Q3 2024 Pebblebrook Hotel Trust Earnings Call
Speaker Change: Greetings and welcome to Pebble Brook Hotel Trust's 3rd Quarter Earnings Conference Call.
At this time, all participants are on a listen-only mode.
A question-and-answer session will follow the formal presentation.
Speaker Change: If anyone requires operator assistance during the conference, please press star zero on your telephone keypad.
Speaker Change: 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. You may begin.
Raymond Martz: Thank you, Donna, and good morning, everyone. Welcome to our third quarter 2024 earnings call and webcast. Joining me today is John Bortz, our Chairman and Chief Executive Officer, and Tom Fisher, our Co-President and Chief Investment Officer.
Raymond Martz: Before we begin, please note that today's comments are effective only for today, November 8, 2024. Our comments may include forward-looking statements, as defined under federal securities laws, and actual results could differ materially.
Raymond Martz: from those discussed today. For a comprehensive analysis of potential risk, please consult our most recent SEC filing and visit our website for detailed reconciliations of any non-GAAP financial measures mentioned today. Okay, we have a lot to cover today, so let's move to our third quarter results.
Raymond Martz: We are pleased to report that, despite the negative impact of two name storms on several properties this quarter, our third quarter hotel operating results were in line with our outlook.
Raymond Martz: RepR growth is driven by occupancy increases at both our urban and resort properties, market share recovery, and gains at many of our recently redeveloped properties.
Raymond Martz: The ongoing recovery of business groups and transient demand, along with strong resort and urban weekend leisure travel, fueled our occupancy gain, even as the broader industry experienced a continued normalizing of leisure travel trends.
Raymond Martz: In the third quarter, same property rep bar increased by 2.2%, landing squarely in the middle of our outlook range, and would have exceeded 2.4% if not for the impact of the hurricanes.
Raymond Martz: Our outperformance significantly outpaced the industry's repart growth of 0.9% and a 0.5% gain in our specific market, highlighting our portfolio's success in growing market share.
Raymond Martz: This growth is largely driven by our recently redeveloped and renovated properties and the strong recovery of our urban markets.
Raymond Martz: Total rent power rose by 2.7 percent propelled by increased occupancy and strong out-of-room spending which grew 3.8 percent.
Raymond Martz: These positive trends more than offset the approximate 30 basis point negative impact from the storms.
Raymond Martz: Our same property, Hotel Ibida, reached $110.8 million, comfortably in the middle of our outlook range, even after absorbing an approximate $1.2 million negative impact from the two named storms.
Raymond Martz: It is important to note that while La Playa was the most significantly affected property by the storms, it is excluded from our same property reporting due to its restoration following Hurricane Ian.
Raymond Martz: We're also pleased to report that adjusted EBITDA exceeded the midpoint of our Q3 outlook by $8.7 million and surpassed the top end by $6.2 million.
Raymond Martz: Adjusted FFO beat the midpoint of our outlook by 9.7 million or 8 cents per share, despite an estimated 1.5 million dollar negative impact from Hurricanes Debbie and Helene.
Raymond Martz: This outperformance was largely due to $7.1 million in business interruption proceeds relating to a ply from Hurricane Ian, which we hadn't factored into our prior Q3 guidance.
Raymond Martz: We had previously anticipated $2.7 million in BI proceeds in the fourth quarter, which we no longer expect.
Raymond Martz: Our strongest, strongest urban markets in third quarter were Chicago, San Diego and Boston.
Raymond Martz: These cities benefited from active convention calendars, improved weekday business travel, and the ongoing return of leisure demand.
Raymond Martz: Additionally, our urban Portland properties showed a promising 18% increase in occupancy compared to the same quarter last year.
Raymond Martz: We're optimistic that this represents the beginning of sustainable recovery in this late-to-recover market.
Raymond Martz: Urban properties occupancy increased by 3.7% year-over-year in Q3. Urban weekend occupancy rose by 3.9% exceeding 85% bolstered by a sustained return of leisure travel to cities.
Raymond Martz: Urban weekday occupancy grew by 3.8% year-over-year, 77.8%, reflecting continued healthy recovery in group and transient business demand and a strong convention calendar in a number of our markets.
Raymond Martz: Out-of-room spending remained healthy, resulting in a 2.7% increase in urban total rent power.
Raymond Martz: I demand that all of our southeast properties were impacted by Hurricane Debbie in the early August and more significantly the Hurricane Helene in late September.
Raymond Martz: While the Playa Beach report in Naples maintained a modest physical damage, it's important to note that storms historically lead to cancellations and reduced bookings both before and after they hit, which explains the broader impact on our southeast province.
Raymond Martz: In a resort segment specifically, despite the impact of the named storms, same property occupancy climbed by 5.9% year-over-year, reaching 74.3%.
Raymond Martz: Resort weekday occupancy improved by 6.7% and resort weekday occupancy grew by 5.2%.
Raymond Martz: These are very encouraging trends that highlight the benefits of our significant capital reinvestments, making our properties more appealing to both group and leisure travelers, and allowing us to gain meaningful market share.
Raymond Martz: A key driver of our resort's retail equity growth was the over 10% increase in group demand.
Speaker Change: led by Serge and his group said this segment specifically While business group demand at a resort typically comes at a lower ADR and weekend leisure bookings Potentially given the impression of declining property ADRs
Speaker Change: The business group segment generates substantial out-of-room revenue, particularly in food and beverage, and frequently drives more total revenue in EBITDA per occupied room than transient segments.
Speaker Change: For example, in Q3, our same property resort ADR declined by 4.8% compared to the prior year period primarily due to a higher mix of business group booking.
Speaker Change: Excluding business group, our resort ADR declined by only 1.9 percent, highlighting the impact of demand mixes on ADR, specifically higher portion business group in this case.
Speaker Change: This also reflects the normalization of Leisure Weekend ADR, which appears to be stabilizing.
Speaker Change: Strong demand for business groups and the resulting shift in their customer mix contributed to an overall increase in same-property resort total REPR of 2.5 percent.
Speaker Change: significantly higher than the 0.8% increase at St. Property Resort Rappaport alone.
Speaker Change: Across our total same-property portfolio in the third quarter, group nights grew by 9.1 percent year-over-year with ADR increasing 1.9 percent, driving a total group revenue increase of 11.2 percent.
Speaker Change: Group revenue accounted for about 24% of total group revenue in the quarter.
Speaker Change: Transit demand also is trending with room nights up 2.8% year-to-year across the portfolio. The transit revenue remains roughly flat.
Speaker Change: This growth was supported by higher bookings through consortia partnerships with firms like Capital One and American Express, as well as improving demand from international wholesale markets.
However, internationally inbound demand still remains well below pre-pandemic levels.
Speaker Change: Turning to profitability, our tent's focus on efficiency and cost reduction across all departments continue to yield positive results.
Speaker Change: Total same property hotel expenses before fixed expenses such as real estate taxes and insurance costs increased by 3.2 percent while the same property occupancy grew by 4.2 percent.
Speaker Change: This means we're able to decrease costs for occupied room again in the third quarter.
Speaker Change: Year-to-date, total same-property hotel expenses have increased by just 2.7%, with occupancy up 3.7%.
Speaker Change: Our aggressive approach to efficiency and best practices has effectively mitigated inflationary pressures, including wages and benefits.
Speaker Change: These continuous and relentless efforts position as well manage anticipated wage and benefit cost pressures in 2025 and beyond.
Speaker Change: Regarding capital investments, we rebranded our Delfina Santa Monica Hotel as a Hyatt Centric on September 18th. The $16 million property refresh is already underway and expected to be completed in the first quarter of next year.
Speaker Change: However, as we realign customer awareness and marketing programs with the new Hyatt brand, we believe this integration will drive a strong rebound once fully embedded into the Hyatt system.
Speaker Change: In addition to the key money provided by Hyatt, we expect to invest $90-95 million in capital projects across our portfolio this year.
Speaker Change: Over the last several years, we have completed major redevelopments and repositioned nearly all of our properties. We have invested hundreds of millions of dollars to dramatically enhance our portfolio's quality and elevate the property's market position.
Speaker Change: While we have already made substantial investments, the majority of the upside remains to be realized.
Speaker Change: We're already seeing incremental returns from these investments, but many of our recently redeveloped properties are performing during the quarter and year to date.
Speaker Change: We expect this positive momentum to continue as these properties further ramp up their performance.
Speaker Change: Now that our major capital investment program is largely complete, we're poised for significantly lower CapEx over the next few years.
Speaker Change: Moving on to the restoration of La Playa, as we detailed in our Hurricane Milton press release last week, the resort experienced property damage from Hurricane Helene on September 26th and from Milton on October 9th.
Speaker Change: The damage is primarily due to storm surge. Water and sand intrusion affected approximately 20 ground-floor guest rooms in a 79-room beach house building and the pool's resort complex.
Speaker Change: Resort's pool complex. Fortunately, the majority of the resort, including the Gulf Tower and Bay Tower, which together house 110 guest rooms, sustain minimal damage.
Speaker Change: Our previous capital investments in La Playa and our other southeast properties have significantly enhanced their storm resilience, minimizing damage and reducing the time needed to restore operations ever after such events.
Speaker Change: And we're pleased to report that the Gulf Tower and Bay Tower fully reopened on November 1st, after being closed, to be first evacuated and closed the day before Hurricane Milton hit Florida on October 9th.
Speaker Change: Thanks to our team's extensive preparation efforts, including positioning a third-party remediation team nearby, we were able to begin clean-up and repairs immediately after the storms.
Speaker Change: We're targeting to reopen our pools between now and the end of the year as soon as the new pool equipment arrives. We're also targeting to reopen the upper floors of the Beach House in the next few months and complete the ground floor guest rooms by the end of the first quarter of next year.
Speaker Change: Our ability to achieve these targets is based upon receiving all necessary governmental approvals in a timely manner and avoiding supply chain delays for construction materials in FF&E.
Speaker Change: The cost of these repairs and restoration work will be covered by insurance after deductible.
Speaker Change: Turning to our revised outlook for the fourth quarter in 2024, we estimate that the combined impact of Hurricane Helene and Milton will reduce Q4 same-property REPR by approximately 100 basis points, resulting in a $2.5 million decrease in same-property hotel EBITDA.
Speaker Change: Please note that these same property numbers exclude La Playa, which is not part of the same property reporting this year.
Speaker Change: When including Applio, we estimate the total negative impact in Q4 from the two hurricanes to be about 10 million on adjusted FFO and adjusted EBITDA, with Applio accounting for $7.5 million of this amount.
Speaker Change: We also estimate that the Hyatt-censored brand transition will reduce our Q4 REPR by approximately 100 basis points leading to a 1.4 million dollar reduction in same-property hotel EBITDA.
Speaker Change: So, if not for the weather and rebranding impacts, our Q4 Rapport Outlook would be 1-3% up.
Speaker Change: The remaining $3 million reduction in our Q4 same-property EBITDA outlook is attributed to slightly weaker-than-expected transient demand in several urban markets, including L.A., San Francisco, Boston, and Washington, D.C.
Speaker Change: Most of the softness seems to stem from a weaker final week of October and the first week of November, as the election appears to have had a more significant impact on travel than previous presidential elections.
Speaker Change: Shifting out to our balance sheet, we've actively worked on to strengthen our financial position and extend our debt maturities.
Speaker Change: On October 3rd, we successfully completed our inaugural instrument of $400 million of a trapped-leaf price 6.378 senior unsecured notes maturing in 2029. We used these proceeds to significantly reduce our 2024, 2025, and 2027 bank term loans.
Speaker Change: As a result of these refinancing efforts, we have no significant debt maturities until December 2026.
Speaker Change: And our debt is well-structured with a weighted average interest rate of just 4.3%.
Speaker Change: And finally, as the hotel industry in our portfolio continues to normalize, we made the decision to discontinue the monthly operating updates we started during the pandemic. We initiated these updates during the pandemic to provide timely information to our shareholders during a period of significant uncertainty and rapid change.
Speaker Change: stepping back from these monthly updates signals our confidence in the improved stability of both industry and our portfolio.
Speaker Change: And with that comprehensive update, I'd like to turn the call over to John to provide more details on our hotel operating results and our expectations for the future.
Thank you.
John Bortz: Thanks, Ray. I thought I'd start with a simple evaluation of the industry's performance.
Speaker Change: provide some further insight on our performance, briefly highlight some of the significant share gains from our redeveloped properties
Speaker Change: And then provide some high-level thoughts on 2025 for both the industry and for Pebble Brook.
So let's start with the industry.
Speaker Change: In Q3, business group demand continued to grow and business transient demand continued to recover as return to office patterns improved.
Leisure demand was a little more complicated.
Speaker Change: While overall leisure demand remained healthy, it was roughly flat year over year.
Speaker Change: This was partly due to international outbound travel goosed by the Olympics in Paris, outpacing the inbound recovery following the pandemic.
Speaker Change: In addition, the return of leisure demand to the cities, particularly the coastal cities that suffered most during the pandemic, has negatively impacted overall industry resort demand as historical demand patterns normalize.
Speaker Change: We also continue to see a noticeable difference in demand across price segments.
Speaker Change: with stronger performance at the upper end compared to the mid to lower price segments.
We talked about this before.
Speaker Change: We believe this is largely due to economic pressures impacting individuals in lower income brackets.
Speaker Change: where pandemic-related governmental support has largely phased out, personal savings have diminished, and high credit card interest rates, along with inflation, have created added financial strain.
Speaker Change: The STR data reflects these challenges and we've heard similar comments from companies in many other industries.
Speaker Change: Encouragingly, employment remains strong, and wage increases in this lower-income group are solidly outpacing inflation, which should provide support for a better 2025.
Speaker Change: The unusual aspect of the hotel industry this year, at least from our perspective, is that demand has remained flat despite healthy GDP growth, a trend persisting since April of last year.
Speaker Change: This suggests that demand patterns change significantly during and after the pandemic.
and have been normalizing over the last 18 months.
Speaker Change: We believe most of this normalization has now occurred and is winding down, positioning the industry favorably for 2025.
Speaker Change: Assuming continued healthy economic growth, as most economists are forecasting, we expect demand growth in 2025 to better align with GDP growth.
Speaker Change: With supply remaining extremely limited, this should result in healthy occupancy growth next year.
Speaker Change: For Pebble Brook, as evidenced by our three queue and year-to-date results.
Speaker Change: We're not following the industry's flat demand performance thanks to several factors.
Speaker Change: making them much less impacted by the challenges faced by travelers in more price-sensitive segments.
Speaker Change: Second, a significant portion of our portfolio resides in the urban markets that continue to regain significant occupancy with leisure and business transient demand returning and group bookings growing.
Speaker Change: Third, we're also regaining occupancy that was previously displaced by last year's renovations and redevelopments.
Speaker Change: And fourth, we're gaining market share in most of the properties we've redeveloped over the past few years.
Speaker Change: However, we face certain market headwinds all year, including in the third quarter, that are negatively impacting our performance.
Speaker Change: Three urban markets, San Francisco, Los Angeles, and Portland, all took a step backward this year, each for different reasons.
Speaker Change: San Francisco experienced a significant decline in convention business this year, negatively affecting occupancy, but even more so putting pressure on rates.
Speaker Change: Encouragingly, this demand drop was more than offset by increases in business transient, in-house business group, and recovering leisure travelers to the city.
Los Angeles and Portland have had different headwinds.
Speaker Change: L.A. faced significant reductions in demand due to the entertainment industry strikes last year and the potential for a strike this past summer.
We're seeing production begin to return, albeit gradually.
Speaker Change: and we're encouraged that this trend should accelerate as the governor just announced a doubling of entertainment production financial incentives next year.
Speaker Change: Portland's recovery has been slower due primarily to quality-of-life challenges that were exacerbated during the pandemic.
Speaker Change: However, there have been noticeable improvements recently as local policies have been implemented to promote a safer and cleaner city.
Speaker Change: As Ray indicated, we've seen a significant recovery in Portland's business demand this year, particularly in Q3, and we expect 2024 will represent the market's bottom with a more robust recovery ahead.
Speaker Change: The combined REPAR for these three urban markets declined 5.7% in the third quarter.
Speaker Change: and we're forecasting a decline of 5.6% for the full year.
Speaker Change: Combined, these three markets present a year-over-year EBITDA decline of over $17 million for this year.
In contrast,
Our urban properties in Boston, San Diego, and Chicago
Speaker Change: grew combined REVPAR by 9.6% in the third quarter, and they're forecasted to achieve 8.1% growth for the full year.
Speaker Change: Combined EBITDA from these three markets is currently forecasted to increase by $15.5 million this year.
Speaker Change: So quite a contrast between the faster-recovering cities and the slower-recovering cities.
Speaker Change: We anticipate that these three slower and later to recover urban markets.
Speaker Change: should no longer be a drag on our performance in 2025 and should even become a tailwind next year and beyond.
Speaker Change: In addition, we expect significant further benefits from our recently redeveloped properties throughout our portfolio, which have achieved substantial market share gains in 2024. Let me provide a few examples.
Speaker Change: We previously talked about the redevelopment and conversion of Hotel Vitale in San Francisco into the One Hotel San Francisco.
Speaker Change: In a very challenging market, which generally makes it harder to gain share, one Hotel San Francisco gained another 765 basis points of REVPAR share year-over-year in the third quarter.
Speaker Change: and it's gained over a thousand basis points here today. This is on top of last year's 2,400 basis point gain.
Speaker Change: Margaritaville San Diego Gaslamp Quarter gained over 2,600 basis points in the third quarter and over 3,600 basis points here today.
Speaker Change: Newport Harbor Island Resort gained over 400 basis points of REVPAR in just its first full quarter of being open following its redevelopment.
Speaker Change: Sancia La Jolla Hotel and Spa gained over 400 basis points in Q3 and over a thousand basis points year-to-date.
Speaker Change: Properties redeveloped in prior years are also showing strong gains as ramp-up typically takes three to four years and was interrupted by the pandemic.
Speaker Change: Loberts Del Mar gained almost 700 basis points of RevPAR share this year so far.
Speaker Change: Harbor Court in San Francisco has gained over a thousand basis points this year.
Speaker Change: Viceroy Santa Monica and Hotel Zena in Washington DC each gained over 400 basis points
Ziggy in West Hollywood over 300 basis points
Weston Copley in Boston gained over 800 basis points
Speaker Change: I could go on, but I think you get the idea.
Speaker Change: Continuing REVPAR share gains from all of our major redevelopments will drive significant REVPAR growth and EBITDA gains over the next few years, particularly with limited to no supply growth in our markets.
Speaker Change: Looking forward to 2025, group pace for our portfolio continues to be very favorable.
Speaker Change: Group room nights are currently ahead by 6.2 percent year-over-year with ADR up by 2.2 percent and total group revenue on the books up by 8.5 percent compared to the same time last year.
Speaker Change: When combined with transient, total room nights on the books for next year are ahead by 12.2 percent with rate up by 0.1 percent and total revenue on the books ahead by 12.3 percent.
Speaker Change: We're particularly encouraged by next year's group pace at our resorts.
Speaker Change: They're currently ahead by 11.2% in group room nights, 2.7% in ADR, and 14.2% in group revenue.
Speaker Change: Our redeveloped resorts are leading the way to this favorable pace.
As we look out to 2025...
We see several very significant positives.
Speaker Change: First, we expect headwinds turning into tailwinds in our three challenging urban markets.
Speaker Change: with our other urban markets set up for continuing growth in 2025.
Second, we expect significant growth.
from Ongoing Share Gains at our redeveloped properties.
Third, we believe the recovery in
Speaker Change: Fourth, we expect the trend of leisure travelers returning to the cities will continue next year and international inbound versus outbound should begin to become a tailwind, further benefiting the urban markets.
Speaker Change: And fifth, we believe it's likely that overall hotel industry demand growth will return to its normal historical relationship with GDP growth.
Speaker Change: leading to higher occupancies as demand growth outpaces a very low level of supply growth.
Speaker Change: Of course, all of this assumes a relatively normal year of economic growth.
but it's consistent with the current consensus forecast.
Speaker Change: So that completes our prepared remarks. We're now happy to address your questions. So Donna, you may proceed with the Q&A.
Donna: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue.
Donna: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. In the interest of time, we do ask that you please limit yourself to one question. Today's first question is coming from Dory Keston of Wells Fargo. Please go ahead.
Speaker Change: Thanks, good morning. It may be a bit early but do you do you think La Playa should be able to exceed this year's original 24 million EBITDA expectation next year and can you just let us know what you're able to do to change the property so that future storms might be less impactful?
Speaker Change: Sure. Well, I appreciate your qualifier. It is a little bit early, but I would say if we're successful with the schedule that we laid out, the timeline,
Speaker Change: I do think we should be able to get back to where we were, expecting to be for this year, for a couple of reasons. First is, we have a lot more group on the books this coming year. In fact, much more in line with
sort of pre-hurricane pace.
Speaker Change: Second, the club continues to grow there and that growth continues to add EBITDA to the property.
Speaker Change: I do think that's a reasonable scenario for next year provided we meet the timeline that we've laid out.
Speaker Change: And then, I'm sorry, what was the second part of your question?
on the enhancements that we did.
Speaker Change: Yeah, sure so so we we did a bunch of enhancements after
Ian as part of the rebuild
Speaker Change: Systems in the beach house are out of storm surge way. They're on upper floors.
Speaker Change: We've rebuilt dunes on the beach. We've added hurricane-proof sliders and windows and things like that. We're looking at... we did a lot of temporary protections this go-round.
Speaker Change: that kept water at least in the second storm from from getting into the beach house in a meaningful way from the ocean side. We did have some flooding in the streets on the bay side.
Speaker Change: that caused water to come in from the other side. And so we've laid out some other both permanent and temporary protections.
Speaker Change: that we plan to do between now and next year's hurricane season that we think will will dramatically mitigate even further the impact from from storms
Speaker Change: And we've done a lot we've done a lot of work with our insurance providers and advisors about what kinds of things we can do at the property in anticipation of a storm that will limit damage and speed recovery.
Got it, thank you.
Thank you.
Speaker Change: Thank you. The next question is coming from Jay Kornreich of Wedbush Securities. Please go ahead.
Speaker Change: Hi, good morning. Just going back to your comments on the 2025 outlook looking much more promising for the hotel industry, can you provide some more details as to what you expect from the Leisure customer and specifically, you know, really being able to start pushing a rate at the resorts?
Speaker Change: I think where we are with the Leisure customer is we've
Speaker Change: We've sort of gone through this normalization process over the last 18 to 24 months.
Speaker Change: following, you know, the sort of peak demand post-pandemic in 2022. It's hard to say where average rate will end up. I think as Ray explained, you know, as we add...
Speaker Change: group, and we look at group coming into next year. I mean, we're ahead in rate on our group rate. Now, we're going to do more group at our resorts next year. That's our objective. We're not yet back to where we used to be pre-pandemic, and we've also added.
Speaker Change: event lawns and meeting rooms and other facilities that we think should drive additional group into the mix in these properties, so
We continue to build occupancy
international or wholesale.
channels, I think
will be in a position to get more compression.
Speaker Change: have more high occupancy weekends and holidays and begin to grow rates again as we're doing at some of our properties, particularly the ones that have been redeveloped.
Okay, thank you. Thanks, Jay.
Speaker Change: Thank you. The next question is coming from Smeads Rose of Citi. Please go ahead.
Smeads Rose: Hi, thanks. I wanted to ask you just a little bit about what you're sort of thinking about for wages and benefit growth and overall cost growth next year or prices sort of moderating or how do you think about that right now?
Speaker Change: From our properties and and we're just our teams are just starting to work through those
Speaker Change: from a philosophical perspective are gonna be slightly lower than they were last year given the lowered inflation rate overall. So I think as it applies to most.
Speaker Change: employees throughout our portfolio, I think that will apply. In the markets where there are new union arrangements either already agreed to which is in
Speaker Change: Most of the markets at this point, or likely soon to come to resolution,
Speaker Change: you're going to risk being unionized. So our non-union properties typically follow the union agreements and
Speaker Change: And so as a result that I think in the cities some of them We're going to have a higher increase on average than we're going to have in Any of the secondary markets or in the resort markets in general?
Speaker Change: and to me it's also important to see where the union...
Okay.
Speaker Change: Well, why don't you finish your question and I'll continue on expenses.
Why don't you finish your question, Smeeds.
Speaker Change: My question was, I'm sure it varies by market, but if you guys just have a sense of where the union contracts are coming in, it looks like a number of them are getting settled. I'm just wondering if you have a sense of what kind of first year wage increases are as a percentage.
Speaker Change: Yeah, I mean, I think we have a pretty good idea of where the agreements have come in because we're in some of those markets.
and they apply to our properties.
I think the
The
Speaker Change: There are offsets in many of these markets that relate to other
Speaker Change: , and we are looking at either reductions or . . . . . . . .
credits for other categories.
Speaker Change: And I think that, you know, giving you a number at this point would be probably misleading, particularly since we have, what we're really focused on is what are the averages going to be at each of the properties for all of our wages and benefits on a combined basis. And we don't have that.
at this point.
Speaker Change: And to me, certainly wages and benefits are an important part of the cost structure, I mean it represents about
Speaker Change: 60% or so of our overall cost, but the other 40%
Speaker Change: The inflation pressures subside, so less pressure on the food and beverage costs. Energy costs are becoming less pressure. In many cases, the costs are coming down, the inflationary are actually turning negative.
Speaker Change: and a lot of the cost enhancements and technology we're using help take out the other expenses. So it's certainly, we focus a lot on wages and benefits because it's an important part of the overall cost structure, but the other 40% are a lot of areas that we can, we have control over and we can have savings in. So that's why I look at the whole picture and not just, you know, one component of the cost.
Thanks for watching!
Thank you. Appreciate it.
Speaker Change: Thank you. The next question is coming from Ari Klein of BMO Capital Markets. Please go ahead.
Speaker Change: Thanks and good morning. John, you noted some of the optimism in the struggling urban markets. I'm wondering how you would stack rank?
Speaker Change: San Francisco, Portland, and L.A. from a longer-term standpoint. And then dispositions have largely focused on reducing exposure to West Coast markets, giving you a view on the tailwind, being comfortable with the existing exposure.
Sure, so...
Speaker Change: I think our view on Portland and San Francisco and LA is that the underlying fundamentals of those markets, the reasons
Speaker Change: that they were successful before the pandemic will be the same reasons why they're successful after the pandemic once.
Speaker Change: during the pandemic. LA is a little different because of what's going on in the entertainment industry, but it too is challenged by some of these quality-of-life issues. What we're encouraged about is, well, we just had another election.
in these markets and seeing
Much more business-friendly, moderate.
Representatives get elected.
Speaker Change: and a more practical approach to addressing a lot of these issues so that
Speaker Change: the restaurant scene, the cultural activities, you know, those all remain and they continue to be drivers.
in those markets, sporting activities continue to pick up, etc.
I think we're comfortable with a rebound in these markets.
Speaker Change: In some cases, it's not surprising. I think we've said it's going to take significant time to turn things around in these markets, but there'll be a point at which these become hockey stick markets. We're not there yet. Obviously, they went backwards this past year.
Speaker Change: In terms of our position in the markets, I mean, we're going to continue to try to be active in recycling capital to take advantage of the opportunity to repurchase.
Speaker Change: our portfolio at a, you know, dramatic discount to the underlying value of those assets.
Speaker Change: What we need is a more active transaction market, and we think that's coming in 2025. So, of course, there's still uncertainty with what's going to come out of this election and what policies are going to come out of this election.
Speaker Change: We'll see what that does, if anything, to this recovery in the transaction markets in these markets.
And Aria, just to remind you...
Speaker Change: Since 2019, we've sold 15 hotels, largely in the West Coast markets, in markets like San Francisco, Seattle, and Portland, and we distributed a lot of that capital to more leisure markets and some more in the East Coast. So the portfolio has changed since 2019, and we'll make some continued progress, we expect and hope, in 2025.
Speaker Change: Thanks, and then just maybe a kind of unrelated follow-up, but just on the Delfina conversion impact, did something happen there that that was unanticipated? Because obviously we knew about that before this quarter.
Speaker Change: Yeah, we knew that we were changing the brand on September 16th.
Speaker Change: We expected that there would be significant disruption. You know, you're changing all the systems, you're renaming the property, you've got to work with third parties, OTAs.
Speaker Change: review sites, everybody. Obviously Hyatt had a very significant staff that was focused on the property and
Speaker Change: and help guide the property to getting all those things changed. Some of those things are just outside of the control of all of us.
Speaker Change: that it takes longer. But two, we did anticipate significant disruption. We've put in place a lot of policies to try to fill even at lower rates during this disruption. And it's just turned out to be more significant.
for your thoughts?
Thanks for the call.
Speaker Change: Thank you. The next question is coming from Duane Finningworth of Evercore ISI. Please go ahead.
Speaker Change: Hey, good morning. John, I appreciate your thoughts on demand and normalization over the last 18 months.
Speaker Change: Sounds like there's some optimism. We could see acceleration or a pickup. I wondered if you put a finer point on it. What segments do you think have the most upside potential? You know, which chain scales could see the biggest pickup if that view plays out?
Well, that's a little more challenging question perhaps than
Speaker Change: the potential growth on the business travel side, being led by group, but continuing recovery on the business transient side.
Speaker Change: I guess, you know, this week we've had a few things happen.
Speaker Change: you know, profits, you know, connect to travel and opportunity. So.
Speaker Change: next year, I think we'd be we'd be very excited about the final normalization of leisure demand
Speaker Change: and the opportunity to begin to see, you know, rates stabilize and perhaps increase next year on the leisure side. You know, the return of international inbound
I think we would normally be
excited that that could be significant next year, but
Speaker Change: Again, the reaction in the markets to the election and the increase in the dollar, I guess, is a meaningful headwind to some of that happening.
Speaker Change: And if we get some stabilization on the further end of the curve...
Maybe we'll begin to see some softer
Speaker Change: currency dynamics that would help us with international inbound recovery. The other thing is we would we would hope to see a greater effort on the part of the administration to enhance
Speaker Change: The speed at which people are getting visas, although that might be an unrealistic expectation.
Speaker Change: That's helpful. And then just in terms of the lagging markets and some of the changes you alluded to.
Changes in mayors, district attorneys, I think it's Prop 36.
Speaker Change: How long do you think it will take for those things to kind of change the perception of the markets and move the needle on your results? It certainly seems directionally positive, but is this more of a 5 to 10 year phenomenon than a 1 or 2 year? Thank you.
Yeah, I
Speaker Change: Well, I'd like to think it's not a five to ten year it shouldn't take that long for the truth to come out
because I think the good news is the...
Speaker Change: The reality on the ground in these markets, the condition of the cities, the cleanliness, the safety side is dramatically improved. In fact, when I go to San Francisco, I think San Francisco is in better condition than it was.
Speaker Change: I think things have dramatically improved. We've been working to try to get that news out.
Sometimes there's a competing narrative that perhaps is politically driven.
Speaker Change: But I just think it takes, like anything, it takes getting people there to see the truth and to have a good experience.
I think that is what's been happening.
Speaker Change: I think people have had good convention experiences when they go to San Francisco.
Speaker Change: I think they have good leisure experiences when they go there. I think that's the case in Portland as well. It's much improved. Although I do think Portland still has a little ways to go on the ground, in addition to the perception. And again, I think the elections...
The Supreme Court ruling on homeless encampments.
Speaker Change: the return of staffing for police forces, the focus on... I mean you just saw a change in law in California on theft and I think that's...
Speaker Change: Again, an indication that the people who live there have had enough.
Speaker Change: to see that the prior policies haven't worked. So I do think there are a lot of positive things happening. That's extremely encouraging. And I do think the perception will follow. It's still probably about a year behind, Dwayne, but I don't think it takes.
Five years, I think it takes a couple years
Thank you.
Thanks for watching!
Speaker Change: Thank you. The next question is coming from Gregory Miller of Truist Securities. Please go ahead.
Thanks. Good morning, everyone.
Speaker Change: I'm hoping you could provide an update on the progress and goals with Curator and items I personally think about relate to the financial performance for Curator itself and a number of hotels. And as a brief aside, I'd be curious to get your thoughts about KSL's sale of Davidson, if that impacts
either a curator or your hotel operations at all.
Thank you.
Speaker Change: Sure, well I think as it relates to Curator, you know, we've been publishing the number of members and the number of vendor partnerships.
Speaker Change: continue to see growth in that over the next 12 months, but it's certainly behind our goals as it relates to the size we would have hoped we would be at at this point in time.
Speaker Change: In some regards, I think it's a it's a sort of a sad statement on the part of
Speaker Change: our industry where we're either operators or owners or both don't like to save money and create value because that's what
Speaker Change: Curator does and it's what it's done for us. It's a significant
Speaker Change: We continue to encourage folks to take the time and put the effort into partnering with Curator because I think it's
It's
Speaker Change: It's a significant value creator for their properties. Yeah, and just to add to that, Greg, so...
Speaker Change: You know what you don't necessarily see is because of the hundred-plus hotels You know Pebble Brook benefits from that, you know as an example Curator just negotiated a new contract with Avendra And it's part of the scale we have not just the Pebble Brook hotels
Speaker Change: but the curator member hotels. So curators getting a better deal from Avendra because of the larger contract we just negotiated. So our costs will be, among those areas, going down or some of the rebates we're getting. So those are several of the pluses and pluses as well as the digital marketing that they're making efforts on. It doesn't always appear on, doesn't appear in our P&L because it's directing business to the hotels.
Speaker Change: but that's an area which does overall help. So a lot of other areas as well as R&D areas, you know, we've, you know, with Curator they've...
Speaker Change: They've pioneered a couple of new technologies, working with new services. There's an AI tool, a bot now that can use a hotel to reduce service requests. That's something that before, before AI, you would need to be a large company to have the scale to have a tool like that. Now, individual hotels can have areas to use the AI bots where guests can ask for towels or requests and other areas could be done. So those are these different areas that we're able to do much better and provide more bandwidth here versus if we didn't have Curator under our belt here.
Speaker Change: I think as it relates to the KSL sale of Davidson
Obviously, we were well aware of
the possibility.
from both Davidson and KSL that
Speaker Change: that Davidson would get sold. We're pleased they executed well. They found a...
Speaker Change: a private equity group that's excited about the opportunity and based upon what we know today we don't see any impact either on our relationship with them or the relationship that either Davidson or KSL have with Curator.
Okay, thanks John. All right, I'll leave it there.
Thank you.
Speaker Change: Thank you. The next question is coming from Michael Bellisario of Baird. Please go ahead.
Michael Bellisario: Thanks, good morning. John, you bought back a little bit of stock in the quarter but but it wasn't match funded with the disposition. Can we read into this that you're making progress with asset sales or has your view changed a little bit on how you fund buybacks?
John Bortz: Yeah, I mean, I don't think you should read anything into it from a transactional perspective I think that'll continue to be the primary source of Proceeds
John Bortz: that get used to buy our stock back. We are, as you know, generating very significant cash flow this year, $100 million or so, give or take.
John Bortz: It's an effort to continue to get capital back to our shareholders.
John Bortz: as a result of the significant free cash flow that we're generating. So again, we continue to try to find the balance with the way we allocate capital, the state of our income statement and our balance sheet.
Thanks for watching!
Good.
Speaker Change: Fair enough, and then I know your redevelopments are largely done except the one that might happen in San Diego at some point, but
Speaker Change: When do you start thinking about maybe the next wave of projects and then sort of along those same lines any initial expectations for CapEx spending in 25 X any Hurricane dollars that might need to be spent and that's all for me
Thanks.
Speaker Change: Yes, so I'll address the first part. There is no next wave of projects. I mean, we've redeveloped pretty much everything in the portfolio from our acquisition of the assets.
Speaker Change: I don't, I mean there are always small projects, there's been some ROI projects, small ROI projects that we've deferred because of better use of capital, but nothing major in the portfolio and I think that's...
Speaker Change: In a way, it's the good news. Not that there isn't further opportunity in the portfolio for additional investment. There is some of that, as I said.
Speaker Change: particularly smaller ROI projects, sustainability, energy, things like that. But the major projects are done. There aren't going to be another group of them and there's really just the one left.
potentially at Paradise Point. But...
Speaker Change: The again the good news is we've already gone through the hard part. We've invested the dollars
Speaker Change: We've had the disruption and we've lived through that and we're on the ramp-up side where the capital is already gone out the door and the upside is what's remaining so
Speaker Change: We feel really good about where we are, the organic growth that we're going to have over the next three or four years, and the fact that we're not going to have any material disruption as we move forward over the next few years.
Beyond. Again, this is X, the Paradise Point potential.
Speaker Change: It was something in that $65 million to $75 million range is the appropriate run rate. We're going to have a little refresher there.
Speaker Change: on a property that may we have done, you know, seven, ten years ago that's due for a light touch.
Speaker Change: will have a couple of those, but in that vicinity, which is a lot less than the CapEx that's gone out the last several years. So that's one thing to think about there.
Speaker Change: As it relates to any sort of hurricane restoration, as we noted earlier, the good news is, because a lot of these capital investments that we've made...
Speaker Change: This is not going to be near the cost of what Ian was or the disruption, you know. Ian, when you add up the impact between La Playa and Southermost...
Thanks for watching!
Thank you.
Speaker Change: Thank you. At this time I'd like to turn the floor back over to Mr. Bortz for closing comments.
Thank you all for your time and your participation.
Speaker Change: Lots of exciting things going on in the world and we look forward to seeing many of you out in Las Vegas for NARED.
Speaker Change: and then perhaps not too long after the New Year. So, I hope you enjoy your holidays and we look forward to being in touch in the near future.
Speaker Change: Ladies and gentlemen, thank you for your participation. 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.
Speaker Change: Music Must be getting early, clocks are running late Ain't my number one in sight, look so phony Dawn is breaking everywhere, light a candle, curse the glare Draw the curtains, I don't care, cause it's alright