Q3 2022 Pebblebrook Hotel Trust Earnings Call
Greetings and welcome to the Pebble broke hotel trusts third quarter earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you 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 Mr. Raymond Martz Chief Financial Officer. Thank you Sir Please go ahead.
Thank you Donna and good morning, everyone welcome to our third quarter 2022 earnings call and webcast. Joining me today is Jon Bortz, our chairman and Chief Executive Officer.
But before we start a quick 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 as described in our SEC filings.
Results could differ materially from those implied by our comments.
Forward looking statements. We make today are effective only today October 28, 2022, and we undertake no duty to update them later will discuss non-GAAP financial measures during today's call and we provided reconciliations of these non-GAAP financial measures on our website at <unk> Dot com.
So last night, we reported stronger than expected Q3 results led by our urban hotels business travel both transient group continued its recovery throughout our markets clearly benefiting urban properties the most and.
Leisure travelers returned to the cities as well bookings improved after labor day as business travelers got on the road to meet with our customers reconnected with our co workers and participate in major conventions and meetings.
Leisure travel in quarter remained robust along with very strong rate premiums over 2019, we saw a solid and consistent improvement in our operating metrics throughout the quarter.
Overall, we experienced encouraging trends across our portfolio throughout the quarter, which continued in October we have not seen any signs of a slowdown in travel demand. However, given the fed's actions, we continue to closely monitor bookings cancellations activity levels corporate travel policies and overall <unk>.
Spending for any signs of a slowdown.
Q3, total revenues exceeded our outlook despite the negative impact of hurricane in which made landfall near Naples on September 28th.
Given the hurricanes hurricane unions large sides changing tracking forecast and its impact on Florida, and the Georgia coast. It had some effect on all of our southeast properties.
Overall, it reduced our hotel revenues by approximately $2 million in September of course, the most significant impact was in Naples with roughly half of the September revenue loss occurring at La Playa.
Despite the impact of hurricane in on our results adjusted EBITDA was above the top end of our Q3 outlook by $1 5 million.
And adjusted funds from operations of 66 cents per share was <unk> <unk> above the top end of our outlook.
On the revenue side same property Revpar exceeded Q3 dollars 19 by one 3%.
Q3 was a first quarter since the pandemic that we surpassed the 2019 comparable quarters results.
Both July and September same property Revpar total revenues and hotel EBITDA exceeded the comparable months in 2019.
July benefited from solid leisure demand and September benefited from strong business demand, which was very encouraging.
ADR was 20% above Q3, 19 led by our resorts, which were up 57% to Q3 dollars 19, and our urban ADR was up eight 3%.
Both of these represent an increase from the Q2 Q2 premiums of 54, 4% for our resorts and six 8% for our urban hotels.
Non room revenue per occupied room rose, an even stronger 23, 3% versus 2019 and total revenue per occupied room increased by 21% maintaining.
Maintaining the positive trends, we've experienced all year.
These revenue increases demonstrate our sustainability to take room, and non room price increases across the portfolio and our customers' willingness to accept them, thereby helping to offset operating cost increases.
Q3 occupancy finished at 72, 7%, which is still only 85% recovered to 2019, indicating a substantial opportunity to grow revenues further as demand continues to recover and normalize.
Our resorts achieved an occupancy of 69, 3% and despite all the discussion about strong leisure occupancy at our resorts is still only about 88% recovered to 2019.
Urban occupancy, which exceeded our resort occupancy for the first time since the pandemic finished at 73, 3%. It is still only 83% recovered to 2019, and even a lot of upside yet to recover.
Same property hotel EBITDA of $139 million is 96, 8% recovered to Q3 dollars 19, which marks our best quarter compared to 2019 since the pandemic and it would have been closer to just 2% off from 2019, but for the impact of hurricane in.
Our hotel EBITDA margin was 32, 4% versus 34, 3% in 2019, so off just 192 basis points with occupancy down about 13 occupancy points to Q3 dollars 19, so very encouraging.
When you consider that the CPI has increased over 15% since 2019. This means that in today's dollars if our expense growth in 2019, but it'll follow the increase in the CPI index, we would've had $300 million of operating expenses in the quarter versus the $273 million, we actually incurred so about $27 million less.
And operating expenses.
This underscores our success in mitigating operating cost increases in this inflationary environment through price increases and also evidenced as the more efficient operating models created at our properties as a result of the pandemic.
As the recovery continues in the hotel industry, we expect to generate higher profit margins.
Shifting to our capital improvement program, we remain on track to invest $100 million to $110 million into the portfolio in 2022 with over $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 transformed and remerchandise hotels and resorts stabilize over.
Next two to three years.
Relating to apply them, we want to provide you an update on the restoration of reopening of the resort following hurricane in.
Apply which sits directly on the Gulf of Mexico Beach was unfortunately impacted by an eight to nine foot storm surge that caused the most damage to the property.
Unfortunately, the golf tower lobby and restaurant start one floor up from the beach as those debates hour on the other side of the property.
As a result, the most significant damage was done to the beach House building impacting rooms, and building equipment on the beach level as well as the landscaping and Hardscape ing throughout the property.
The building is also suffered some water infiltration from the heavy rains and win though it is relatively minor compared to the ground floor impact.
Fortunately, we're well prepared and it had a large third party rumination crew positioning nearby.
Arrived with remediation equipment and improved 200 to start the inspections cleanup remediation and repairs the day after the hurricane hit.
And while the Naples Beach area continues to be without power or remediation partner brought in large generators to power all of the buildings to dry them out and get the air handling systems working quickly.
While the pie remains close as we conduct repair and remediation work, we have already gone to make significant progress in the cleanup repair and rebuilding even without electricity being restored to the area.
We are striving to reopen parts of the resort by late November but much of the public areas repair and renovated we expect to have most of the guestrooms and the baytown completed and available that time with Guestrooms in the Gulf carrier schedules opened then or perhaps late in the fourth quarter.
The Beach House, which I just named suggests is right on the beach will take more time to repair at this building received the brunt of the damage from the hurricane.
Our best estimate at this time is that the beach House building reopened sometime in the second half of next year, but we're not really comfortable any forecast at this point.
The biggest obstacle to reopening is a long lead time for electrical and elevator equipment. The rest of the building repairs will be completed much earlier.
Based on our review of the resort and our with our property Adjustors and physical property experts. We currently estimate that the cost to remediate repair replace and clean up the playa will be between 15 and $25 million.
This estimate could increase as we progress through the remediation and repair program in.
We expect that our business interruption insurance will cover all the losses after the estimated $1 $7 million deductible for BPI.
Beyond the plan at Southern most beach resort key west.
Which remained open throughout the hurricane we incurred wind and water related damages to the resort, including attaining peer that was destroyed we estimate that the property damage to be between $7 million to $9 million.
At the interim fifth in downtown Naples, we expect to incur $1 five to $2 5 million of remediation repair work and we're already pretty far along to completion.
As a result of the impact of Hurricane Iannello apply them in southern most we accrued a reduction in property assets of approximately $12 9 million. However, we believe we will recover this write down through our property insurance program, except for the $7 $9 million combined property and casualty.
With your deductibles at these two resorts.
We have reflected this amount in our impairment and other loss loss items on our income statement.
When we received the business interruption proceeds from our insurance carriers, we will reflect this in our financial statements. We do not expect this to occur until sometime in 2023.
Shifting now to the investment side of our business, we sold three hotels in quarter, one in San Francisco, one in Portland, and one in Philadelphia generating a $183 9 million of sales proceeds and year to date, we have sold four hotels generating $269 million.
Turning to our balance sheet, we successfully completed 2 billion refinancing of all of our credit facilities and term loans.
This has allowed us to extend our debt maturities and increased the size of our unsecured revolver to $650 million.
While maintaining the same price and this debt as we had pre pandemic.
As a result of the successful refinancing we have no meaningful debt maturities until October 2024.
We also have limited exposure to rising interest rates as 79% or $1 9 billion of our debt and convertible notes has fixed interest rates, leaving about $500 million of floating rate debt.
As a result, our weighted average interest cost is a low three 2%. This floating rate debt allows us to pay down debt whenever we like without prepayment penalties.
So the proceeds of our recent property sales positive operating cash flow and debt refinancing. We currently have approximately $120 million of cash.
Our $650 million credit facility is completely undrawn, providing us with tremendous liquidity and flexibility.
We also paid down approximately $127 million of debt since the end of the second quarter.
And on that positive note I'd like to turn the call over to John .
Thanks Ray.
As Ray indicated despite the impact of hurricane in the quarter came in slightly above the top end of our outlook.
The hotel operating performance at the high end of our outlook.
The outperformance was driven by the continuing strong recovery in our urban markets.
With transient group and citywide demand improving and.
And leisure customers returning to the cities.
This urban recovery in our portfolio was widespread and it involved all properties and markets.
Every one of our urban markets, except Miami achieve better Revpar performance in the third quarter compared to 2019 versus the second quarter compared to 2019.
In the third quarter, our urban Revpar was down 10, 1% versus Q3 2019 and that compares to Q2's 17, 7% shortfall.
Clearly that's a significant improvement.
Not surprisingly the markets with the most extensive gains from the second quarter, where most of the previously slower to recover markets, including Chicago, Seattle, Washington, D C and San Francisco.
But but San Diego also moved ahead strongly with a very active and successful citywide convention calendar in the third quarter.
And San Francisco as indicated was one of the most robust recovering markets in the third quarter.
Many of you joined us in San Francisco last month, when we spent two days touring six of our hotels and several of parks hotels.
We happen to be there during dream force, which filled the city's hotels with high rated customers.
It was a very successful citywide for the city.
The city look great. It was clean with lots of people on the streets. The restaurants were overflowing and the negative elements that have gotten so much publicity, where frankly not very noticeable.
The city continues to make progress in addressing its problems.
The successful Dream Force convention, not only helped september's overall performance.
So it was clear evidence that a recovering convention calendar will have a very favorable impact.
On our industry's recovery in San Francisco as we move into next year, which has a much improved convention calendar compared to this year.
I'd also like to highlight the performance of one of our recently Redeveloped and transform properties in San Francisco.
Because due to our great team effort, it's strong performance highlights the power and the success of our redevelopment capabilities.
Our efforts and extensive program following the Lasalle acquisition.
And it does so even if one of the slowest recovery markets in the U S.
I'm talking about the $28 million redevelopment and transformation of hotel Vitale and.
The eco focused luxury one hotel San Francisco.
This extremely well located property across from the ferry building along the Embarcadero reopened as the one on June <unk>.
This property represents our values and our focus on our commitment to sustainability repurposing and reuse.
And it appeals to a large base of customers with similar values.
The hotel has been extremely well received by the community and customers and in just a few months has risen to the number for Tripadvisor traveler ranked hotel in San Francisco, just one spot ahead of our Harbor Court Hotel a block away.
Yes.
Since its reopening is one we've been averaging rates in the $480 to $580 range on a monthly basis.
And these rates are between $130 and $165 higher than the comparable months in 2019.
In September room revenues exceeded September 2019 by over 10%, even with occupancy lower by almost 12 points.
We achieved total revenues that exceeded 2019 by over 18% and.
And EBITDA was more than 50% higher than in September 2019.
Now I'm not saying, we're going to do this next month or every month going forward.
But we do believe the rate premium we ultimately achieve on a stabilized basis.
We will be similar or higher than what we've already been achieving.
And as the market continues to recover and we ramp up we should be able to drive at a minimum of 15% plus plus cash yield at stabilization on.
Our $28 million investment that created this fantastic conversion.
Similar transformational investments, we've made recently and so many of our properties obtained through the Lasalle acquisition.
Should also delivered 10% plus cash yields on our investments.
These include the previous transformations of the Hilton San Diego Resort into Mission Bay Resort San Diego.
The hotel Donovan into hotel Zena.
Mason and rock into Viceroy, Washington D C.
Grafton on sunset into the Funky hotels Ziggy on the Sunset strip.
The dramatic upgrading of shaman <unk> resort in Santa Cruz Skamania Lodge in the Columbia River Gorge.
We're park in West Hollywood.
Viceroy Santa Monica.
Low bears del Mar.
And southernmost resort in key west.
As well as the upcoming transformations of hotel solar Maher.
Into hotel Margaritaville gaslamp quarter in San Diego.
Paradise point in mission Bay, San Diego into a Margaritaville Island resort.
And dramatic transformation and upgrading of our recent acquisitions, the Jackal Island club resort in the Golden Isles of Georgia.
<unk> La Jolla in San Diego.
And Gurney's of Newport, which has also been renamed Newport Harbor Island resort.
ADR and Revpar share gains as these properties grow to stabilization.
We'll add to our growth in the years ahead, regardless of the macro environment.
And I'd be remiss, if I Didnt mentioned, the dramatic upgrading of la Playa and Naples into a luxury resort that we completed before.
And unfortunately again after hurricane Irma.
We apply a beach resort and club, which of course is currently closed due to hurricane in was on track to deliver over $35 million of EBITDA. This year.
This would have been a doubling of EBITDA from 2019, when we completed the upgrades post Irma.
The full year forecast is consistent with the year to date improvement through September and as a result of several positive factors.
Including the huge upgrades, we previously made to the property.
Our unique and very successful beach membership club that is contained in the property, where we've upgraded the experience.
A great collaboration between our team and noble House, who has done a fantastic job on the ground driving this performance.
And the ongoing benefits of the pandemic that have led to increased pricing at many high end resorts.
I raised supplier not only as an example of a very successful transformation. We previously previously completed.
That has delivered a very high return on our investment.
But because it will be built back better after hurricane and unfortunate damage.
As we look forward to the fourth quarter, which of course is well underway.
The improving business travel trends, we experienced in Q3 are continuing.
Corporate group bookings leads and site visits remain very healthy.
And at most properties theyre exceeding 2019 levels.
We're closely monitoring overall business and leisure consumer behavior.
And have not seen any pullback in demand future booking pace or room rates.
Other than the normal seasonal slowdown later in the quarter.
Nor have we seen any increase in cancellations.
Or any meaningful changes in corporate travel policies.
But of course, we will be monitoring these closely as we are now as the macro economy slows down.
We believe that we have strong tailwind from the continuing recovery of business leisure and inbound international travel to more normalized levels consistent with the current levels of GDP.
Of course are significantly higher than 2019 levels.
We believe these strong counter cyclical tailwind wins.
Along with already low and falling levels of supply growth.
We will help blood pressures from the inevitable economic slowdown.
That the fed intends to deliver.
Yeah.
Based on our recent trends our current outlook for Q4, Revpar is to be down 3% to flat to 2019.
And up 32% to 36% to Q4 2021.
The closing of La Playa.
Which represents a disproportionate amount of our room revenues and EBITDA.
As a roughly 150 basis point negative impact in the fourth quarter to our room revenue and total revenue percentage comparisons to 2019.
And it has an approximate 750 basis point negative impact to our EBITDA comparison to Q4 19.
So our same property outlook for Q4 assumes supply is essentially closed for the entire fourth quarter.
While we are currently targeting a partial reopening in the quarter.
We still expect additional expenses related to operations and cleanup.
We will exceed any revenues achieved in the quarter by $2 $5 million.
So this is obviously a pretty rough guess at this point as we still have an even had electricity restored to the vendor Vanderbilt Beach area.
So we've removed approximately $17 $1 million in hotel revenues and.
And $10 5 million in hotel EBITDA or.
<unk> or <unk> <unk> per share of <unk> from our Q4 outlook.
So it is impactful to the quarter.
However, we expect to recover this lost EBITDA less RBI deductible from our insurance claim next year.
Adjusted EBITDA for Q4 is expected to be down 30% to 38% to Q4 19.
And up 45% to 63% to Q4 2021.
Excluding the impact of La Playa due to the hurricane our Q4 outlook would assume same property revpar.
Down one 6% to up one 3% to Q4 2019 with adjusted EBITDA of $74 3 million to $82 $3 million.
Which is roughly in line with 2019, if you add back will apply his impact.
This outlook is generally in line with our previous expectations.
Is consistent with our Q3 performance excluding the Playa.
And indicates that our expectations for Q4 performance Havent changed despite heightened concerns about an economic slowdown.
So that completes our prepared remarks, we'd now like to move on to the Q&A portion of our call.
Donna you May now proceed with the Q&A.
Thank you 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.
<unk> tone will indicate 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 star keys.
In order to give everyone the opportunity to ask questions. We do ask you. Please limit yourself to one question and only one follow up once again that is star one to register a question at this time the next or the <unk>.
Last question is coming from Dori Kesten with Wells Fargo. Please go ahead.
Hi, good morning.
And how long do you think it may take some of our Naples property to return to normalized operations. When you consider hopeful because the entire market.
[laughter].
I don't think we have an estimate on that yet Unfortunately dori.
It's it will be extremely hard to forecast, we had a pretty quick recovery from Irma back in 2017.
18 was a very good year 19 was obviously, even better for for that market in that property.
Interesting if you go three blocks inland.
They're not a whole lot of visible signs of of an impact from Irma and if you go downtown.
Which obviously is a.
Very popular destination.
We're in on fifth is.
The downtown looks.
Like it did before pretty much so.
I do think.
The recovery will be pretty quick the cities already been cleaning up the beach.
Their objective is to open the beach as quickly as possible and and of course, you can't beat the weather. The last thing I would say about Naples, which is a little different than than maybe some other.
South Florida markets is Theres a regular crew that comes every year.
To Naples and.
A lot of them have homes down there their families come to visit that generates a lot of demand.
And we expect them to come back pretty quickly and in the meantime, there's a lot of demand in the market and we're seeing it.
Downtown it in on fifth.
From folks who need to come to the market for either business purposes or.
To deal with issues related to their homes that are down in the marketplace.
So it's pretty hard it's pretty hard to forecast at this point, but I would think it would come back pretty quickly dori.
Okay.
Have you noticed.
Behavior meeting planners.
Boston worries are weighing on them.
Right.
<unk>.
Wilson.
Hello, Adam.
No we haven't seen any of that.
Okay. Thank you.
Thanks Stuart.
Thank you. The next question is coming from Jay Kornreich of <unk>. Please go ahead.
Hey, good morning, guys.
Just curious if you can kind of discuss your current thinking on portfolio repositioning it strategically it still makes sense.
Can you selling out of the urban markets and investing into leisure resorts.
They are potential oncoming recession makes you rethink that strategy.
Yes, I mean I.
I don't see any change in the.
The way we've been modifying the portfolio are our objective was really to get a more balanced segmentation.
Between business and leisure in the portfolio.
We're pretty close to that level now I think we are.
Between between leisure and leisure transient and group I mean, our estimate is we're about 50 50.
So I don't see a lot of change to that focus I don't think we will be selling resort properties because of our sort of long term secular view.
The opportunity there and the difficulty of adding new supply competitive supply against.
Those properties in the very long term.
And in the meantime, we will continue probably I mean, our objective is to re re circulate capital out of.
Some of the urban markets.
And use that capital elsewhere.
Got it and then I guess, maybe in a similar more more near term aspects of that that should a recession arise over the next year or so would you expect more vulnerability on the business transient side, which is still recovering lost occupancy or more at the leisure transient side, which has been far outperforming historical standards at this point.
It really.
It really depends on what kind of downturn. It is we always throw the word recession around like.
Like it means the same thing all the time.
And it doesn't.
Each of the recessions I've lived through.
Five or six of them now.
They've all been different and they've had different impacts some of then consumer focused.
Some have been business focused.
This one will be different for a lot of reasons.
With with the challenging labor markets I think it won't be.
I don't think it will be likely to be unemployment led downturn.
And.
There is continued to be plenty of open jobs and businesses I think are looking at their employees.
And hoping that there'll be more sticky.
So I don't think well see the same kind of lay offs.
That perhaps we've seen in other recessions, where unemployment has gone up to very high levels like in the last downturn that was driven by the great financial.
Impacts that that caused the recession.
The other thing is.
It's likely that this is going to again like bust recessions, but not all impact more folks at the bottom end of the market than the top end of the market.
And then the third thing I'd say is these.
We're going through what I would describe as a.
Continuing secular change.
Of consumers' desire to spend money on things versus spending money on experiences and so.
I think all of that leads to.
The likelihood that any recession or slowdown has less of a traditional cyclical impact.
On our industry and whether it.
It's greater on the business group side or group is usually the first thing cut in a downturn because it's what makes.
A major difference.
From a financial perspective has the most impact.
I just don't know if we're going to see that at this time given the lack of group meetings over the last two and a half years and the pent up demand that exists and the need businesses have.
To get people together so.
It's a hard thing to forecast, but I think the one thing we feel pretty good about is that the impact on the industry will be less than a typical any typical downturn.
Would be and we still have some strong counter cyclical tailwind.
Our business recovering to more normalized levels.
Okay.
Okay. Thank you that's very helpful color I appreciate it.
Thanks Jay.
Thank you. The next question is coming from Smedes Rose of Citi. Please go ahead.
Please please make sure your phone line is not on mute.
We'll move on to the next question is coming from Floris Van <unk> of Compass point. Please go ahead.
Good morning, guys.
I had a question on.
Getting back to capital allocation.
As.
Part of it.
I think what helps to explain your view on the resort markets. I mean, we looked at your seven resorts that you held since 2010 now some of them were obviously.
<unk>.
Held at the time, but.
Be it as it may I think they've averaged something like 8% annual CAGR.
In hotel NOI.
As you think about.
Going forward and obviously went through.
Some.
Turbulent times from 2010 to 22021.
Do you think that's repeatable or have you built enough of your properties or are you looking to get more things more assets like this like for example, with the <unk> in the <unk>.
It sounds to your acquisitions.
Yes, Floris I mean I think.
As as indicated by.
The investments we made over the last couple of years, both what we've acquired and what we've disposed. It probably gives an indication of where our our thinking is right now as we've reached this more balanced level, we feel a lot more comfortable.
With our city exposure.
But for the very long term and we're a long term investor right.
We don't look at these things is.
Opportunities to make some quick Buck a quick buck in a year or two we really look at where do we want to be over the next 510 15 years.
And we do think there is some some very positive continuing secular trends as I mentioned.
And the desire of consumers to.
Two I don't know collect experiences or have experiences.
Given by social media, the sharing of those online with your friends and family.
And and.
I also think.
At least for the for the next few years and maybe longer.
A desire on the part of of businesses some businesses to maybe favor meeting in.
Outdoor areas, our resorts versus meeting in major cities.
That have sort of come out of the pandemic. So.
We do we do have a little bit of a bias.
Our long term towards the leisure customer versus business travel, but I don't think we see overall business travel trends changing dramatically from the last 50 years.
Where business travel is generally follow GDP growth.
And maybe if I could if I could follow up.
Obviously, theres some noise around the playa for.
For the fourth quarter and presumably.
Some of that could bleed into the first first quarter, a little bit as well, but.
Excluding la Playa you're essentially at.
19 levels of profitability already despite the fact that you're still your occupancy is still lagging significantly.
Confident are you about.
Sort of your 500 million hotel EBITDA estimates as you look into 'twenty, three 'twenty four and how quickly.
Do you think you can achieve that is going to that is that going to take two years is that going to take.
Could that even could you achieve that by the end of next year potentially.
Yes, I mean, I think first of all I think we feel very good about.
The bridge.
The the resorts this year.
We are going to run right now they are forecasted to run about $60 million over.
2019 levels when we look.
When we look at the operating cost side as we discussed.
We think we have say very significantly.
On the bottom line and as occupancy comes back it should deliver a pretty pretty good margins.
Because of the the high fixed cost nature of our business overall, so I think we feel good about the bridge the the share gains we've been making and expect to continue to make in these properties that we've <unk>.
Completely repositioned to different levels, where we've.
Where we're picking up very strong share gains in rate.
And ultimately Revpar as.
Demand continues to recover.
Will we get there by the end of next year I doubt it.
I think first of all some of these projects were just completed earlier this year or mid year like the one.
Some of them.
Take time to regain that share at these higher rates I mean, we've raised rates at low bears bye.
200 to $250 compared to where it was pre development and it takes time to rebuild that clientele, because it's not the same customers.
It's trying to find.
Higher end customers willing to pay for that higher end experience. So I do think it will continue to take time I think we feel good about next year, let's leave the macro out of it for a moment none of US know what that's going to look like.
And none of US know, how it's going to impact the business, we're not going to shake being cyclical, but we have some pretty strong.
Countercyclical trail, a tailwind not the least of which is supply growth has already fallen.
Below 1%.
That's going to go much lower over the next couple of years.
Right now, we're not forecasting supply growth.
To recover to 1% or more growth until the 2026 2027 period and that would be consistent with sort of peak.
To trough and recovering supply growth history and here, we haven't stretched out because we have both the pandemic, which obviously dramatically slowed starts for.
For which we're benefiting from that now.
And now we have the fear of recession and difficult capital markets that have slowed starts even further and for a longer period of time. So we feel good about getting there we think.
The rate growth.
Is probably even more fixed than what we thought a year ago, particularly in the resorts, but all of our urban markets continue to surpass 2019 levels as they recover.
So.
Time, if we have if we have a significant downturn and it impacts the travel industry.
Which.
Cyclical downturns, usually do again, we think it will be less.
But that tends to slow your ability to regain share you really need a growing demand environment.
To have material impacts there.
Okay.
Thanks, Sean.
Thanks Lars.
Thank you. The next question is coming from Neil Malkin of capital One Securities. Please go ahead.
Thank you.
Good morning, everyone.
Good morning, first one okay.
Okay.
First one.
He'll report that you guys may have a.
A couple more assets on the market.
For sale can you maybe talk about.
How you see capital priorities.
At the current.
Current moment, just given the sort of the.
Headwinds that we might be facing.
Sure well we're.
As we've indicated we had we believe we'd be a net seller. This year, we've had additional properties.
On the market.
And.
We've also indicated that they have.
The debt markets have gotten obviously, a more difficult over the last 90 to.
150 days I think.
And so our desire to sell will obviously still be.
Dependent upon value.
And then what we do with that capital will depend upon what the other opportunities are.
At the time.
Last earlier this year and last year those opportunities were primarily in properties that we could acquire that where leisure focused.
Where we can make some very significant improvements and generate high returns and as we look forward. What we do with any capital that comes out of proceeds will depend upon what the environment is at the time and where valuations are not only for assets, but for our own stock.
<unk> and <unk>.
And that in our preferred so all of the all of the allocation opportunities are on the table and they'll depend upon what the opportunity is at that time.
Okay, Great I don't want to burn my second question, but just to clarify that right now are you more bias toward paying down debt or buying back stock.
I think I.
I think it's going to depend upon how these things move around so.
We feel very comfortable with where our debt is I think we have a very strong balance sheet.
Our interest cost is low most of it is fixed.
And our debt to EBITDA is about where it was pre pandemic. When you assume Q1 at the same kind of run rate that obviously, we've recovered two already.
Here in Q3 and Q4.
Okay, Thanks, and the other one for me.
I guess, maybe continuing down the capital allocation path.
Commentary from different industry participants data providers suggest that there is a fair amount of potential distressed coming in terms of <unk> maturities. The brands are getting more firm on requiring pit, we're not deferring them anymore.
With lenders and the debt markets, obviously like you spoke to a few minutes ago are very unfavorable.
Can you just maybe talk about how you see the potential.
To be opportunistic and take advantage of a potentially.
Attractive environment to buy.
That potentially had some distress.
And how you are positioning.
The balance sheet to potentially do that in some form or fashion.
Yes, I mean I think the.
Way, we've always looked at the world and we've talked about this in the past is we're.
We're opportunistic.
Our approach just as I was just describing in terms of where we might allocate capital.
Second I think what we've what we found.
Found in these downturns, it's not really about taking advantage of distress as much as it's taking advantage of an opportunity to buy assets that you really want.
That might not otherwise trade.
Or be forced to trade.
And a more favorable environment and and so.
That's really the way we're approaching it and when we think about it.
It's funny when you think about distress.
And if you look at the market or the upcoming market.
Whats the distress, that's built into the valuation of our stock already.
And so that again back to what we were talking about that will be a consideration as we move forward.
As to how we allocate capital.
Yeah.
Alright. Thank you appreciate the time.
Thanks Neil.
Thank you. The next question is coming from Smedes Rose of Citi. Please go ahead.
Hey, good morning. This is matti on proceeds can you hear me.
Yes.
Okay great.
Apologies. If this has been asked already but I saw you took the full year guidance range down by $10 million.
Is that more of a function of reducing scope or pushing projects for next year.
Then as a quick follow up to that.
What are your kind of initial thoughts on what next year could look like and specifically about the Newport assay.
Sure I mean, the capital was really just how what the it's more of a timing issue than anything obviously, we don't know.
When when dollars can get invested.
Long longer lead times.
Certain equipment replacement and other things like that so it's not a change in scope Maddie. It's all just about timing of capital. So if it doesn't.
If it ends up.
If it ends up lower than our happens to end up lower than our range. As an example, it's capital that would end up probably being put out in the first quarter of next year.
And then as it relates to Newport as I indicated we've.
We've removed the gurney's flag.
Change the name too.
Newport Harbor Island resort, which I think is representative of exactly what it is it's in Newport Harbor, It's an island and it's the only resort really in the Newport market.
Our focus this year is on planning.
We've been going through a full plan for both.
Getting deferred capital.
Invested in the property fixing stuff that's broken debt.
We've talked about previously and then the plan.
Repositioning the property higher providing.
A higher level of experience to the customer that they are willing to pay more.
So the timing of it would be.
A lot of the capital maintenance deferred capital maintenance, what is both ongoing and through this winter, particularly.
Making one of the buildings.
A little more secure from the weather, which is which.
It wasn't when we bought it which we knew and then.
The upgrades will be primarily the winter following so the $23 20 for winter.
Given the time it takes to design go through the plan make the building whether protected and then do the interior and exterior improvements that we're going to do at the property.
Okay, great. Thank you.
Thank you.
Thank you. The next question is coming from Duane <unk> with Evercore ISI. Please go ahead.
Hey, Thank you good morning.
On your comments regarding urban markets, leading the improvement in <unk>.
Was this leisure driven improvement or BT, I mean, I'm, just thinking about some commentary from the likes of United about.
Extended leisure peaks every weekend now behaves like a holiday weekend I am not sure if you'd take it quite that far, but where would you push back on the view that this was all sort of leisure driven improvement in urban markets.
Well.
First of all we have we have a lot of prop a lot of properties, where our corporate transient business is actually at or above 19 levels.
So as we track that just like the airlines do Duane obviously, we track the accounts that do contract with us.
And their use and and.
We've seen a dramatic increase in that level of use of corporate accounts. So that's one indicator we look at clearly our group business is up in our city markets.
That is primarily business group.
We don't do a lot of.
We don't do a lot of leisure groups in our cities, we do some but.
Most of it's in our most of the leisure group is in our resort properties. So it's.
Honestly, it's not it's not even in question.
About the.
The increase in business transient and group.
The citywide business and we look at the attendance there and the pickup in those group blocks, which is.
Increased dramatically in the third quarter versus earlier in the year.
And then we look at weekday occupancy, which is a pretty good proxy.
So you look at your Tuesdays Wednesdays.
In particular right mid week and those Occupancies are up four five points sequentially from the third quarter.
That's a good that's a good answer to that question.
My follow up is more of a comment than a <unk>.
Question, but to the extent you are repositioning food.
Food and beverage Naples here has one vote for bringing back the capes and thanks for taking the questions.
Thanks, well, Phil Phil Mccabe would be would be really happy if we did that but he was the one who eliminated it.
Yeah.
Thank you.
You might have to call it something else Duane.
Sports is.
No I don't think so but that but thanks for the suggestion.
It doesn't have a very good rig.
Go ahead.
Thank you. The next question is coming from Anthony Powell with Barclays. Please go ahead.
Hi, Good morning, just had a question on I guess, the leisure revpar growth against algorithm for for next year, particularly in the resort side I think you mentioned that.
It's been very strong obviously, but <unk> is still below prior peaks.
Incremental oxycodone come from for the resorts.
How is pricing looking like next year on top of these these levels now I guess, what's the prospect for continued Revpar growth next year and this is kind of <unk>.
Excluding kind of light renovation bumps.
Yes, I think most.
Most of the recovery at our resorts is going to come from from two areas.
One is the return of festivals and market events and activities in those markets and a willingness on the on the part of the consumer to participate in those.
Larger Human Act.
Activities, if you will.
Meaning they are more comfortable with.
The state of the vie.
The virus and society.
And the risk they are willing to take but probably the bigger one would be the return of group, which we've been seeing which we do again I've talked about this in the past we do a lot of group at our resorts.
I mean, we do historically, we do 60000 plus rooms at Paradise point as an example.
We do almost 50000 at mission Bay resort will do.
30000, plus at Margaritaville, So the return of group.
Which has been occurring we will continue to add occupancy to the resort properties in the portfolio now the rates will not be at the same level as leisure.
So the average rates at some of those properties that are bringing back group.
<unk> going to be bringing it back that occupancy back at a lower rate, but it is going to positively impact revpar and have a very positive impact on F&B and other revenue at.
At the properties that will help deliver higher EBITDA at the bottom lines, so and the rates. They are coming in at next year I think our Oh.
Overall for the portfolio.
I don't have the resort alone handy, but overall in the portfolio for 23 year over year, we're up about 14% in group revenue on the books versus where we were a year ago for this year and.
Half of that a little under half of that is rate and a little more than half of that is his group and.
Gabby is flipped me.
The pace on resorts the rates up $30.
At our resort properties. So again, it's about the same levels, probably 767% when you think about where that is compared to this year.
Thanks for that and then maybe just one more on the dividend could you remind us where your NOL position is I guess in a broad sense that dividend policy. Some of the other peers are starting to starting to it stayed more meaningful dividends here. So maybe what's the outlook for <unk> for you on that front.
Sure well based on our <unk>.
Current outlook would imply about $100 million of Nols that we will be bringing into 2023 and then we'll see how next year looks like.
Those would be used up and of course those can also be used up not just from <unk>.
Positive operating performance, but also sales if we have some gains so that obviously will move around a little bit but.
I think given where our view of the world is unless there is a.
Can change in the outlook today.
The macro challenge.
Having some sort of dividend as we get into the second half of 2023 is likely will be required because we would use up our nols and our positive income would require one so we'll work through that obviously it has to be approved by the board, but you should expect something unless there's some unusual thing in the world that occurs.
Sometime in the second half of 'twenty, three and I think 111 answer to a question you didn't answer but I think is relevant is if we had no nols.
Today our.
Our forecast for 23 would be a need to pay about $1 a share.
Depending on your assumption of the Alex there, but if you assume we're at kind of 2019 kind of run rate.
That would be about $1 share dividend that we acquired.
Just wanted to taxable income.
Alright, thank you for that very helpful.
Thank you. The next question is coming from Shaun Kelley of Bank of America. Please go ahead.
Hey, good morning, everyone.
John Ray just as we think about the outlook for fourth quarter and I know the lead times here are relatively short, but can you just give us your thoughts on sort of the interplay between.
The two big themes data a lot of people we talked to you are interested in which is the state of the urban recovery, where all the sign posts continue to sound like they're moving in the right direction relative to the tougher comps and maybe a return to seasonality on leisure I mean, when we put those together relative to your outlook. It's looking like Q4 comes out if we adjust for la Playa.
Q4 comes out pretty similar to Q3, and I guess, we're sort of asking or wondering is why don't we have another leg in the urban piece, especially when you think about the occupancy some of the recovery in some of your specific market and some of the renovation capital you've put out. So maybe you could just help us think about why we don't have kind of another leg up from.
From here.
Sure well it would really be three things Sean.
One is we did have a small impact from the hurricane in the first week to 10 days in October .
La Playa so.
Obviously, the hurricane went through.
Florida and up the coast.
And we had a lot of cancellations and <unk>.
That weekend and into early next week.
At places like Jackal at Margarita Bill.
And even in the Naples market in key West where the hurricane hit right before it went through Naples. So there was.
Again, it's all at the margin, but when we start talking about an improvement of three.
Three additional three points or four points in a quarter and you lose one or two of them to a hurricane so thats.
They are meaningful.
The second thing would be we do have some redevelopments in the urban markets.
<unk>.
Commencing in the fourth quarter.
Assuming we get our permitting.
They're soon to start in downtown San Diego, both the gas and Hilton Gaslamp as well as the commencement of the conversion of <unk>.
So lamar to Marguerite at all in fact, we already started the exterior work at the <unk>, where we're we're painting the exterior of the building the Margarita Bill Green color if you will.
And then the third thing was.
<unk>.
As we were talking about earlier that sort of return of normal patterns. If you will and the impact of things like convention calendars in our market. So Boston D C. San Diego all had great third quarter calendars compared to 19, but the <unk>.
<unk> fourth quarters arent quite.
As good so again, it's an impact at the margin and as probably.
At least in our numbers, perhaps maybe not others, but in our portfolio. It is having some impact on the sequential.
Improvement compared to <unk> 19 in the fourth quarter, but the high keep in mind again, the high end of our range.
Excluding la Playa for Revpar is is flat I mean is up one 5%.
Percent.
Alright, Thank you for that and I know, there's probably some conservatism in there a little bit to sit in I guess the second question.
Would just be thinking about maybe a little bit broader for the industry. It does feel like in recent weeks as we cut the data urban occupancy has probably leveled out more broadly even sort of not in just.
Pavel Brooks markets.
You guys watch the industry stats as close as anyone can you just give us your thoughts on.
Is this kind of.
Or do you think there's something else that can kind of drive or change corporate behavior increasingly from here again, I think we were probably a little bit more optimistic about that a month ago or six weeks ago, and I'm kind of curious to get your take.
Yes, I mean I don't think this is it I actually think we have a long way to go.
Sequentially, we're just going into some seasonally slower periods.
For business travel and as we indicated the return of sort of the normal impact of holidays, like Halloween, which is negatively impacting.
Again, the week before and after Halloween are.
Half of the week before and have the week after which.
Is why we want to move Halloween to Saturday night every year.
And and so I don't I mean, there is there as we look at our markets.
And we look at what we're seeing on the corporate side I mean.
Santa Monica, which had been slower to recover on the corporate transient side because of its sort of tech.
And VC focused the reports we're getting from our properties are we're we're moving back to hitting transit levels that were similar to 19 and again I think it's just going to continue to happen around the country and the different urban markets that we're in so I don't really think it is leveling.
I think we have to be careful that the.
The normal seasonal slowdown as we head into mid November and beyond all the way until March.
Is not going to be is a sequential growth.
Over the prior months because its seasonally slower.
Yeah, and Sean one one kind of constraining factor also that does have impact on business travel is airline capacity and that's something where we've seen we track the TSA data that's been up in the 90% to 95% range to 19 and that is not moving much.
There's a lack of pilots, but as you heard from the other airline calls their training and are pumping out more pilots so that should be help improve the restarting capacity, there which would put it.
It was pre pandemic says we've got more airline capacity and I don't know if you've been in a plane reasonably but every seat full.
Even though the planes or slow down, but as we get more national does not have more flights and more opportunities for business travel.
Yes. Thank you very much I appreciate it.
Thanks, Sean.
Thank you. The next question is coming from Michael Bellisario of Baird. Please go ahead.
Thanks, Good morning, everyone.
Just one P&L question for me did you guys see any expense pressures pick up during the third quarter and are you seeing anything improve our worst and now that were in <unk> or you start your budgeting process for 'twenty three.
Energy energy as being a pressure and will continue to be.
So that's an area, where it's only calling out.
The whole side about other inflationary costs like labor and input costs.
We've had a lot of the labor increases during the year and strategically attractive.
Talent.
Hotels, so I would say, there's probably less pressure there on a year over year basis than it was earlier.
Input cost continues to stay high but.
One area that we've been continuing to be up as an energy side and thats going to mean.
We had a tough winter.
I think one other thing that we have to look forward to and frankly.
We don't know what the timing is because we deal with we have to deal with the governments around the country, but.
We have we have claims and for for the last few years for property tax.
Assessments that in many cases did not decline with the pandemic and.
We think theres going to be very significant wins, there I mean millions and millions of dollars of savings, but it's going to take time in some cases.
It could be as much as five years.
From from the assessment year in other cases, if there is ultimately resolution before litigation.
That may be two or three years. So we're getting close to some of those hopefully getting beginning to get resolved and ultimately we should begin to see some mitigation.
The property tax increases that we've continued to see despite the.
Obvious negative impact on our industry from the pandemic.
Got it and then just one follow up there are you seeing any divergence between urban and resort properties.
Cloud today.
I don't really I mean, the resorts are probably gone up a little bit more just because they tend to be in resort locations where.
There's a lot of competition. It was an industry that came back first.
The cities tend to be more.
In many cases fixed and following the contracts the union contracts in that market, regardless of whether you are your union or not so.
So.
That's that would be the only difference I would highlight.
One of the benefits, we have seen Mike as the.
Both the return of <unk> and the <unk> program, but also the administration.
Approved going up to the Max number of <unk>, which had never been done before.
And that will help our industry, particularly the seasonal resorts.
Helpful. Thank you.
Thank you. The next question is coming from Gregory Miller of <unk> Securities. Please go ahead.
Hi, good morning.
I wanted to start off following up on your comments on the tech industry.
Could you share what your current expectations are for tech travel budgets for 2023.
Either compared to 2019 or 2022.
<unk>.
Yes, I mean, I think thats.
Unfortunately, probably a better question for the brands, who have who have a much broader view view of that then.
And then we do.
We've seen a continuing.
Fairly rapid increase more recently.
On the tech side and their travel.
And probably coincides a little bit more with.
With their with our efforts to return to the office.
We are seeing an increasing number of the tech firms coming back to their office. So the.
The markets for us that where we see it is.
Obviously, San Francisco, and Seattle, and as I mentioned, Santa Monica, the what they call the Silicon Beach and.
And so.
I don't know where that will end up at all.
We believe any of these surveys about.
Budgets are.
Comparisons I think travel frankly is much more controlled by the individual employees in the organization that it is.
By senior management so.
Outside of that occasional announcement like Google made.
About only.
What do they call it essentially only essential travel which.
It's always a debatable issue, obviously by those who want to travel. So we think all travelers essentially everywhere.
So we have a small industry bias and also Greg just.
You know the tech industry has been a lagging industry and the recovery since the pandemic as it relates to travel demand. It's really been other industries like entertainment industry life Sciences consulting a lot of other sectors have been coming back more than attacking recently attack hasnt coming back, but certainly that's been a noticeable industry that's been.
Not bouncing back as quickly as others.
Hi, gentlemen.
And my follow up.
To ask about the two western and Boston and Chicago.
Combined and as you know these hotels were about $50 million of hotel EBITDA in.
In 2016.
Could you share roughly where these hotels are likely to finish this year or more broadly how you see the recovery for these hotels over the next couple of years.
Yes, I mean.
Ah Copley is going to be pretty it looks like it's running pretty darn close to 19 EBITDA.
Or take one or $2 million.
Depending upon how the last.
Three months ended up.
So clearly a great.
And pretty quick recovery in that market rate is up significantly now over 19 in.
Group bookings for next year look really good are tracking very close to 19.
But with with rate up.
About 5%.
Over 19 so.
I don't have a comparison back to 16.
Westin, Michigan Avenue, obviously, much slower market to recover.
And I don't recall off hand, right, where we are it's probably I mean, it's probably down a lot from 19.
So likely down 40%, 50% to 19 on an EBIT basis.
But the.
The summer in particular and into the fall.
We've seen a really nice recovery in business transient and group.
The west and in Chicago.
Great. Thanks, Thank you Beth.
Thank you. The next question is coming from Bill Crow of Raymond James. Please go ahead.
Good morning, guys John .
John that too.
Beat the whole sequential.
Change to death, but.
Look about the same store revpar versus 19, right going from a.
One and a half or two.
Your midpoint.
X reply I think you said there were three items that are the hurricane impact rent.
Reno disruption.
San Diego.
Seasonality seasonality out because I assume seasonality, which was around 19 right in the region calendar changes or anything that we should know about.
Can you quantify the hurricane if we didn't have the hurricane impact.
And maybe if it didn't have the renovation disruption, although I'm guessing how active you were in 19, you probably had some disruption there.
Where would that same store revpar guidance.
For the fourth quarter.
Yes.
Bill just to clarify.
The the comment about.
Q4, compared to Q3 wasn't about seasonality of the third point related to how the convention calendars fall.
And and so.
So when we look at that and again.
It all compares back to 19, but the comparisons were not as good for.
For San Diego.
For Boston and for D C, which are obviously a meaningful part of our portfolio and then when we look into next year. As an example, the calendars for San Diego, Boston and D. C are actually all up for at least for the year.
Paired to 19, but im sure theyre going to be.
And compared to this year, they are up and I'm sure there'll be some quarterly movement from.
Around and all of those markets, but I don't know that off hand so.
The impact from the Hurricane we don't have the numbers in for Octobers the impact from October we'll get those.
In about two weeks from from the property teams.
And Youre right I think we did have some.
Redevelopment impact.
In.
19, although I don't recall, exactly which which properties it was.
Okay.
Interesting discussion thats, one of them, having increasingly with investors.
And I think Sean went through that dialogue as well.
Suspicion that things are.
Potentially stalling a little bit and I just want to make sure that we understand.
The progression third quarter fourth quarter. Thanks.
Thanks, Joe.
Yes.
Thanks, and I think it's look if it was stalling we'd tell you.
If we saw indications of that and we've looked at others.
We look at visa, we look at American Express, we look at the airlines for the fourth quarter and.
It doesn't appear that any of them are reporting a stall in the in the recovery. So.
But I promise you that we'll we'll let you know if thats if we see it.
Yeah.
Thanks for the time.
Sure.
Thank you our final question for today is coming from Chris <unk> of Green Street. Please go ahead.
Thanks, Good morning.
John can you speak to the downward revision of your internal estimate estimate of NAV.
Maybe elaborate a bit on what youre seeing in the transaction market and how values have changed across some of your markets.
Sure.
We.
We continuously.
Evaluate the values of each individual property and take into consideration all of the meaningful factors.
What is the sentiment in that market.
Is it union is it non union as it unencumbered as it encumbered.
Is it management encumbered is it brand encumbered because those have negative impacts and obviously unencumbered has a positive impact on.
On values, what's going on in the debt capital markets.
What's what's the equity flow.
And in <unk>.
And basically what are the transactions and what's going on in the pricing and the values of those transactions, whether they've been reported or ones. We know that are being completed and what the pricing and valuations of those are in the marketplace. So we take that into account and obviously in the last quarter. What we've seen is a continued.
An increase in the challenges related to the debt capital markets and an increase in the cost.
Of that capital and a decrease in the availability.
Of that capital and that is impacting levered buyers in the market and impacting values in the market.
The mitigation to that continues to be.
How values are determined based upon increasing confidence and recoveries.
Both ongoing and expected on a go forward basis, and then ultimately also I'm sure buyers take into account as we do what does the macro look like.
And what are the risks there so.
The long I want to provide that background because the result is what we deliver to you what youre, commenting on which is.
The ultimate result of that of looking at values on each and every property.
On a <unk>.
Sophisticated basis based on transactions and buyer sentiment.
A reduction of about $330 million in the value of our assets in the portfolio.
Which is about $2 $5 a share so the range came down two and a half from low to middle to top end and is now between $27 50, and $32 50 for those on the call, who who haven't gotten through the investor presentation, yet like you have Chris.
Got it I appreciate that color it's helpful.
And just quickly I wanted to return to a point you made around margins and the opportunity to improve bottom line performance as occupancy continues to come back.
You mentioned that expenses become relatively fixed at a certain point in demand and I just wonder how close we are to that inflection point I guess I'd call. It.
I know, it's tough to kind of measure this on a portfolio basis, but I just wonder how we should be thinking about the trajectory of expenses.
From this point forward.
Excluding really any CPI related.
Cost increases.
Yes.
Yes.
I didn't mean to say that we get to a point where.
They're almost all or all fix there, obviously theres always marginal expenses related to both labor and materials, but but volume revenue volume does matter because when you. If you have a full team of all of your people.
Primarily you are management people.
And you have a lot of your other expenses insurance taxes.
Things like that that are fixed and don't vary.
Based upon those volumes Youre flow, obviously for every dollar ultimately improves.
As your total occupancy in your total revenue base improves. So you just end up getting much better flow on a marginal basis than than what <unk> gotten what we've gotten in prior quarters.
Fair enough understood. That's it for me thank you.
Thank you at this time I would like to turn the floor back over to Mr. Bortz for closing comments.
Hey, thanks, everybody for participating those who are still here and.
Hope you enjoyed the.
Song that we provided for you.
It's a classic.
San Francisco and we look forward to seeing you in San Francisco at NAREIT.
Yes.
Thank you ladies and gentlemen. This concludes today's event you may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.
Okay.
Yes.
Sure.
Okay.
Yes.
Thank you.
<unk>.
Yes.
Okay.
Yes.