is there enough urban recovery left for Palo broke here just help us kind of think about how those two pieces fit together in a in.
A more stabilized 2023.
Yeah.
I actually think there is there's way more.
Two to continue to drive profitability I think there is a misconception.
Theres been a miss misconception or Misbelief and pretty much everything we've said the last two years about pricing and I think there are a couple of things to consider one is I think resorts to some extent have structurally repriced.
And I don't think that rate those rates are going to be given back I mean, we are seeing very encouraging signs of that in southeast, Florida, where demand is normalized out of season.
Rates are not are not coming down and in season rates continue to go up.
Markets like the West Coast.
We are far away from.
From the kinds of increases we think are available in those markets Southern California was closed for part of the first quarter. This year and then when you add to that.
The bulk of the demand recovery still to happen in the resorts.
Particularly on the group side, which is replacing some transient, but it's coming with more food and beverage and other revenues.
Which continues to increase profitability and Youll see at La Playa and we gave you the trailing 12 numbers, but by the time, we get to the end of the year. The EBITDA numbers are going to be substantially higher than the trailing 12 numbers.
And that's the case and most of our resorts, it's how we're going from $30 million over.
<unk> 19 in the first half to $50 million to $60 million by the end of the year.
So I think there's a long way to go.
On the resort side and clearly the urban has a lot to go.
And.
Take San Francisco is a good example, which is a slow to recover market or even D. C. Both of those markets are ahead of 19 from a rate perspective at this point so the.
The approach to pricing what customers are willing to pay.
The value of the product.
I think we're going to continue to see further pricing opportunity within the portfolio as we get a significant further recovery in occupancy.
Very helpful and just maybe as a quick follow up.
Just can you give us any.
I know you probably want to shy away from.
Detailed underwriting or details around the transactions on the disposition side until they're announced but could you just give us a sense on a net basis, you guys have been pretty disciplined buyers and sellers over the years.
Are you is net accretive on an <unk> basis.
Just kind of would be a helpful guidepost.
Well, it's it's very net accretive off of 2022 numbers so trailing basis.
Well on a trailing basis on a full year basis on on probably next year basis as well so.
It just.
It depends what you want to compare it to when.
When you talk about accretion or dilution we think.
The the pivoting we've done.
Out of these assets and others, we've sold already into the assets. We bought I mean Ray mentioned the yields that we're already achieving at properties like Margarita Villa, which is approaching 10%.
And Jacko island, an eight and a half and a stance he at seven and a half et cetera. So those are those are highly accretive to to the assets that we've sold and that we are selling.
Understood. Thank you very much.
Thanks, Sean Thanks.
Thank you. The next question is coming from Michael Bellisario with Baird. Please go ahead.
Thanks, Good morning, everyone.
Just on group could you maybe provide what paces for the second half of the year and then also 23.
And then is there any desire kind of on the revenue management front, maybe group up more to potentially offset a softer transient environment over the coming quarters.
Yeah I mean, we are planning we are we are.
Plenty of room for group, So I don't think we need to.
We're not displacing anything we're trying to drive as much group at the right prices.
On the right contribution to the bottom line is as is out there in the marketplace, we're going to continue to maintain rate integrity. However.
At our properties and our pace from a rate perspective, I think is up.
Six six.
3% to 5% for the second half year on the group pace.
But the one of the struggles we have now comparing back to 19 is we don't have good data for a bunch of the resorts.
Mike that.
That.
That we bought more recently and we know obviously that that pace is up substantially.
Over 2019 at those properties, but what I can tell you is from a from a.
From a booking perspective in the second quarter, we booked more revenue.
In group and in fact in group and transient in total than.
Then we did in Q2 of 19.
Four in the year for the year so.
The booking pace has picked up substantially.
April was the first month, we exceeded 19 and and it continued and actually improved throughout the quarter. So the pace of activity.
<unk> group and transient.
Is is significant.
Helpful. Thank you.
Thanks, Mike.
Thank you this brings us to the end of our question and answer session for today at this time I would like to turn the floor back over to Mr. Bortz for closing comments.
Hey, Thanks, Donna and thanks, everybody for participating.
Out of respect for Hilton's call at 10 30.
We've made a decision to limit any further questions. So thanks for participating have a great rest of the summer we look forward to updating you throughout the quarter with our update monthly updates.
As well as in October when we provide third quarter performance.
Yeah.
Thank you ladies and gentlemen. This concludes today's event you may disconnect your lines of log off the webcast at this time and enjoy the rest of your day.
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