Q4 2022 Pebblebrook Hotel Trust Earnings Call
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Greetings and welcome to the Pebble Brook Hotel trusts fourth quarter and year end 2022 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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 fourth quarter 2022 earnings call and webcast. Joining me today is Jon Bortz, our chairman and Chief Executive 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 to numerous risks and uncertainties as described in our industry.
Filings future results could differ materially from those implied by our comments.
Forward looking statements that we make currently effective as of today February 22023, and we undertake no duty to update them later will discuss our non-GAAP financial measures during today's call and we provide reconciliations of these non-GAAP financial measures on our website at <unk> hotels Dot com.
Okay 2022, we made significant progress on our road to fall to a full recovery, we want to thank our hotel teams and operating partners for their hard work sacrifices and creativity.
Our portfolio continues to benefit from their tremendous effort as we continue on the path of recovery and growth following the pandemic.
Our adjusted EBITDA finished at $356 7 million compared with $99 8 million in 2021.
A very significant progress from a year ago and.
And while we still have much work to do we believe we have considerable upside ahead.
At the broker share ended at the end of 2020 to $1 69.
A substantial improvement from 2021 at a negative <unk> 23 per share.
On the investment side, we were very active we required to leisure focused resorts for $330 million and sold for urban hotels for $261 million.
2020, we've acquired six leisure focused resorts for over $820 million, while selling 11 hotels and slower to recover urban markets for a total of 957 million.
Between acquisitions and dispositions since 2020, we have recycled almost 30% of our portfolio representing a dramatic transformation of our company.
As a result of these investments and divestitures, we have increased our market segmentation from leisure both group and transient to roughly 50%.
We are extremely excited about the many operating re merchandising and redevelopment opportunities at a recent resort acquisitions, some of which are already underway, which John will discuss later.
We expect that these major projects will generate outsized growth over the next several years.
For the fourth quarter same property total revenues of $310 6 million for 94, 1% recovered. The 2019 and this was driven by continued solid demand at our resorts and further improvement in group and transient business travel.
These results exclude apply a beach resort due to its closure from hurricane in which negatively impacted our same property revpar growth by approximately 150 basis points and an estimated $16 million in property revenues and $12 million of same property EBITDA.
In terms of market, we continue to experience solid demand in Los Angeles, San Diego, and Boston and Encouragingly, we are seeing the demand recover accelerate and are slower to cover markets, including San Francisco, Chicago, and Washington D C.
Shifting to Q1 2023.
And operating trends have generally been in line with expectations, excluding the impact of the severe winter storms, we've experienced to date in the first quarter.
The significant rainfall fall in northern and southern California disruptive major travel to these markets and then cold temperatures in Boston disruptive business travel costs and water damage, resulting in an estimated $1 1 million in additional operating and capital expenditures, which also includes the estimated cost to remediate and cleanup. Following these multiple storms.
Yeah.
On the demand side, despite the numerous layoffs announced across many industries, we have yet to experience any notable changes in demand booking activity or increase in cancellations.
Leisure demand remains healthy despite concerns about the consumer become more cautious.
Except for some softer demand in key west, which was robust and relatively pricing sensitive in 2021.
Part of it was one of the few states to fully open for business.
Are these are already a demand is maintaining its strength.
Demand started the year, an encouraging note in San Francisco with the Jpmorgan Health Care conference in early January compared with 2020. The last time Jpmorgan was held in person demand at our hotels was at 76, 8% of 2020 levels with ADR up nine 7% and overall revenues at approximately 84.
4% of the 2020 conference levels.
This is a very positive start to the year for San Francisco, which we expect will continue with a much improved convention calendar this year.
Overall for the company January same property Revpar was up a very strong 49%.
Fitting from easy comparisons to the Omicron impacted January last year.
We anticipate same property revpar for Q1 to be 15% to 18% higher than Q1 last year.
Not surprisingly the quarters Revpar growth will slow substantially from January as growth rate versus last year as omicron is as the quarter progressed.
Our Q1 operating results were negative will be negatively impacted from the closure of our playa for repair and remediation work due to hurricane season, which will reduce our Q1 hotel revenues by an estimated $25 million and same property EBITDA by approximately $14 million.
In addition, we will experienced displacement due to several major transformational projects underway.
This is expected to negatively impact Q1, revpar by approximately 225 to 300 basis points and overall same property EBITDA by four five to $6 5 million.
These include the comprehensive redevelopment at Hilton Gaslamp, San Diego, So Omar as it converts to a margaritaville and downtown San Diego Estancia, La Jolla, Jekyll Island resort and Viceroy Santa Monica.
Combined the disruption that will apply from hurricane in in our Redevelopments will negatively impact Q1 same property EBITDA by approximately $18 $5 million to $25 million.
Shifting to our capital improvement program for 2023, we are targeting to invest a $145 million to $155 million into our portfolio, including several major redevelopments. They are very good. We're very excited about and we expect will generate healthy returns on invested on our investments.
John will discuss this year's strategic redevelopment projects and overall program in more detail later in our remarks.
Also as we detailed in last nights press release, we have made substantial progress in repairing and restoring the playa.
Reopened the property is Bay tower is expected to partially open the golf tower shortly.
The golf tower houses the lobby restaurant bar and club errors. So it is a significant component of the resort.
We will also open it with one of the three pools and a temporarily relocated spa and fitness center.
The Beecher has been cleaned reopened and we will be providing <unk> services to our resort and club guests. Our Beach House. However is still undergoing restoration work, which we expect to be substantially complete in the fourth quarter.
We received $25 million, so far from our insurance providers to complete the necessary repair and remediation work, we expect additional proceeds from our insurers for their work needed to fully restore this fantastic resorts shortly.
Upon completion, it will be better than ever and we expect it will be quickly returning to its pre hurricane performance.
We're also expecting the first one your installment a business interruption proceeds for this case $7 2 million for loss business. During the fourth quarter of 2022, which is net of our $2 million Ti deductible.
This has been incorporated into our Q1 outlook and we'll get other income and benefit adjusted EBITDA and adjusted <unk>.
We expect to receive additional proceeds for Q4 of 2022.
2023 later in the year or by the time, we reach a final settlement and we will update you quarterly as we progress in this area.
Turning to our balance sheet and other capital uses since the start of the fourth quarter of 2022, we have utilized proceeds from prior dispositions to repurchase five 5 million common shares or just over 4% of our outstanding shares at a weighted average share price of $15 12.
Roughly 51% discount to the midpoint of our recently updated NAV.
In addition, we repurchased 1 million shares of our series H preferred equity at a 36% discount to par or $16 per share compared with the $25 per share par value.
We also use disposition proceeds to pay down debt last year.
Our board has authorized an additional $150 million common share.
Our repurchase program, which combined with the remaining unused portion of our prior authorization implies we have $224 million available for common share repurchases. The board also approved a $100 million preferred share repurchase program.
As we sell additional properties, we will evaluate how to best utilize our proceeds including reducing debt and or additional share repurchases, depending on our outlook on the economy and how our performance progresses if.
If we do utilize some portion of the proceeds for repurchasing our stock, which we believe is currently trading at approximately 50% discount to net asset value. We do so only while reducing our debt no worse than a leveraged neutral basis.
And we have been comfortable with taking advantage of the public the private valuation arbitrage for several reasons first our net debt is just 43% of the net book value of our assets, which we believe is very reasonable.
Assuming the $750 million convertible notes, which comprises about one third of our total debt converted to equity before the maturity in late 2026, this would drop to 29% of debt to net book value.
Second our net debt to our estimated NAV is also a reasonable 33%.
And third most of our debt over 90% in fact is unsecured bank debt or notes largely held by our bank group with whom we've had relationships for many years in several decades for some of them.
These relationships go well beyond just a lender borrower relationship whether its investment banking substantial cash deposits credit card processing and many other services, we're very attractive client to our banking partners.
As we've seen during the depth of the pandemic relationships do matter. We are one of only a handful of hotel rates that did not have to secure debt during the pandemic.
This highlights the confidence and trust our banks have in US. In addition, on a $220 million or less than 10% of our debt is secured property level debt of which only $162 million of mature before 2028 that is very manageable.
Finally, our existing liquidity is very substantial we have more available than we did before the pandemic our $650 million unsecured credit facility, which is largely undrawn provides flexibility, while reducing any refinancing risk.
And our average debt cost is currently just three 5%, perhaps the lowest in our industry and this of course enhances our cash flow and our fixed charge ratio, which reduces risk.
In addition, 75% of our debt is fixed through the end of 2023 and 50% is 63% is fixed through 2024.
And we use a very attractive window the market in January to complete $400 million of swaps for two to three years to effectively extend swaps that expired. This year. So the cost of service of our debt is very predictable and manageable, even if interest rates surprised to the upside.
And on that positive note I'd like to turn the call over to John John .
Thanks, Ray I'm going to focus my comments on two important topics.
First our setup for 2023, and what we're seeing in the market.
And second the EBITDA bridge, we laid out in our investor presentation.
Where we are where we're going and how we're going to get there.
It is far easier to predict long term value creation than it is to forecast short term performance, especially in highly uncertain times like today.
As Ray indicated we've not yet seen any material impact from the macroeconomic slowdown that is either occurring are that many are forecasting.
Group business transient and international inbound travel all continue to recover and leisure travel remains very healthy.
But we're not so nave to think that we won't see an impact or that we're suddenly no longer a cyclical industry.
And we are humble and recognize we've never been through a pandemic and recovery before.
Let alone one where the fed is working over time to slow down the economy in order to bring inflation down to its target.
So it's extremely difficult to forecast how these conflicting waves will impact each other as we move forward in 2023.
All we can do is plan for different scenarios and monitor all of the macro and micro indicators very closely.
And we will let you know when we see the trends changing.
In the meantime, we expect our first quarter to significantly improve over omicron impacted Q1 2022.
As Ray said, we saw healthy year over year, Revpar and total revenue growth in January .
Though it was negatively impacted by unusual weather on both coasts early in the year.
February continues to see improvement over 2022, so we had a nice benefit from the Super Bowl in Los Angeles last year.
As early as one of our largest markets. It does represent a year over year headwind for the months yes.
Yes, we're seeing significant continuing improvement in la <unk>, which is definitely mitigating or submit a significant portion of that grade four day period.
Group pace is looking good for 2023.
As of the beginning of February Q1 Group room Night pace was ahead of last year by 54% with ADR pacing five 6% up to last year for a total group revenue improvement of 62, 7%.
Transit is also pacing ahead of last year's first quarter by 16, 2% and transient room nights.
Bill rate is up by one 4%.
Total group and transient pace for Q1 was ahead by 27, 5% in room nights and two 1% in ADR and 32% in total revenues.
While Q1 is an easy comparison.
We're currently pacing ahead year over year in group and transient in every quarter.
This is partly a reflection of the ongoing recovery in demand and partly due to greater confidence on the part of group and transient customers booking further out than they did last year.
For 2023, our group revenues are pacing ahead by 29, 1% with rate up by seven 2%.
Total room revenue on the books for 2023 was stronger by 21, 3% with ADR ahead by four 4%.
Our urban ADR as are driving our rate advantage.
Our reserve grades are up marginally.
Driven by group right. So there are substantially higher while our transient rates are slightly down.
We expect this will likely be the case for the year.
As we look at our bridge to the short to intermediate term EBITDA upside in our portfolio.
We expect our urban properties will recover to their 2019 EBITDA in total over the next couple of years.
Led by our earlier to recover markets like San Diego, Boston and Los Angeles.
Following by current recovering markets like San Francisco, Washington, D C, Chicago, Portland, and Seattle.
In 2022, our resorts achieved an EBITDA level greater than the high end of our $55 million to $60 million range of improvement over 2019, EBITDA that we had been forecasting.
This assumes we utilize it.
Supply is actual results.
For the first three quarters of last year and their forecast at the time the hurricane hit for the fourth quarter of last year.
We expect the resorts are likely to generate total EBITDA that is roughly flat in 2023 versus 2022 again, ignoring the impact from la Playa being closed.
So our resorts are already ahead of the bridge to a more normalized level of EBITDA upside that we provided in our investor presentation.
In addition, we have already achieved the cost reductions in our property operating models detailed in the same EBITDA bridge presentation.
From a margin perspective, we wouldn't expect higher margins until we regain a significant portion of last year's almost 19 point occupancy deficit and as total revenues continue to recover along with that demand.
And there are still more operational efficiencies available in our portfolio and the continuing efforts of curated or to bring down costs.
Just on the growing scale of curator and the increasing use of technology will offer further benefits in 2023 and beyond.
That brings us to the last portion of our upside opportunity.
And our EBITDA bridge.
That's the upside from our multi year extensive property redevelopment and transformation program emanating.
Emanating from the Lasalle assets, we acquired in late 2018.
And the resorts, we acquired in the last two years.
We historically have had great success redevelopment repositioning and re merchandising properties to a higher level that we believe had significantly more potential than their prior positioning.
While these projects tend to take anywhere from one to three years for planning and construction.
And then three to four years to ramp up revpar share gains and substantially higher EBITDA.
They have pretty consistently delivered high single digit to low double digit unlevered cash on cash returns on our investments upon stabilization.
Since the Lasalle acquisition back in late 2018, when Lasalle had completed three to Redevelopments.
We have redeveloped and repositioned <unk> 13 of the acquired properties, including Mission Bay resort in San Diego, which was a former Hilton low bearish del Mar Viceroy Santa Monica.
Look park Montrose, the Chamberlain and Grafton on Sunset the hotels Ziggy <unk>.
All four of which are in West Hollywood.
Chaminade resort in Santa Cruz.
Tell vitale in San Francisco, which is now one hotel San Francisco.
Both southernmost resort and marker harbor side in key west and.
And Mason and rock and the Donovan, which are now viceroy DC and hotel Zena.
Both in Washington DC.
In addition to these recently completed projects.
We're in the process of a dramatic re imagining of Hilton Gaslamp in San Diego as a lifestyle hotel.
And then a block away we are in the process of a major redevelopment of soul of R, which is being transformed into a margaritaville.
During the same timeframe from 2018 to today.
We also fully renovated redeveloped or transformed.
Eight of Palo Brooks properties.
Including Westin Gaslamp and embassy suites, San Diego Bay downtown.
Mondrian, Los Angeles, the hotel Zags and Portland.
<unk> Zelos San Francisco.
Skamania Lodge in the Pacific Northwest.
W. Boston.
And we'll apply a beach resort enables.
Of course, we also renovated or Redeveloped most of our previous acquisitions.
But we generally did so one or two years following their acquisition.
Just as we're doing now with the Redevelopments and transformations of Jeff Jekyll Island Club resort in the Golden Isles of Georgia.
<unk> La Jolla hotel and Spa.
And Newport Harbor Island resort.
Former journeys resort in Newport, Rhode Island.
The total investment in all of these projects both completed since 2018 and currently underway is over $520 million.
And most of these properties have yet to ramp to their full stabilized potential.
As detailed in our EBITDA bridge, we expect these projects to delivered $27 million of additional EBITDA over the next three to four years.
And as evidence of the confidence that we have in delivering this additional EBITDA, we have a sharp focus on how our customers are responding to our new products.
Since 2019, our portfolio taken as a whole.
Has climbed from an average customer popularity ranking of 45 on Tripadvisor to.
And the average ranking of 33 at the end of 'twenty two.
A 26% plus improvement.
Historically correlates with an ability to gain share through both rate and occupancy.
So it seems pretty clear to us that our investments have dramatically improved the overall quality of our portfolio.
That our service levels have also improved and that this substantial improvement will lead to significant revpar share gains and EBITDA gains.
And we expect performance over time to improve the value of this large investment program.
As it relates to this year's projects.
The $25 million complete upgrading and Reimagining of the 286 room Hilton Gaslamp quarter as a lifestyle hotel has been underway since November of last year, and do and is due to be complete in the second quarter.
The $27 million redevelopment of the soul of our as a marker Redeveloped hotel in downtown San Diego.
Dan in January and should be completed early in the third quarter.
The $20 million plus repositioning of Jekyll Island Club resort began early this year and.
And should be complete late in the second quarter.
The first phase of the repositioning of our staff commenced earlier this month and is due to be complete late in the second quarter with the final phase starting late this year and finishing in the spring of next year.
The rooms renovation advisory Santa Monica started in November of last year and should be complete later this quarter.
This will complete the two phase $19 $5 million repositioning of this iconic luxury lifestyle hotel on Ocean Boulevard in Santa Monica.
At Skamania, we just completed the addition of three more treehouses.
Bringing the number of luxury treehouses to nine and later this year, we'll complete five luxury glamping units.
The first of their kind of skamania.
Along with a three bedroom villa and two two bedroom cabins and our second large outdoor pavilion.
As we test these new alternative lodging experiences out with our guests.
The results will help guide the programming for the remaining 100 acres, where we believe we can add up to another 200 lodging units.
And this summer at southernmost resort will undertake a complete 220.
Per key redevelopment and upgrading of the four guest houses totaling 50 rooms.
Recall that two of these guest houses were purchased in late 2021, and immediately integrated into the resort as unique and distinct products.
Finally, we commenced the first phase of the redevelopment and repositioning of Newport Harbor Island resort in December last year and.
And we will commence the second phase later this year in November with a completed product delivered in Q2 of next year.
The total project is currently estimated as a $45 million investment. The first phase is focused primarily on deferred capital maintenance.
And the second phase represents all of the improvements that we will reposition this property as a luxury resort.
Taken together this long list of major repositioning investments.
Along with a very substantial transformation of our portfolio.
From a heavily weighted urban coastal portfolio to a more balanced business and leisure segment segmented urban and resort portfolio.
Positions us very well for significant growth in Revpar share in EBITDA over the next three to five years, regardless of the macro environment.
And by the end of the first half of next year with.
With the exception of Paradise point, we will have completed the investment portion of the strategic redevelopment program opportunity that emanated from both the Lasalle acquisition and.
And the resort purchases, we made in the last two years.
With only the significant upside to achieve and enjoy over the next few years.
I'd also like to make one final announcement on behalf of myself and our board.
It is my great pleasure to inform you that Ray Martz, our Chief Financial Officer.
And Tom Fisher, our Chief investment Officer.
Have both been promoted to co presidents of Pebble broke.
Frankly, the new title merely reflects the much greater leadership responsibilities. These two have undertaken.
On over the last few years and as my long standing leadership partners I want to congratulate them on this long overdue recognition of their superior efforts and value to our company.
So with that good news that completes our prepared remarks, we'd now like to move to the question and answer portion of our call. So operator Donna you May now proceed with the Q&A.
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.
Formation tone will indicate your line is in the question queue.
You May press star two if he would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Due to upcoming peer lodging calls we are asking you to please limit yourself to one question today once again Thats Star One to register a question. The first question is coming from Shaun Kelley of Bank of America. Please go ahead.
Hi, Good morning, everyone. Thank you for taking my question and congrats to Ray and Tom on the new titles.
Got a few different places we could go but.
In the interest of time, maybe the right way to think about it is it feels like Q1 is always a really hard quarter to extrapolate too much from and obviously theres a lot that idiosyncratic that's going on with Teleflex portfolio. So can you just help us think through the balance of the year to some degree I mean, obviously.
If trends hold and it seems like everything you're seeing right now is pretty positive is it reasonable to think John array that we can see.
Year over year growth in the Pebble book portfolio for the remaining three quarters of the year if again.
Given that there's a lot we don't know about the macro right now because I think what we're trying to we're struggling with a little bit is the bridge John that you laid out versus the sort of the absolute number in EBITDA that kind of came in for Q1. When we look back to places like 19, and I think some of that seasonality and a lot of these renovations. So I'm just trying to kind of get a sense of how to model our balanced.
The remaining expectations for 2023.
Yes, Sean.
I think the best way to answer it is if we assume that we don't see any material impact from an economic slowdown or a recession.
Later this year that we would expect Q2 Q3 and Q4, all all to exceed.
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Last year with the with the caveat of La Playa impacts so let's settle apply aside for the moment, we expect to be fully compensated.
For its performance or what would have performed had enough in the hurricane through our insurance proceeds, but yes, we would expect that continuing significant improvement on the urban side.
I would say generally flat performance.
In our resort portfolio with ups coming from repositioned assets and continuing improvement in the west coast markets and probably some weakness, particularly in the keys.
Yes.
In terms of bottom line performance. So so yes, we would expect two three and four to be improved over last year.
Thank you very much.
Thank you. The next question is coming from Duane I think worth of Evercore ISI. Please go ahead.
Hey, Thanks, good morning.
Just just with respect to the hiring environment. If you could just play back for US your experience in the fourth quarter.
Was this a function of you had a bunch of open open positions that were filling at a certain rate.
And the and the catch up of that surprised you.
And going forward are you at kind of a more yeah can you just sort of qualitatively speak to kind of the number of open positions you have going forward and if you sort of fully caught up on staffing.
Yes, so I'd break it into two areas sort of the management team team members.
As well as <unk>.
Folks who fall under the administrative and general category. So that's your general managers Youre accounting team finance team et cetera.
And then your sales and marketing team.
Team.
Sales agents youre catering folks.
Related to group and finally, your your engineering team.
And I would separate that from your sort of hourly ftes on housekeeping in and.
Yes.
On on banquet and catering in particular food and beverage so.
We've had these open positions really since we reopen the properties on the management team side and on the sales team side and as volume came back we added.
We sought to add people, we had a lot of struggles in the first half of last year doing that and so filling those open positions.
Occurred on a much slower pace than what we would have liked albeit as we indicated last year, helping the bottom lines.
Frankly people, having to work extra shifts managers, having to work shifts having.
Having depth where lots of pads.
Et cetera within our hotels.
It started to improve in the third quarter as we.
We're having success more success filling open positions, but still it was still a struggle and by the fourth quarter all of a sudden it was like in turn the switch on and those positions generally got Phil So they did Phil.
<unk> quickly then the pace they had been on I think thats.
Probably something experience by a lot of different industries in the back part of last year.
And where we still have hiring to do just relates to volume. So I think as it relates to our management staff our sales team our engineering team, while we still have openings they're.
They are not materially different than they were.
Pre pandemic.
We always have openings were always turning over people.
We always have vacancies.
And we're generally filling those auto on a continuous basis.
We're we're still hiring is as volume returns, we're still hiring our lease.
Both in housekeeping and in food and beverage and I'd say, it's it's a lot easier than it was.
But there is still.
Theres still positions on the FTE side on the hourly side that we'd like to fill that are probably still having a negative impact on some of the revenues we can generate in those areas.
So I think we're in pretty good shape I think our run rate for what I would call the fixed portion of the business throughout the portfolio is generally.
Where are we where we want it to be or at least at the very least its at a similar level to where it was pre pandemic and we're just hiring on the hourly side as volume goes up.
And Duane on the cost side for the fourth quarter, if you're going to model it sequentially.
You should model it sequentially because it is very seasonal to fourth quarter behavior generally in the first quarter, but also in the fourth quarter. This year, we had some onetime bonuses for a lot of our management teams.
About $3 $5 million or so that was more of a <unk>.
One time.
Number so I wouldn't necessarily extrapolate that out into future quarters.
As you model out for 2023.
The one other thing to mention is when.
We've indicated the EBITDA impact, but one having having la playa out of service in the first quarter.
When in the first quarter of last year with a pretty much a full team there our EBITDA margin was 56%.
And so between that and the negative impact on margins.
When we do redevelopment so when we do these redevelopments and we have properties that are running at.
Call, it 50 or 60% of the rooms available.
With public areas under renovation, we still have all the fixed cost from AMG sales and marketing accounting.
Engineering et cetera, we just don't have the revenue volume. So there is there is not much ability to flex other than the our lease.
Which we do and it's indicative of.
The negative flow on.
The redevelopments in the first quarter with $7 $5 million of lost revenue.
We're losing $5 5 million at the midpoint of EBITDA. So you can see there the flow is is challenging and so those two combined make our.
Frankly make our margins in Q1 look far worse than the way the business is actually performing underneath that.
Okay. Thank you.
Thanks.
Thank you. The next question is coming from Bill Crow of Raymond James. Please go ahead.
Hey, good morning, John .
<unk>.
Detailed discussion on that.
Renovation and repositioning program, but as you went through the timeline of three years to design in.
Plan.
Year, so construction in the three years of ramp and you just think about where that fits within an industry that seems to go through problems every seven years or eight years I was just wondering whether.
The benefits of that.
Actually it would it be found within the public markets.
Well I mean, I can't speak to the public markets I can only speak to the value creation that goes on at the individual property level.
And whether that ultimately is.
Is recognized in the public market.
I'll leave to you in the investment community to to determine.
But there is no doubt.
<unk>.
John These projects and in cases, where we've actually sold assets that had been redeveloped.
The returns have been quite attractive and.
And so.
Building cash flow over time in the long term.
That's our business and in the short term.
A lot of businesses may not be recognized I mean, theres a lot, obviously theres a lot of cyclical businesses out there.
He is still need to invest for the long term in order to generate the most attractive returns.
Okay.
And at some of your recent sales that have been.
Flat.
But where you bought them X the reinvestment so.
I'm going to follow up on the second question for Ray Congratulations on an entitlement.
Given where the stock is today its more difficult to make the assumption that the converts are going to be converted in 2006 and I'm just wondering whether that plays any role in your capital allocation decisions.
Sure.
We look at each of these.
Decisions as we make additional progress on sales.
Want to do without whether it's pay down certain pieces of debt indoor reinvesting in our portfolio and stock repurchases to look at each of those 2026 is a.
A long time from now.
Other levers to pull when market, we haven't accessed the high yield market and some of that could we could evaluate down the road.
After the yield curve come down but were intact because right now for us is not that attractive, but so right now.
There is a potential we could also just extended.
Issue, a new convert in 2026 two.
That one is the market or their desire. So theres a lot of levers we can pull that a lot of time between now and 2026.
It really our focus now is on over the near term here.
On addressing.
Various capital uses that we have a plan we have a couple of maturities coming up nothing too significant we only have one.
Our mortgage debt maturing between now and 2028 and estimated very tangible and also just a reminder, we have a $650 million line, which is basically unused at OE.
Always provides the ability to pay out some of that in short periods of time in the capital markets are an accommodated for any refinancing.
I think the other thing we should.
I forget.
To put it all in perspective as a year ago. The stock was was over the convert price.
With operating performance that was that was far lower than where it is today with fewer dollars invested in the portfolio in terms of its transformation and so I think it has I think where the stock prices has more to do with near term sentiment.
And the cyclicality.
The overall economic cycle.
And its potential impact on our industry than it does.
The actual value of the company so.
Sentiment can change as bill as you know.
You've been you've been around as long as I've been around in this industry and.
When the industry when things turn positive the industry tends to move a lot and it tends to move.
It tends to move very fast in the public markets. So.
As Ray said, we're a long way from.
From 2026.
But we do obviously look at that and we're not making an assumption necessarily that it will get converted.
Okay. Thank you both.
Thank you. The next question is coming from Gregory Miller of <unk> Securities. Please go ahead.
Thank you good morning, Tom.
Tom very well to serve new use kudos gentleman.
My question.
Between upper upscale and luxury resorts in your portfolio and competitors.
Which chain scale do you think is overall better positioned on occupancy and room rates this year.
The traditional luxury leisure customer booking distinctly from the traditional upper upscale customer. Thanks.
It's an interesting question.
Well I'm not sure I know the answer to that.
The.
I think the actual luxury customer is in great financial shape as frankly as is the upper upscale.
Customer is I think at the margin what we don't know is how will the customer who was.
Spending up if you will maybe maybe on a short term temporary basis or.
Maybe it's a change in how they allocate their dollars.
Towards the higher end experiences but.
We don't know how thats going to react in a in a downturn right whether whether people.
Either naturally come back down and say that was a onetime experience coming out of the pandemic I really wanted to splurge or weather.
On a longer term basis. The answer is hey, this is the way.
Life is too short I want to have these great experiences all the time and I'm willing to spend money on this and not by another pair of sneakers or another sweater whatever it might be so.
I'm not sure I can give you a great answer to your question I think we're going to have to see how.
How how those sectors perform.
And the industry overall, I think our portfolio.
Is more heavily weighted to the upper upscale in resorts than it is to luxury.
Property certainly like.
Like will apply.
And low bears at at the highest end of our portfolio certainly appeal to that to that luxury customer.
<unk>.
We're just going to have to see Greg.
Plays out.
I'll take a vacation or our person acres, but I appreciate the color John .
I appreciate that yeah.
Thank you. The next question is coming from Smedes Rose of Citi. Please go ahead.
Hi, Thanks, I just wanted to go back you provided.
It sounded like a lot of good news on the on the go.
And I was just wondering if you could talk a little bit more.
Where you're seeing that is it that your larger kind of Boston Hotel, which I think there's a lot more group business are you just seeing it evenly across the portfolio and maybe just kind of any sort of themes in terms of what the demand is coming from.
In particular versus kind of pre pandemic levels.
Sure. So I think from a from a segmentation.
Perspective within group I'd say, it's it's coming from two areas one is <unk>.
Corporate group, which is I would say back with a vengeance.
So we're seeing an awful lot of group.
Corporate.
Groups that want to meet that need to made for various different reasons, whether it's bonding whether it's <unk>.
Meetings with their with their customers and events related to them, whether it's incentives to reward their people.
We're seeing.
Sure.
Big increases in corporate.
Group and then on the association side.
Of course, a lot of the biggest ones come through.
Either the big houses that we have whether it's Copley and Boston Westin, Michigan Avenue in Chicago or Westin Gaslamp in.
In San Diego or it's our larger resorts like Paradise point in mission Bay, or the mission Bay Resort and mission Bay or a margaritaville.
And in Hollywood, Florida.
They are all benefiting from both association and corporate group increases and I'd say, a modest moderation in the number of weddings, which I think last year was sort of catch up year and this year seems more normalized in <unk>.
And the overall wedding pace so.
Big increases is throughout the portfolio.
I think we've said this before and it shouldnt be forgotten, we do a lot of group at our resorts some of them like skamania and shaman <unk>.
That were previously conference centers.
Do well more than 50% of their total business and group.
And.
I would say pretty much throughout the portfolio.
Group is up.
It also means that we also have a pretty favorable convention calendar this year, which should benefit.
Orben hotels in those markets in San Francisco the commitments in our room nights are doubling versus last year, which is now about the room nights are about in line to where they were in 2018. So a good encouraging increase Boston is up about 37% year over year, San Diego up 25% Seattle about 20%.
So those are all again encouraging themes for travel.
Really didn't take into consideration the international inbound which is continuing to improve.
For levels, especially in the West coast, which really Hasnt benefited yet from the Asia Pacific travel, which has been very very low for the last several years I think the other thing we've been seeing which sort of doesn't come through pace, but it comes through results.
As.
Certainly last year and earlier in this quarter I would say attendance.
Versus what was on the books at either city Wides or large group.
<unk> tended to be softer.
Even our earlier this year with sort of the increase in number of cases.
And not really people being scared about it but frankly more people, having COVID-19 or the flu or RSV, we probably had a little more wash.
And then what we're seeing now as things settle down on the health side and and.
It's good that people are sensitive about maybe not traveling when they're sick.
I hope that's a new long term trend that would benefit all of us.
But it certainly helps attendance throughout the portfolio.
Great Thanks, and congratulations Tom.
Okay.
Thank you. The next question is coming from Ari Klein of BMO capital markets. Please go ahead.
Thanks, correct Ron.
I have a quick follow up on the comment to grow EBITDA year over year, the remainder of 'twenty three X Naples would that include the renovation impact as well.
Yes, it would still be.
Growth.
Even with the impact from our renovations.
Got it and then how are you thinking about dispositions moving forward. The markets that have challenges are also seen that reflected in their prices. You've obviously sold in some of those markets, but to what extent are you willing to maybe cut bait or are you more inclined to wait wait it out.
I think I think the way, we evaluate dispositions as we look at what our.
What the opportunities are.
Related to what we would otherwise do with that capital.
And while it's not as easy to sell an asset and buy an asset.
As easy it is to buy stock and sell our stock.
And the market.
We do look at.
Risk adjusted returns in our markets.
Over a minimum of a five year period and understand are there better places to put that capital whether it's in other markets whether it's in other types of assets like we've done over the last two years or whether it's to repurchase our stock.
Which is trading at a 50% discount due to the leverage level the company, but a 25% to 30% discount and actual private market value.
Compared to how that's valued on an unlevered basis.
With the company so.
We're taking all of that into account. We obviously also are looking at.
Whats salable in the market and what might be much more challenging to sell in a market.
I would say today size.
Is probably the biggest deterrent to a sale unless it's a high cash flowing asset.
Our resort I think if one were trying to sell up.
<unk> thousand room Convention hotel today, and I'm not taking a shot at anybody we have couple of $750 800 room properties it would be more difficult to sell because of the debt markets today.
Today now obviously, all cash buyers can buy those but they generally they are generally not sold to all cash buyers. So we try to take everything into account already but were.
We're looking the primary driver is where's.
Where's the best return risk adjusted return for the for the shareholders and.
And then we have to take into account the time that it takes to do these transactions.
Thank you.
Thank you. The next question is coming from Anthony Powell of Barclays. Please go ahead.
Hi, Good morning, I guess, maybe related follow up looking at your NAV schedule in your deck, you've kept kind of.
The mid to high fives on a cap rate basis versus 19 NOI.
That's pretty positive I guess, we've seen other cap rates rise elsewhere in real estate. So what is holding and I guess your views on cap rates and value.
For your portfolio or is it the unencumbered nature smaller assets over there would be great.
Yes.
First of all it's.
It's a whole bunch of factors.
Couldnt look at the cap rates and how that how the cap rates change.
Determined whether.
Sure.
Either properly adjusting values or that theyre, a proper reflection of where we could sell these assets. Some assets first of all our sector and generally it doesn't trade at a cap rate it trades at a price per key trades at five year IRR is it's very different than.
Long term leased product.
Like we have in a lot of the other sectors or a shorter term product like apartments that are far less volatile. So we have markets today, where much of our San Francisco portfolio.
The biggest influencer in San Francisco is just price per key at this point just like New York went to price per key.
Over a long span a period in <unk>.
In the late mid to late teens and into the early part of this decade.
So that's a factor.
As it relates to valuations the cap rates are just a mathematical result of us valuing each individual properties the way a buyer would value those properties, which as I said is not a cap rate.
Approach.
The other thing to keep in mind is where.
We've invested I think last year out of the $100 million I think.
You can argue that that somewhere between <unk> <unk>.
70% to $80 million went into significant upgrades at the properties out of the $1 45 to $1 55 this year.
Over $100 million is going into these transformations and repositioning.
The dollars being invested in the portfolio.
Increased values now maybe not by the amount we put in.
That would be to a buyer to determine but it certainly reduces the amount of capital that a buyer would be allocating and their own underwriting when they look at buying a property.
<unk> been redeveloped renovated and repositioned so ill.
All of these things get taken into account.
When we look at these values, but.
But it's traditionally it's done by what do we believe a buyer would pay for that today and outside of a market that's not functioning.
These are pretty I mean, when we are selling assets or selling them within our NAV.
Range, sometimes it's at the low end.
Sometimes it's at the high end, sometimes it's above or below but never buy much much.
Much percentage.
Thank you.
Thanks Anthony.
Thank you. The next question is coming from Jay Corvid.
S. NBC. Please go ahead.
Alright, thanks, very much I'm just wondering if you can provide any further commentary on the underperforming urban markets you called out San Francisco DC, Chicago, how you see those improving in 2023 and I guess, maybe Conversely on the leisure side, you mentioned some softness expected in the keys, but any other markets you would call out there for either strength or <unk>.
<unk> that you would expect this year.
Sure So I mean I.
When we think of these these slower to recover markets. There are obviously a number of factors.
Impacted them one being.
How they dealt with.
The pandemic and what impact that had on their cities.
Both from a business underlying industry perspective change in use patterns change and work patterns, whether people come into the office or they don't whether they support their local restaurants and retailers and the impact that has on the leisure experience.
And the convention experience than people would have coming to market. So they all had.
For the most part outside of the southern cities.
Most of the cities have had a meaningful impact.
From the pandemic and the issues that have been created around that some of them have had quality of life issues going into the pandemic may have worse in may have gotten better in some markets and they're all focused on improving.
Improving that today, and we are seeing that improvement.
And a number of cities like San Francisco, like Chicago, and even DC, which we think is the activity on the streets is continuing to get better.
They are just slower to recover.
We're seeing a significant ramp and recovery in those markets as group and transient comes back and we Shouldnt forget so cities like San Francisco like Sandy.
San Diego like Seattle, and Portland like.
Boston and D. C. These are big leisure destinations.
And that leisure customer really didn't begin to come back in those markets.
Until the middle of last year, So we're going to see significant growth in the urban markets. I think I said most of most of the growth in our portfolio at the bottom line. This year will come from the urban markets and much of that is coming from the recovering markets, albeit they're still going to be.
Some of them will still be below.
Where we were at 19, and some like San Francisco, which may only get to about 50% of the EBITDA. It was add in 19.
This year.
But theres a lot of operating leverage in these markets.
We do expect them to fully recover as I indicated in my remarks, we expect a full portfolio.
To get to 19 full urban portfolio to get there.
And the next couple of years, but it's still May mean, a market like San Francisco or Seattle, or Portland may still be below.
Where it was in 19.
Okay. Thanks, very much for the helpful color I appreciate it.
Thank.
Thank you. The next question is coming from Chris Sterling of Green Street. Please go ahead.
Thank you just a quick one for me can you.
Comment on how the cost of insurance is changing particularly as it relates to some of your southeast resorts and maybe just for context, you could maybe comment on how much insurance premiums maybe represent as a percent of revenue percent of expense et cetera.
Sure, Chris well Theyre going up.
No.
Yeah.
So I look part of this is we don't want to negotiate against ourselves with our insurance carriers starting to the.
The process of the renewals for us our property insurance renews.
In June and then <unk> later in the year.
But all indications of what we're seeing in the market. It is going up but there were a lot of events last year, which we all know apart.
Part of that with Hurricane.
Ian there, but there are other kind of losses. There. So expect that to go up and then also the number of players in the insurance market has also shrunk so its a double hit there so right now in a full year basis.
Property and GL.
About one 5% of our total.
Operating cost.
So it's a as a large number we're talking about $20 million or so.
But it's not a material number and so we expect it to be challenged especially in the markets on the.
The windstorm market like Florida.
Good thing is we have a.
Very diversified portfolio so.
<unk> like us because we have.
We've done a good job here.
So tomorrow that will provide an update my guess is by the third quarter. Our July earnings call. We'll have a good indication of where that came in in the renewals.
<unk>.
And we will update you accordingly, there and raise that we would expect the increase for the P&C to be.
Later than the GL.
Liability.
We don't see the pressure on GL that were seeing on PC actually last year, our general liability insurance actually went down.
Year over year basis, because of the losses, we have a pretty managed but yes. The P&C will be going that will be the area will be increasing in areas like cyber.
Cyber actually are also being held in check coming down.
Because of the ransomware, that's much smaller than the other sites, but to P&C.
More of a challenge here.
Yeah.
Got it I appreciate the comments.
Thanks, Chris.
Thank you at this time I would like to turn the floor back over to Mr. Bortz for closing comments.
Well again, thank you all for taking the time to join us for our fourth quarter call.
We have a quick turnaround to to the next quarter in late April .
We will continue to provide these monthly updates as we've been doing.
And we look forward to many of you for to seeing you down at the Raymond James Conference and the Citi Conference.
Early next month.
Thank you ladies and gentlemen. This concludes today's event you may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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