Q1 2023 Pebblebrook Hotel Trust Earnings Call
Our 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 Co President and Chief Financial Officer. Thank you. Please go ahead.
Thank you Donna and good morning, everyone. Welcome to our first quarter 2023 earnings call and webcast. Joining me today is Jon Bortz, our chairman and Chief Executive Officer, and Tom Fischer, Our Chief investment Officer and co President.
But before we start a reminder, that many of our comments today are considered forward looking statements under federal Securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings and future results could differ materially from those implied by our comments today.
We're looking statements that we make today are effective only today April 27, 2023, and we undertake no duty to update them later.
non-GAAP financial measures on today's call and we provide reconciliations of these non-GAAP financial measures on our website at Pebble Brook hotels Dot com.
Our financial results exceeded our outlook for the first quarter adjusted EBITDA finished at $60 8 million, increasing 39% from a year ago adjust.
Adjusted <unk> was at $22 4 million with adjusted <unk> per share of <unk> 18.
67, 3% improvement and represented very significant progress from a year ago and a great start to the year, especially in many of our urban markets.
We're pleased with our financial results, despite cancellations and disruption from numerous winter storms excessive rain.
Our estimate for mirrors rivers and flooding that negatively impacted demand in many of our hotels and resorts during the quarter and knocked out approximately 80 guestrooms in Los Angeles, where most of them not due back into service until mid to late May.
Our year over year revenue EBITDA and <unk> would have been higher if not for the remediation and restoration of supplier from hurricane in and the disruption caused by the five significant redevelopment and repositioning has taken place in the quarter.
These two issues negatively impacted adjusted EBITDA and <unk> by approximately $11 million or about <unk> <unk> per share.
On the revenue side same property Revpar increased 18, 5% and non room revenue increased 34, 4% exceeding the top end of our outlook highlighting the robust out of room spend we continue to experience.
Total Revpar increased 23, 7% at the high end of our Q1 outlook.
The markets showing the most robust year over year growth in San Francisco, Washington, DC Portland, Seattle.
In Chicago.
Our San Francisco hotels generated a 117, 5% increase same property revpar driven by occupancy rising to 46% versus 26% the prior year.
Our San Francisco hotels generated $3 5 million of EBITDA versus negative $2 4 million of EBITDA in Q1 'twenty two.
Outstanding $6 million improvement from last year.
San Francisco benefited from several city by groups that performed well, including J P. Morgan healthcare in January the game developers conference March as well as improved corporate transient and leisure demand city.
Obviously, despite the significant improvement in San Francisco still a long way to reach full recovery.
Washington D. C hotels also exhibited strong improvement during the quarter over the prior year growing same property Revpar of 126, 6% as occupancy increased 53% up from 27% the previous year and ADR rose 13%.
<unk> benefited from increased group business group.
In convention demand as well as slowly improving international demand.
The administration's recent announcements encouraging federal workers to return to the office and successful could further bolster hotel and restaurant demand in the market.
He is shaping up to have a solid second quarter.
Our two key west resort continued to perform well in a difficult year over year comparisons due to the robust quarter last year in Florida was one of the few states fully open for business during the Omicron search.
Fortunately, the Florida year over year challenges were primarily focused on key west and to a lesser extent, Naples, which was probably still impacted by negative perception of the market following hurricane in <unk>.
Margaritaville increased revpar by 5% growing occupancy, 4% with ADR up, 1% and food and beverage revenues climbing by 14% as group recovered.
Demand remained healthy.
Margaritaville continued outperform its fort Lauderdale competitors and our expectations.
<unk> was our weakest market from a quarterly growth perspective, Revpar declined 16, 6%, primarily due to <unk> being down 15, 5% and occupancy down 130 basis points, we expected a pullback in key west Edr still up more than 37% versus the comparable period in 2019 with Revpar up 20.
Two 1%.
We expect that overall demand in these markets will return to 2019 levels with ADR premiums remaining very significant through pre pandemic pricing levels.
Also as we detailed in last nights earnings release, we have made substantial progress in preparing restoring and reopening will tie up.
We were able to open the baytown rooms in Q1.
The golf tower, partially opened in April so the overall resort is operating with limited services and amenities.
But this is a positive progress other hotels M&A high rise apartment and condo buildings, along the beach remain completely shuttered.
In March we ran 90% occupancy.
In April we expect to achieve 24%, 25% occupancy as public areas and services return, we expect this to improve.
Yes.
We're currently forecasting the beach house to be restored and reopened by the end of the year rebuilt.
Rebuilding.
Rebuilding inside of the Beach House, which is in progress it's quite a process as we and our board.
Last week when we toured following our board meeting.
Yeah.
Our insurance carriers have approved approximately $8 1 million in business interruption income during the first quarter slightly more than we assumed in our outlook. This is an initial preliminary amount related to lost business from the fourth quarter of 2022 and it does not represent the full amount of <unk>, we expect to receive for Q4.
Last year.
Our Q2 outlook assumes we will receive approval from our insurance carriers for an additional $10 million of BPI.
Which would be the initial preliminary amount for lost business from the first quarter of this year historically seasonally strongest quarter full time before.
For the Hurricane we expected to generate approximately $14 billion of EBITDA for Q1 'twenty three are they reflected in adjusted EBITDA and <unk>, but not hotel EBITDA, which should be noted by our investors.
Analysts and their respective model.
To date, we've received approximately $35 million from our insurance providers to complete the necessary remediation repair NPI work.
As we looked at the second quarter, we haven't experienced any noticeable increase in cancellations or attrition related to concerns with the macroeconomic environment.
Generally speaking the cancellations and negative surprises we have experienced so far in 2023 have been weather related non economic.
April same property Revpar is expected to be flat to down versus the prior year period negative negatively impacted by the redevelopment and repositioning was out of order rooms, peaking in <unk>.
April and the storm.
Later rooms out of service in West Los Angeles as well.
Our Q2 outlook same.
Same property Revpar increased 1% to 4% and this outlook incorporates the disruption from these ongoing redevelopment, which we estimate will negatively impact Q2 same property revpar by approximately 150 basis points total revenues by approximately $7 5 million and adjusted EBITDA by approximately $5 five.
Yeah.
Our portfolio continues to narrow the gap to 2019 same property revenues and EBITDA.
After adjusting out the impact of the pie and a renovation.
Same property EBITDA versus 2019 has improved from down 21% in the fourth quarter of 'twenty two to down eight 3% in Q1.
And based on the midpoint of our Q2 outlook down just eight 8%.
We had some onetime expenses related to the cleanup and remediation of our hotels that.
They were affected by the storms in Q1, plus increased energy and property insurance costs, which unfortunately are likely to persist for the balance of the year.
Our revenues continued to improve as well as our property EBITDA. Despite some of these operational challenges.
Shifting to our capital improvement plan, we completed approximately $26 million of investments during the quarter. The majority of these dollars represent investments in five significant redevelopment and repositioning which John will discuss later.
We continue to target investing $145 million to $155 million into the portfolio during 2023.
On the investment side, we are very active we sold three properties in the quarter one in Portland, a retail parcel initially on Michigan Avenue in Chicago, and a hotel in coral gables, generating $135 3 million of proceeds.
As we highlighted in last night's earnings release, we also executed contracts to sell the Monaco Seattle for $63 3 billion and da Vinci, Seattle for $33 7 million separate third parties.
We expect boat sales to be completed later in the second quarter subject to normal closing conditions.
The net proceeds from asset sales are being held as cash and are being used to reduce our net debt and for prior and potential additional share repurchases.
Since we reported in late February we repurchased an additional 3 million common shares comprising $42 million of capital at an average share price of $13 96.
Since October of last year, when we commenced repurchases, we have utilized $124 $6 million of capital to repurchase $8 5 million common shares or over 6% or does that existing common shares outstanding at an average share price of $14 64 reps.
Representing a more than 50% discount to the midpoint of our LTV range.
These share repurchases ever increase our NAV by roughly $1 per share.
As we sell additional properties, we will evaluate it.
The best utilize these proceeds including reducing debt and there are additional common and preferred share repurchases, depending on our outlook on the economy and how our performance progresses.
If we use the some portion of future proceeds to repurchase our securities. We will do so only vault and reducing our net debt on an O works in a leverage neutral basis.
And on that positive note I would like to turn the call over to John John .
Thanks Ray.
I'd like to provide some color on the demand trends we've been seeing.
Where our growth is coming from our booking trends in pace for Q2, and the rest of this year and I'll discuss the cost pressures we're experiencing.
First the demand trends.
Then just two months since we last reported our year end earnings and trends and we provided a mid quarter update last month with performance through February .
And March Hasnt been any different we.
We haven't seen any changes in overall demand trends in our industry in the last 60 days.
Business travel continues to recover both group and transient.
Demand related to conventions is getting back to normal.
International inbound travel continues to improve with Europe closing in on pre pandemic levels in Asia at the early stages of its recovery with a long way to go.
Leisure travel remains healthy, though with less exuberance than last year, when splurging on suites and upgrades was higher than historical norms.
With the continuing recovery in business travel our urban properties have benefited the most.
Our urban market occupancy climbed over 10 points or 22, 1% versus an omicron impacted first quarter last year.
And ADR increased a strong eight 7%, bringing same property revpar for our urban hotels to an increase of 32, 8%.
Non room revenue growth was even higher at 53, 1% with increased prices and group demand that comes with more non room spend driving this higher level of growth.
Yet with leisure and international in the early stages of recovery in the cities.
And business travel with a ways to go.
We have significant occupancy and total revenue opportunities as our urban market occupancy was still over 19 occupancy points or 25% below the 2019 level.
Some of this will be recovered after the three urban Redevelopments are completed later in the second quarter.
But most of it will be recovered as business leisure and international travel normalize at higher levels.
The cities that led to first quarter recovery as Ray indicated included San Francisco, Washington, D C, Chicago, Portland and Seattle.
We saw continuing improvement in San Diego, Boston and Los Angeles.
Our west La properties were up against a tough comp in Q1 with Super Bowl in February last year.
And <unk> also experienced uniquely heavy and continuous rains throughout the quarter, which negatively impacted leisure travel yet.
Yet we still grew revpar by 14, 9% due to the continuing recovery in business travel, particularly entertainment that helped drive a 15 point or 28% increase in occupancy in the quarter.
Yet, we're still 10 points or 12, 5% below 2019 occupancy.
In San Diego, the first quarter was very strong in the market benefiting from a robust convention calendar.
It too was negatively impacted by the never ending heavy rains.
We had two of our four downtown properties under redevelopment.
Hilton Gaslamp and solar Maher.
As a result of this disruption the Hilton lost almost nine points of occupancy or 17%, while solar <unk> lost seven eight points of occupancy or 14%.
Comparatively and as indicative of the market strength.
Our Westin Gaslamp grew occupancy by 12 points or 17% and our embassy suites grew occupancy by $19 six points or 33%.
The western occupancy climbed all the way back to 2019 as level.
Due to its higher group segmentation.
With overall ADR, 22% higher than 2019.
And the embassy is still nine five points or 11% below 19 as occupancy.
But with a rate of 10% higher.
San Diego was our best performing urban market and it hasn't even better convention calendar next year.
Our resorts performed well in the quarter, despite the year over year softness in rate in key west and the continuous heavy rains have negatively impacted all six of our west coast resorts.
On a same property basis, which excludes the playa our resorts gained six six points of occupancy or 12, 1% growth.
While ADR declined by 11, 7%, resulting in Revpar down one 1% year over year.
As expected the occupancy gains were driven by the recovery in group demand and some lower rated transient segments.
The ADR decline resulted from the decline in key west and the return of demand from some lower rated channels.
While group rate throughout increased at a healthy rate.
Our Q1 2023 same property ADR for our resorts remained at $126 premium.
Or 44% higher than Q1 2019.
Our non room revenue at our resorts resorts also grew substantially in the quarter up 19, 2%.
This was primarily a result of price increases we've taken.
And the recovery of group that drive substantially higher non room revenue spend versus transient.
Turning to our pace for Q2, and the rest of the year.
It looks pretty good.
In Q2 on a year over year basis group.
Group room nights on the books at the end of March were up five 7%.
Group rate was up six 1%.
And group revenues were up 12, 1%.
Total revenue pace for Q2 versus last year.
<unk> group and transient.
Was up four 9% with rate representing two 1% growth.
For the entire rest of the year.
Including Q2 through Q4.
Group room night pace is ahead of last year by a strong 10, 3%.
Group ADR is up by eight 7%.
And group revenue pace is ahead by 20%.
Factoring in group and transient and looking at the total pace for the remainder of the year.
Total room nights are up by 8%.
<unk> ahead by three 9%.
And total revenues are up by 12, 2%.
Q2 year over year total room revenue pace is the weakest of the year.
It improves in Q3, and then further in Q4.
This is encouraging considering the current concerns about an economic slowdown or a recession later this year, which we certainly do not yet see and our pace for the rest of the year.
However, we should all remember that in the hotel business.
It is good until it's not.
Meaning it can turn very quickly and business on the books can cancel as well.
Outside of the positive demand trends, we're experiencing a challenging cost environment.
While we believe the rate of growth in wages and benefits is normalizing this year.
And generally following inflation we.
We have significantly reshaped our property teams.
Over the last six months and so total staffing costs versus last year have been and will remain a challenge through September .
In addition, as food and beverage and other services volumes like Spa services recover significant marginal expenses also recover.
At this time, we're also experiencing significant increases in costs related to energy water and property insurance.
Despite these expense pressures, we believe that after we lap last year's re staffing success later this year.
We'll have significant operating leverage in the business to drive higher margins and higher EBITDA.
In addition, and also on the positive side, we had further success in one of our markets significantly reducing some prior year property assessments.
As a result, we achieved a significant property tax reduction that was true up in Q1, we.
We expect to have further success in this market and other markets on prior year assessments in the coming years.
These reductions in true ups in likely over accrued property taxes will help reduce cost increases related to some of these other expense categories.
And the transaction market as Ray indicated we've had great success selling numerous properties over the last 18 months.
We have two additional properties both in Seattle under contract with buyers, who have completed due diligence and have hard money deposit at risk.
Assuming these two property sale closed sale.
Sales to date will total over $230 million.
Of course sales are not done until theyre done regardless of the contracts.
High quality and well located properties like we own.
Continue to be highly desirable to the buying community and as a result, we're bringing additional properties to market.
While the transaction market for hotels, and frankly, most property types continues to be challenging because of the debt markets and they've probably been made more difficult because of the recent events surrounding several smaller regional banks will continue to work smartly by seeking out buyers who can over.
<unk> is that market challenges.
Finally, I wanted to update you on this year's major redevelopment and repositioning projects.
We completed the first phase the final sorry, the final phase of the redevelopment of Viceroy Santa Monica earlier this month.
Following the renovation of the public areas two years ago, we now have a lifestyle property at the luxury level in Santa Monica that is highly attractive to both business and leisure travelers.
We believe we are now in a great position to drive a 30 to $50 or higher rate in a market that is seeing some shrinking supply and improving demand.
By the end of next month, we expect to be substantially complete with the renovation and transformation of our Hilton Gaslamp hotel and in San Diego into a higher end lifestyle hotel with a dramatically improved and larger indoor outdoor bar restaurant expansion.
<unk> and improved event venues and a whole new vibe.
This property probably has the best location in downtown San Diego.
And our benefits for being the closest hotel to the entrance to the convention center as well as the main entrance to the Gaslamp district.
This repositioning coupled with the properties premier location.
Should allow us to drive $25 to $35 of higher ADR.
Substantially higher non room revenues and and achieve a 10% or better annual cash return.
On our investment.
In July we expect to complete the redevelopment and transition of hotel solar Mar into the Margaritaville Hotel Gaslamp District.
Just two blocks from our Hilton.
We're incredibly excited about this project.
And we expect to drive significantly higher rates and dramatically higher food beverage and non room revenues at this property as a margaritaville.
Between the right share gains and increased total revenues.
We expect to deliver a stabilized annual return substantially above our typical 10% cash yield on investment.
And a Sofia La Jolla.
<unk> acquired in late 2021.
We expect to complete in June the first phase of our two phase repositioning of this property as a luxury resort that will be more appealing to both leisure travelers as well as its already heavy social and business group and corporate transient customers from the surrounding La Hoya area.
Including its large and growing life Sciences hub.
This phase involves a complete renovation of the guestrooms, including bathrooms.
And an expansion and upgrading.
Of the many outdoor event venues at this expansive resort.
We will commence the second phase of this redevelopment and repositioning starting late this year.
Second phase includes the renovation of the main ballroom and meeting space restaurants lobby and coffee shop, and it involves expanding and upgrading the entire pool complex <unk>.
Including adding high end cabanas, a new pool bar and creating a new event venue as part of the pool complex.
Finally, we are in the process of completing a major upgrading of Jekyll Island club resort.
Which includes.
Our comprehensive Guestroom renovation of all of the historic buildings include.
Including the main building and the three large cottages.
It also includes complete public area and meeting space renovations and upgrades.
Expansion of both pool complexes.
Including the addition of high end cabanas for rent.
Relocating and expanding the properties retail store.
And upgrades to the property's numerous outdoor venues.
We believe repositioning this grand and unique historic resort as a luxury regional resort.
We will deliver upon stabilization.
Very attractive double digit cash yield on our total investment.
Okay.
In addition to these current projects, we expect to commence the complete redevelopment and upgrading of Newport Harbor Island resort late this year.
This represents the last major redevelopment projects in our strategic plan involving the Lasalle portfolio and the properties we purchased in the last two years.
In addition, as you know we've completed over 24 major repositioning and redevelopment projects throughout our portfolio during the last several years. These.
These projects are gaining share as the demand returns and we expect to achieve very attractive cash yields at these properties upon stabilization.
Significant progress has already been made at Chaminade Resort Mission Bay resort, Westin, Gaslamp and embassy suites, San Diego downtown.
Skamania Lodge, one hotel San Francisco W. Boston, the marker key west and low barriers del Mar.
All of these projects also involve creating and expanding indoor and outdoor event spaces.
The concept being in upgrading restaurant and bar outlets.
And generally merchandising all indoor and outdoor spaces to drive significantly greater out of room revenues and EBITDA.
We're confident that with the dramatic reshaping of our portfolio during the last several years through dispositions and acquisitions combined with these many major projects. We're now in a great position to organically grow our topline and Bottomline.
Beyond the industry's growth in the years ahead as we achieve the pay off of the very significant dollar investment and hard work that's gone into the dramatic improvement and repositioning of the properties, we acquired in the Lasalle transaction.
Those resort properties, we acquired in the last two years.
That completes our prepared remarks.
We'd now be happy to take your questions Donna <unk>.
May proceed with the Q&A.
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Today's first question is coming from Smedes Rose with Citi. Please go ahead.
Hi, Thanks.
Sure.
John I was wondering if you could just talk a little bit more about some of the cost pressures.
You mentioned on the wage side.
And maybe just kind of.
On the sort of hourly kind of I guess relatively lower skilled workers versus more on the managerial side.
At the hotel level are you seeing similar pressures across the board.
He said sort of in line with inflationary so what does that around like maybe 5% increases for the year or maybe just a little more detail there.
So generally I think.
We look at cost pressures I don't think the biggest cost pressures are the growth in wages benefits at this point I think they are running they will run this year in the probably 4% to 5% range.
And we will vary throughout the portfolio by market, it's pretty similar for the managers and up within the portfolio. So.
The increase in costs from wages and benefits is really due to the re staffing within the portfolio filling a lot of open positions.
Getting trying to get off a contract <unk>.
Third party contractors, who are providing people and to be able to accommodate frankly, the occupancy growth that we believed.
And continue to believe that we'll be able to achieve this year.
And going forward. So it's not really about the rate of growth in wages.
Or benefits, it's about the increase in volume from staffing up.
Okay. Okay, and then just I'm sure it's still a relatively small piece of your overall expenses, but could you just kind of quantify what you're seeing on the insurance side in terms in terms of the percent increases that youre having to pay.
Yes.
And all of our negotiation process with our renewal with insurance carriers, which is June one so.
It's going to be a tough market.
We touched on this last quarter because of all the storms that occurred throughout the country as well as inflationary costs.
This is going to probably be the second most difficult renewal since Katrina. So costs are going to go up significantly we certainly don't want to negotiate against ourselves, but it is going to be a headwind, we're going do our best to evaluate the different areas in.
And how do we.
Frame up some parts of insurance in the stack and maybe take some.
High deductibles and other adjustments to work through that but it is going to be a headwind for us for the year.
And Smedes in terms of sort of what we're experienced prior to the renewal more of it really comes down to the fact that we've had a lot of.
A lot of smaller weather related.
Events within the portfolio.
Whether it's.
The huge freeze we had in the northeast that led to a lot of pipe breaks and damage from water.
Or the heavy range out on the West coast that had.
Inflicted some significant damage on on four of our la properties.
And rooms within those properties they are not big in and of themselves each but each one hits the deductible and that adds up.
Over the course of six weeks, but maybe just to put in perspective overall insurance costs are about one 5% of our total.
Expenses.
And on the.
The property casualty side about 75% of that sort of about 17 million years.
Sure Bob.
<unk>.
Alright, Thank you guys.
Okay.
Thank you. The next question is coming from Shaun Kelley of Bank of America. Please go ahead.
Hey, good morning, everyone.
John maybe just kind of follow up.
Alright, Thank smedes is going there.
If we put all these pressures together I think when we rewind of how we thought things would evolve post pandemic.
I think we oftentimes talked about framing things in terms of margin improvement.
Yes.
Like efficiencies learned or earned during the pandemic about what was able to be done on the staffing side.
Forward to today and the narrative has shifted to a lot around the cost landscape.
Multiple years of inflation pressure.
Thanks, you just talked about too.
Should we be thinking really in terms of how much margins are a little bit lower than 2019 is that too aggressive or too concerning to worry about or how would you help us kind of like update.
The framework from let's call. It two years ago. When we were talking about on a stabilized basis things being maybe 100 or 200 basis points better on a margin basis, and where they where should we be thinking about.
100 to 200 basis points, possibly worse than where we were all other things equal and if you could just help us level set that I think it would be really helpful.
Yes sure.
Well.
Hey.
The cost of 100 to 200 basis points that we've talked about previously and cost reductions to the operating model have been taken so.
The operating more efficiently using more technology operating with fewer people.
That's actually occurred Sean So we have talked taking those costs out of the model, which tells you.
Would be worse today had that not been the case. So we don't think of a world of margins. We think of a world of profits. We look at expenses and we forecast expense growth as opposed to forecasting margins in our portfolios.
And margins get impacted by it.
Dramatic increase in non room revenues as an example, as we as we increase the percentage of our revenues to non room categories.
With the re merchandising and redevelopment that we're doing within the portfolio.
That will actually lower our margins, but it will increase our profit per key.
No.
We're focused on operating as efficiently as we can to think about your sort of general comment I'd say expenses go up over time.
And the macro environment has an impact obviously on profitability.
Both revenue growth and expense growth.
So I don't we don't really think about it the way.
You were describing it.
We think about it is how do we make the operating model more efficient and then how do we mitigate Matt.
Macro and micro pressures on costs that go up and down right Ray talked about insurance, it's going to be a tough year. There were probably four years in a row.
Probably seven years ago, where we went down 10% to 15% a year in our premiums so.
These things go up and down energy does too we've seen oil and natural gas go up.
Natural gas has come down we will if it stays there will be re contracting at lower rates again and that will bring energy back down again.
But all the things all these things move around so I can't really comment on it from a margin perspective I can just tell you that we took a 100 to 200 basis points of cost out of the operating models permanently, but theres growth in other areas.
We continue our we continue to believe that as we get through whatever this.
Macroeconomic thing is a slowdown and recession whatever it is that as we ramp back up.
At peak in the next cycle, particularly with supply being so restrained for probably three to five years.
That will peak again at higher margins as an industry than we did in the last cycle that would be my sort of broader forecast.
That's helpful. And then maybe one sort of on a couple of either markets or asset specific but you obviously called out some of the rate normalization.
<unk> West and I think that's certainly not the first we've heard of that.
Maybe you can help us think about some of these kind of other resort markets you've.
You've kind of.
Acquired into on <unk>, specifically off the coast to Georgia media market like Newport are you seeing similar pressures to a different magnitude I. Appreciate theres. Some renovation property specific stuff going on but just broadly what is the consumer behavior.
Some of those.
Assets that I think were really big pandemic winters.
We're not we're not seeing pricing pressures in those markets where.
Where there is some impact from a change in behavior. It would really come from I would say in general.
A general.
Reduction in demand.
Of premium suites, and premium rooms from the high levels that we got to last year and some even the year before as people splurged.
On themselves after.
Being inside for a year or two so that's pretty general across the board. It's interesting it's a little different than what the airlines are seeing in terms of that I'm talking about the premium customer.
But it is consistent with the high demand we continue to see at our high end resorts.
In terms of the number of overall luxury customers. So.
We're not seeing pricing pressure really elsewhere.
But we are seeing some slightly.
Fewer number of premium rooms at higher rates, we're also driving more group at our resort properties.
So that's a different segmentation and our group rates by and large at our resorts are actually lower than our transit rates not surprisingly right.
And so they come with other revenue and other profitability.
But they also come generally at lower rates.
Then the leisure transient rates in those markets. So that's that's the biggest impact on our rates and the trends that we're seeing on the leisure side, even key west. The good example, the demand has held up in key west.
But we've swapped out some high spending customers, perhaps for some more normal lower rated customers.
That's impacting the market.
Understood. Thank you very much.
Thank you. The next question is coming from Bill Crow of Raymond James. Please go ahead.
Okay. All you there.
Sir please make sure your phone I'm here I'm here.
Yes, sorry.
Sorry.
Good morning.
On the expense side of things is tied to.
Thinking about slowing down the new hire processor or may be even.
Reversing a little bit of it just given the uncertainty in the macro and what appears to be maybe a slowing consumer.
Yes, I think Thats what were doing right now.
Where.
If a position becomes available we may or may not fill it.
I think that really is more.
At the manager level, then it would be at the hourly level the hour level gets just dictated by volume.
And of course, many of those people.
May or may not get hours every week, particularly when it comes to food and beverage and banqueting catering they probably work multiple properties and they work when theres business. So so the general answer is yes.
We are.
We are at the property level.
Talking with our operators about continuing to be.
More cautious about.
Adding additional staff from here.
Until we actually see greater volumes.
Further greater volumes and as we get a clearer picture.
What the macro is going to look like and what its impact is going to be on our industry.
Yes.
One more follow up question Jim.
We have more insight on this topic than others in the space.
Direct it to you but.
The writers.
Writers Guild is threatening to go on strike in Los Angeles, and the last time that happened was in 2007.
I'm just wondering how you assess that disruption to that market your assets in particular, which.
Should rely on the entertainment fairly heavily.
Yes, it's really it's really going to depend upon whether if they do strike bill whether it's short or long.
The short strikes three weeks four weeks two weeks I mean, we've seen these in the past.
They tend to get settled pretty quickly.
<unk>.
Historically at least and they have very little impact on the market.
And I think that.
Compared to history.
The content, obviously development volume has morphed and set in so many different directions.
Music of courses is not impacted.
And some other forms of entertainment.
Most production Thats going on.
Today, and probably is going to go on over the next.
Three to six months is already written.
So.
And likely doesn't have much impact in the short term that's why I said it really depends upon if they do strike how long, it's going to be and and then we're just going to have to see how it plays out.
Okay.
Alright, thank you.
Thanks Bill.
Thank you. The next question is coming from Floris Van <unk> with Compass point. Please go ahead.
Okay.
Thanks.
Thanks for taking my question guys.
I guess I have a question regarding the recent asset sales in Seattle.
Kudos, obviously, if you get those over the line.
It helps fund your.
Essentially you are.
Almost all of your redevelopment pipeline, but.
Could we expect more urban.
Sales, perhaps markets that are they've got some political issues like Portland, and then maybe talk about because your mix of urban versus resort has changed.
Changed at the margin you are now slightly more heavy towards resort at 40% I think you were at 35% before and how do you see that trending forward.
Jorge This is Tom. Thank you for the question I think as it relates to.
As it relates to the locations and that type of thing we don't necessarily indicate what we're going to do but I think it's a safe assumption that will continue to look at some of our urban markets.
Our risk adjusted return investors and so when we look at some of the friction cost and some of the other things that are going on.
From an earnings perspective, and our political perspective that certainly influences, where we're going to look to sell but.
Could it be in markets that you suggested potentially but I think the overall transaction market right now you've got to be careful in terms of what you're looking at because if you want to actually sell something you've got to look at what the marketable and I think certainly looking at assets that are smaller that.
That offer upside to maybe investors that have a strategic.
Our strategic investment thesis those are the types of buyers that were looking for.
And does that mean that.
We've heard people talk about asset.
Less than $100 million are much more liquid is that is that what youre seeing in the market as well and obviously you had a pretty nice add in Portland.
It might be just over that in terms of total value but.
Does that make it less.
Italy transactional.
Well I would say not being necessarily easy in todays market just given the challenging capital markets, but I think you hit it on the head in terms of certainly I think the threshold that we see today is certainly less than $100 million is much more.
You can transact that much more easily than you can something over $100 million I think theres a number of investors that we look at and that we've been successful with you can close on a deal all cash or all equity and finance. It later or sub $100 million relationship lenders that many of these investors have.
Got it.
My follow up question I guess it might.
All waste on that as well, but maybe if you can touch upon the buyers of the assets in Seattle and obviously the lending markets are sort of remain gummed up in very difficult right. Now are these all cash buyers or buyers willing to accept a much higher spreads and cost and in your view.
And looking to refinance it in two years' time, when presumably rates or lower or how did the buyers with the mentality of the buyers and based on what Youre seeing for your assets.
Yes, I can't necessarily comment just based on top of that reality, just as it relates to the characterization of buyers all I can tell you is.
For assets like this.
There continues to be competitive with depth.
There's a number of groups that we will look at it that high.
Our reason for being there that are potentially strategic.
And that have what I'll say relationship lenders recognizing that it is more expensive debt today, but.
But recognize that relationship lenders and how they structure their debt may still fit within their strategic plan.
Maybe because I've heard some stories in San Francisco the sale recently.
That of a hotel thats going to be converted or you're seeing more of that and does that sort of feed the supply demand dynamics that that should be working in your favor as well as longer term.
We're seeing some one off in some markets, but I wouldn't say that that's predominant because that has its own challenges.
But I think overall as John indicated before we think that the supply picture in a number of these urban markets.
It's very promising certainly over the course of the next three to five years, one it's going to be very difficult one from a construction financing perspective and to just from a political climate in terms of what can and can't get done in some of these recovery markets.
Thanks Thats it for me.
Thank you. The next question is coming from Michael Bellisario of Baird. Please go ahead.
Thanks, Good morning, everyone.
Good morning.
John you talked a little bit about your urban markets, but wanted to dig in a little bit more it looks like things really stepped up in March maybe relative to your expectations was that more.
William or price and then what industries or what urban markets actually drove that upside in the <unk>.
Peter.
Yes, I mean I think.
In March it was.
More more volume than it was price.
The price growth remains healthy.
Healthy.
<unk> continues to to increase modestly from quarter to quarter in the urban markets.
As they recover and as the city Wides come back, which which tend to drive more compression and higher rates.
As the corporate transient comes back in those markets. So.
For us.
A lot of these markets have.
I don't know I guess you could described.
Many large tech.
Users in those markets.
There.
They are gradually coming back to work.
The getting people back for the minimum of three days a week is I would say pretty prevalent now including in markets like San Francisco, and Seattle and Portland.
In a market like Boston so.
<unk>.
That's beneficial overall to our business.
In those particular markets and we're seeing more BT, we're seeing more group.
Comes from those industries, but I.
I think the recovery in business travel is pretty broad based from an industry perspective, just happens to be.
Teck needs is a little heavier weighted in some of our coastal markets.
Got it that's helpful and then maybe tying that together.
Topic of urban to the prior question on transactions.
As you get through some more of these asset sales, presumably more urban hotels.
Maybe help us understand what's the ideal pad hotel look like and what's the right size of the portfolio.
Prospectively, maybe 12 months out after some more of these hotels get sold.
Yes, I mean part of the reason were selling.
<unk> is not because.
We don't want to be in a particular market.
Tom said, we're where risk adjusted return investors and so.
The concept of selling has more to do with capital reallocation to places, where we believe the returns are going to be higher and so today.
As indicated by by what we've been doing we've been reallocating some of those proceeds.
To buyback our stock and we think thats.
Far more accretive on a on a value basis per share, then reallocating that capital and going out and buying.
New properties for the portfolio, So that's where our current focus is.
Say in general.
While we've been selling has been the lower quality assets.
That any of our properties are low quality, because we don't have anything below upper upscale.
But selling the lower quality properties, where we think the combination of the market and the individual property will have less attractive risk adjusted returns than what our alternative use of capital today is which is buying the rest of the portfolio back at a 50% plus discount.
On a levered basis, and a 27% discount on a gross basis.
And more than half of the gross sales proceeds that we're using we are using to build cash and have effectively lowered net debt.
Thanks for all that color.
Sure.
Thank you. The next question is coming from Dori Kesten of Wells Fargo. Please go ahead.
Thanks, scoring and just a follow up on that.
Utilizing proceeds.
Thank you.
What would you need to see a macro environment that would make you shift to retaining more of that cash.
Thank you for holding firm.
Hey, Dan.
I think we would need to see.
A significant slowdown in the economy that is actually having a negative a meaningful negative impact on oi.
On the operating business and even then I would say.
It would still dependent upon what happens to the stock. So again, it's back to risk adjusted returns.
If the stock were to react negatively to that I guess, even more so than it already has from the fear of a downturn then again, we're going away, we're going to weigh those two things.
In terms of what we do with proceeds.
But liquidity our liquidity is huge so we have almost $800 million.
Of liquidity.
So if things were obviously to turn bad.
More severely we've got plenty of liquidity to deal with that and we don't really have any material maturities until late next year.
We have more liquidity than we had going in pre pandemic.
Example.
Right.
Thanks, and you touched on this a bit in Europe .
Paired remarks.
What are your expectations for out of room spend as the year progressing and would you expect the outperformance.
And to continue.
We do expect the out of room performance to continue to grow at a higher level than revpar.
And it's again, it's really coming from two areas.
Pricing.
Increases that we've taken to try to mitigate cost increases.
As well as.
Group, the increasing segmentation of group really getting back to its more normal percentage of the portfolio and as those group rooms come back.
They're coming back with non room revenue. So we do think they will grow faster than revpar.
Outside of the second quarter, we don't we don't really have any outlook for the rest of the company. So we don't have a specific outlook, we can share on non room revenue.
Okay. Thanks.
Yes.
Thank you.
Thank you. The next question is coming from Duane Stefan worth of Evercore ISI. Please go ahead.
Hey, Thanks, and good morning, everyone. This is Peter on for Duane I think just following up on the previous question.
You mentioned weather in the West coast resorts for <unk>, and maybe some cancellations that.
Resulted because of that weather did that impact the.
Out of room revenue that we saw in the quarter.
Or is there a way to put a number on how much effect that weather had.
Yes.
It did have an impact on on non room revenue because.
Certainly leisure at our resorts has pretty good spend levels.
So it wasn't just rooms that would have been that were impacted.
It's shocking that people don't go to the beach.
When it's when it's raining or it's raining hard with 50 mile an hour winds.
Plus in place to go to.
Which is a lot of what our certainly southern California properties are about on the leisure side and then even as you work your way up the coast, we had flooding near Santa Cruz that negatively impacted business along with the heavy rains.
And and in that in the Pacific Northwest at Skamania, I think they had.
Four or five week period, where it didn't get above 40 degrees and so again negatively impacting the leisure customer there and as we just saw it in the volumes.
And the bookings and it was probably more bookings than it was cancellations per se.
Throughout the throughout the portfolio, it's pretty hard to estimate it.
In terms of how much it was but it was enough.
To be material enough to mention in this call.
And included in our song.
As evidenced by our solid yes.
Okay. Thanks for that and then quicker.
Quickly you mentioned that wages are up maybe about 4% to 5% year over year.
Given the increase in staffing year over year as well.
How much do you anticipate hours being up or is there a way to put kind of a volume number into that equation.
Yes.
Yes.
We're hoping hours are going to go up because that will be a function of occupancies rising as well.
Last year Refinished occupancies in the mid to low Sixty's, that's still well off where we're in 19, which is low <unk>. So we're making that.
Climb higher and as a result hours will go up and cost will go up because our revenues are going up.
Overall as John indicated earlier the changes we've made we still have fewer ftes at our properties than we had pre COVID-19 and that's a function of the retooling operations.
Or at least less managers combined positions combined management clustering in certain markets. So overall, that's where we felt better about the costs are but this is all just part of theres more of the segmentation.
And operating we have banquets and catering from the group side that we really didn't have as much in the last two years now we are having that adds hours, but also ultimately EBITDA and the bottom line.
Thank you.
Thanks Peter.
Thank you. The next question is coming from Gregory Miller of <unk> Securities. Please go ahead.
Thank you.
I'd like to start off with San Francisco.
I'm curious to get your expectations for.
For 2024 for your hotels.
Challenged convention pace forecast.
And the convention and visitors appear strategy that appears to be somewhat shifting to in house group business at the large big box hotels due to some weakness at Muskogee.
Yeah.
Sure so.
It's pretty hard to indicate what we think 24 is going to look like because we haven't indicated what the second half of this year is going to look like Greg So.
I can tell you that more.
Group rooms on the books is better and fewer is worse so.
The fact that they're down a couple of hundred thousand room nights next year.
<unk> is going to be more of a challenge for that market.
As it recovers.
It's typical it's not a new strategy its typical for them to sell both.
Conventions and short term group at the Convention Center.
And in the year for the year group and frankly future growth in.
In the bigger boxes in the market and so it's not really a new strategy on their part.
I think it's part of their marketing.
To indicate that they are not sitting on their hands, which which theyre not the other thing they need to do and where.
There's two things happening Greg one is there'll be the existing director of SF travel is retiring theres a search process in place hotels in the market, including ownership are actively involved in that process.
And.
Along with the members of the board, who are generally gms of our hotels in the market I don't mean ours Pavel broke but owners in the market.
So we will be involved in the selection of that individual.
Which we think will bring some great passion and.
Energy.
And knowledge.
To that market that will be helpful. I don't think the strategy about spending time booking big hotels is a bad strategy. Its whats available currently will benefit all of the hotels in the market as it always has in the past so.
So we would certainly view them.
Focusing on that because it is business they can sell today as a positive and where they should be putting their effort. The other area that they need to to put more effort into is.
Mosconi was renovated and expanded in order to open it up to being able to have.
Two or three mid size or smaller conventions and at the same time as opposed to I think what was a previous focus because it was easy which was these annual humongous corporate.
Conventions.
That are really difficult on the city.
And drive probably rates that.
Some people find.
Unattractive from a buyer perspective so.
That's the other.
Rotation there'll be doing over this year and future years to help drive.
Business in that marketplace.
I really appreciate all the clarity.
A lot of the learnings for me.
As for my follow up.
I apologize I couldn't hear right very well in the prepared remarks regarding Naples, but given your recent visit to the market.
I'm curious.
It's sort of a crystal ball, but what you are.
What do you think the tourist appeal of Naples will look like by the start of 2020 for the peak season, it will the demand or rate.
<unk>.
A few years to fully recover.
I'm trying to think about it from the perspective of particular model will apply for next year.
Yes, I think.
It's interesting we were down there and there is a there is a <unk>.
$20 million Beach restoration program underway, while we were there in these monster.
I don't I guess, theyre dump trucks, but I mean, monstrous ones basically driving back and forth on the beach.
To replenish the beach and.
That's I think if I remember correctly about a six week process for the full beach, they actually already reached our property and basically added two feet of sand to.
To get back to where it was before the storm and of course. They do this every few years, regardless because sand.
Not surprisingly goes back out to the golf overtime.
So I think the market itself.
Outside of.
First of all I think today outside of.
Those stretches along directly on the beach in terms of buildings.
It looks like normal.
All the golf courses are open all the amenities are open the beaches open.
Vanderbilt Beach here the whole stretch of it with this replenishment program will be completely replenished within.
Six weeks, so it will be.
Then new.
From that perspective, and I think in our case as we indicated we will be we should be complete with the beach house and fully reopened all of the amenities.
Rebuilt and reopened at the property and frankly, a product that's better than what we had going into the storm because of all the rebuilding.
<unk> itself is sort of an annual retreat for a large number of people who come to the market and so the good thing is our experience in the market and we had this five years ago. After Irma is that the market bounces back pretty quickly so the ramp up and frankly the ramp up has already started.
<unk> in the market, but I think it will accelerate next year.
And I don't know that it really takes more than 12 months, but we're just going to have to see.
The Naples needs to do obviously significant marketing.
And I think it's best for them to wait.
Towards the latter part of this year.
When when everything is back and operating again.
It was pre <unk>.
Hurricane.
Thank you very much very.
Very helpful.
Great. Thanks, Craig.
Thank you. The next question is coming from Ari Klein of BMO capital markets. Please go ahead.
Thank you and good morning, maybe.
Maybe just following up on the reserve rate that we talked a little bit about a little bit earlier, I think you mentioned excellent high and they were down 11%. How do you. How are you thinking about the year year over year declines I guess.
More through the rest of the year.
We kind of level off in that range.
The decline Steven.
Yes.
And it's hard to predict at this point.
We can we can look at what we have on the books and it's.
It's probably flattish.
But my guess is the shorter term bookings.
The resorts are probably going to be at lower rates as we fill in.
Some of the less desirable.
Dates.
And days of week so.
I would anticipate I mean, if I had to guess I'd say, they're probably going to be similar.
To where they are now and that's why we've said we said earlier in the year, we think resort rates will be down occupancies up at the resorts.
And probably bottom lines flat.
And probably would be up but for the displacement from the from the Big Redevelopments.
Urban rates will be up.
And we'll be roughly flat.
In rate for the year with our big growth in Revpar coming from occupancy and and the big growth in total revenues coming from non room revenues.
As well so that's kind of the broader way we'd look at we would expect the year to play out quarter to quarter is really hard.
To anticipate.
<unk> also.
It's important to think about and talk about rate, but also on the occupancy side similar to our prior comments about the return of corporate group and then some of that business that will also benefit the resorts. Our occupancies are still down to where we were 19, so even though we have a rate premium.
In the first quarter. As example, our Occupancies were about 800 basis points below where they were in 19.
So we also have ability to grow there, even though it's perceived that.
So we're hitting on all cylinders and they're doing really well.
On a rate perspective, but from an occupancy will gain more and more upside in the recovery.
The lessons here and some of that business, that's going to come back like international wholesale some of it is going to come back at lower rates, but it's going to fill.
Down periods off season.
Business.
And and drive those occupancies and non room revenues.
That ultimately still produce more more profits.
Thanks, and then just on the renovation headwinds.
Full impact in the first half of the year would you expect that to be somewhat similar in the second half and then looking out to 2024 kind of as you wrap up.
A lot of these major projects.
Do you expect those headwinds to.
Furthermore, right.
Yes.
Really has little to no impact in the second half of the year.
From the renovations were really done with the impactful parts the second phase of Estancia.
Is that.
Some of the public areas meeting space and the pool area.
<unk>.
Will have some minor impact on leisure not having a pool in service.
For some period of time, but but generally it's the room Reno that really have the biggest impact on.
<unk> business.
And Newport Harbor.
Actually loses money.
Over that four five month period that we're going to do the renovation so.
It may have an impact on revenues, obviously those will be lost.
But but it won't have much impact at all on the bottom line. So I think we're pretty past it.
<unk>.
With the second quarter.
The other thing to note is we a lot of our heavy lifting on our major redevelopments will be done. After this year. After actually the next couple of quarters here next year, but only two projects major ones that we have currently we are evaluating.
Newport.
Then the potential conversion Paradise point, which is still in process. So the rest of the portfolio.
Leo has been either renovated or redeveloped.
It puts us in a good position as we go into 'twenty four and beyond.
Got it thanks for the color.
Thank you our final question for today is coming from Anthony Powell of Barclays. Please go ahead.
Hi, Good morning, just maybe one more from me on expense growth in staffing.
Let's assume that we escape downturn into next year, we have occupancy up 5%.
You'll have to add incremental staff to your hotels I'm trying to figure out when.
Would be actually able to leverage your staffing increased margins.
Yes.
Every point of occupancy is always going to is always going to add our lease.
At our properties so.
So that will always be the case, it doesn't matter, where where we are.
In terms of overall occupancy it's volume that just has to be dealt with whether it's housekeeping.
Or whether it's in the outlets.
The more volume you have the more people you need etsy.
Et cetera, so, it's obviously a step function, but but you should assume that.
We had five points more of occupancy we're going to have more our lease.
We probably don't have them in every category.
But overall they will certainly be some hours added.
Got it thanks.
Maybe one more if you could just kind of rank.
East coast versus the West coast in terms of desirable markets, we've talked about.
In prior times looking like a west coast change a bit it looks like given your asset sales. So maybe just.
Maybe rebrand to discuss some of the major markets again, and how youre thinking about them from supply demand regulation.
And with that.
Well.
I think most.
Most markets not all of them around the country are going to benefit over the next three to five years of having very limited supply growth, particularly the urban the urban markets.
There is relatively limited supply that gets added to the resort markets.
On the in the hotel resort category, because <unk> tends to be fairly restricted from a zoning approval.
Approvals perspective.
I don't think.
First of all I don't think we ever had a bias to the west coast.
As markets I think our bias was a risk adjusted return.
Attractiveness that brought us to a lot of those markets early on in the in the last cycle and I think that proved to be.
Very successful and I think.
The.
<unk>.
We have a list of 35 different risks that we look at.
And in the markets that we're that we're underwriting.
And so that's one piece of it the return part depends upon what other people are willing to pay so it's hard to tell you. We don't have a strategy that says we want to be here and we no longer want to be here. It really is a set of dynamics that will drive our decision, making both on the as I said earlier on the.
<unk> side as.
As well as on future acquisitions.
Got it thank you.
Thanks, Anthony Anthony.
Thank you at this time I would like to turn the floor back over to Mr. Bortz for closing comments.
Thanks, Don and thanks, everybody for participating sorry to keep you. So long if you are still there hopefully you found it informative and we certainly look forward to updating you in 90 days and obviously if you have further questions feel free to give us a call.
Thanks very much.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines at this time.