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Text: These statements are subject to numerous risks and uncertainties as described in our SEC filings.
Future results could differ materially from those implied by our comments.
We'll discuss non-GAAP financial measures during today's call.
We provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com.
So on to the highlights of the third quarter.
The third quarter marked another important milestone in our recovery from the pandemic.
We generated $21.4 million of adjusted funds from operations, which was the first quarter since the pandemic that we produced a positive FFO and represents considerable progress from Q2 when we had negative FFO of $15.6 million in Q1 with negative $55.7 million.
Third quarter hotel and adjusted EBITDA climbed robustly from the second quarter as well and were driven by significant increases in same-property RevPAR and same-property total revenues while at the same time, costs were well controlled.
Same-property hotel EBITDA rose by 136% to $66.6 million from Q2's $28.3 million.
The sequential growth was driven by robust leisure travel, improving group and transient business travel and an ability to push pricing higher, particularly at our resort properties.
Same-property room revenues rose a substantial 51% from the second quarter and same-property ADR rose 10% from Q2, and for the first time exceeded the comparable quarter in 2019, in this case, by 3.8%.
Same-property total revenues also rose an impressive 47.2% from the second quarter with healthy food and beverage and other ancillary spend growing faster than occupancy.
Total group room nights ADR and revenues also grew from Q2 to Q3 with room nights and revenues more than doubling, which is a very favorable sign for the return of corporate group demand.
The third quarter started strong to RevPAR improved to down just 31% compared with July 2019, clearly better than June's minus 51.6% comparison to 2019.
Lease demand throughout our portfolio at our resorts and urban hotels increased significantly from June.
It was robust and generally not price sensitive.
The strength in demand continues through mid-August until surge in COVID cases from the Delta variant cause a pause in the recovery.
From mid-August through mid-September, we experienced a rise in cancellations and near-term business travel, primarily group for August, September and October and softer near-term booking demand as well as well as higher attrition when many corporate groups who did hold our meetings over this period.
As a result of the seasonal slowdown in leisure travel and business demand that did not pick up the slack, same-property RevPAR weakened compared to 2019 for August, which was down 39.4% and also then September, which is also down 43.4%.
September was also negatively impacted by Jewish holidays, which both fell in the first half of September.
Fortunately, as the trend of new COVID cases began declining in mid-September and have been falling for six weeks now, booking trends began to reaccelerate in mid-September and this improving trend has continued into October.
Both transient and group business demand have picked up with volumes exceeding levels earlier in the year before the Delta variant and associated restrictions were imposed.
Corporate transient is returning led by small- and medium-sized businesses as well as larger companies, including those in banking, consulting, life sciences, medical, entertainment and music segments, among others.
Big Tech has also begun to travel but remains slower and it's recovered.
For us, the most significant improvements in business demand have been in Boston, Los Angeles, Philadelphia and San Diego.
Slower to recover markets continue to be San Francisco, Washington, D.C. and Chicago, which seems to be three to four months behind the faster recovering cities.
Leisure demand remains healthy heading into the fall and upcoming holiday season, which should be very good, and our positive expectations are consistent with the strong advanced holiday demand the airlines are reporting.
However, we do expect a normal seasonal slowdown in business travel levels in late November and December.
Because of these improving trends and business travel demand, in particular, October is performing better than September.
We're now forecasting RevPAR to be down between 37% and 38% to October 2019, and October occupancy for our portfolio should hit or come very close to the occupancy level achieved in July.
This is not something we would have expected a month ago, which really demonstrates how quickly demand trends can reaccelerate and improve when health concerns related to the pandemic decline or moderate.
Considering how strong October is traditionally for business travel, we find this performance a strong indicator of the reacceleration in the travel recovery, especially for business travel.
For the fourth quarter, we expect same-property RevPAR and total revenue to be down between 38% and 42% compared with the comparable period in 2019.
Now back to our third quarter performance.
Same property revenues of $239.2 million were off 36.3% versus the same period in 2019.
This is a significant improvement from the second quarter when same-property revenues were down 57.8% versus 2019 and continue the progress from the first quarter, which was 74.7% below Q1 2019.
Our strongest performance came from our resorts.
For our original eight resorts and Jaco Island Club Resort for August and September revenues exceeded Q3 '19 by 9.8%, driven by a whopping 57.1% ADR premium to Q3 2019, which was more than offset occupancy that was down just 22.5%.
Our resort occupancies would have been higher but for the rooms renovation at Southernmost Resort and the exterior work on the Gulf Tower building at LaPlaya.
At our urban hotels, same-property revenues were off 50.1% to Q3 2019, driven by same property revenue declines of 50.4%.
This illustrates convincing improvement at our urban hotels in the quarter compared with the second quarter when same-property revenues were down 68.6% from Q2 2019 and same-property RevPAR was down 69.7%.
ADR at our urban hotels also improved quarter-to-quarter from last quarter's minus 26.1% compared to Q3 '19, down just 10.8% in the third quarter of 2019.
Drawing down further on our hotel operating results, our same-property resorts generated $34.6 million of EBITDA, up 45.4% versus 2019.
Our hotel EBITDA margins were 41.5% compared with 31.4% in Q3 '19, over 1,000 basis points better.
While some of this is a result of some continuing unfilled position, much of it is due to the significant benefit of a 57.1% or $156 rate premium in ADR to 2019 as well as higher prices for non-room revenues and our new operating models at all of our properties, including our resorts.
Our urban hotels generated $29.9 million of EBITDA in Q3, down 7.2% versus Q3 '19.
This is substantially better in Q2 when our same-property EBITDA was just $2.7 million.
Operating expenses at the hotel level were well controlled.
And in addition to the room rate improvements versus last year, we took price increases throughout all nonroom revenue items.
Same-property hotel expenses were down in Q3 by 29.5%, representing 81% of the 36% rate of total same-property revenue declines.
Excluding fixed costs, hotel expenses were down by 32.7% or 90% of the rate of decline in same-property revenues.
While we continue to have many unfilled positions at our hotels, we made very significant progress in the quarter filling open positions and the cost savings to 2019 represent a superb effort by our property and asset management teams working together to follow up on our new property operating models that are delivering significant efficiencies and productivity gains.
At the corporate level, after corporate G&A, we generated $55.3 million of adjusted EBITDA in the third quarter.
This is a significant increase from the $17.1 million of adjusted EBITDA in Q2 and a negative $25 million of adjusted EBITDA for Q1.
Shifting to our capital improvement program.
Earlier this week, we completed a $15 million comprehensive guestroom renovation of our Southernmost Beach Resort in Key West.
The last of our resorts will be fully renovated or redeveloped and repositioned.
And we continue to make progress with our $25 million transformation of Hotel Vitality to One hotel in San Francisco.
We've experienced some delays due to the constraints of the supply chain in receiving FF&E items.
So we now expect this renovation to be completed in the first quarter compared to last quarter's expectation at the end of 2021.
For all of 2021, we anticipate investing -- reinvesting a total of $80 million to $90 million in the portfolio, which is in line with our prior annual estimate.
Moving to our investment activities.
We continue to be active reallocating capital in the portfolio.
On September 9, we sold Ville Floor in San Francisco Union Square for $87.5 million.
Since Q1 2020, we have sold seven assets generating $664 million of proceeds.
On September 23, we completed the acquisition of the 369 room Margaritaville Beach Resort for $270 million.
And just last week, we purchased the 19-room Avalon,and the 12 room Gardens in Key West for a combined $20 million.
We will be incorporating these two properties into the overall operations of our Southernmost Beach Resort, and we expect significant operating synergies as a result.
By providing guests of these two guest houses with access to the higher service levels and amenities of the existing B&Bs at Southernmost and our overall resort, we expect to be able to drive rates dramatically higher than the prior owner.
As a result, we anticipate generating an 8% to 12% cash and cash return on this investment after a 4% capital reserve on a forward 12-month basis.
We'll obviously narrow this range down as we get deeper into the operations of these properties as part of Southern most.
As a reminder, year-to-date, we have acquired two resorts as well as two Bed & Breakfast guest houses for a combined $384 million of proceeds.
Turning to our balance sheet and liquidity, we have approximately $807 million of liquidity after completing our recent property transactions including roughly $163 million of cash on hand and $644 million available on our unsecured credit facility.
We also currently have approximately $210 million of reinvestment proceeds available under our current bank arrangements.
We're proud of the tremendous progress we made fortifying our balance sheet, reducing near-term debt maturities and lowering our cost of capital through our various preferred refinancings and convertible notes offerings while also increasing our liquidity.
This positions us to take advantage of additional new investment opportunities as they become available.
So I thought I'd focus on what we're currently seeing in our business, how we think the rest of this year is likely to play out, our current expectations for 2022, will delve a little deeper into the performance of some of our existing properties and markets as well as discuss the capital reallocation decisions we've made in the last 18 months.
As Ray said, we're certainly very encouraged by the reacceleration of the recovery we've seen in the last six weeks, particularly as it relates to business travel and group demand.
While leisure demand recovery started early and has grown to robust levels, we all know that getting back to 2019 levels for us requires further recovery in business travel.
As we stated last quarter, we believe we should get back to 2019 EBITDA levels before we get to 2019 RevPAR, and we expect to consistently hit or exceed 2019 ADR levels before we get back to 2019 RevPAR.
We're very encouraged by the performance of rates in both the industry and our portfolio.
We, of course, are aided by our concentration in drive to resorts.
And as Ray said, we're achieving ADRs at our resorts that are dramatically higher than 2019 levels.
Some of this is due to a lack of competitive alternatives like cruises or traveling abroad or even vacationing in cities.
Some of this premium has to do with repositioning resort ADRs to higher levels and a willingness on the part of the consumer to buy up to suites and view rooms and the like.
And about 1/3 of the premium is due to the transformational redevelopment projects we undertook in the last few years at our resorts, where we substantially repositioned them higher in quality, and as a result, higher ADRs are being achieved, generating attractive returns on our redevelopment investments.
So we believe that a substantial portion of these higher rates at our resorts will be permanent.
Most of these higher rates will last at least for the next two or three years and some portion may turn out to be transitory.
In the third quarter, we estimate we gained over $50 alone just an ADR share versus the competitive market properties with that number accelerating substantially from the second quarter.
Some of the rate premium at our resorts that historically accommodated significant group will likely be reduced as that group returns.
However, that group will come with significant F&B and other profitable revenues that should more than offset any reduction in our rate premiums.
In the third quarter, our resorts achieved 9.8% higher total revenues in Q3 '19, even without that group.
Room revenues were up 21.9%, and EBITDA was higher by 45.4% or $10.8 million.
This rate -- with rate up so substantially 57.1% and occupancy down by 22.5%, EBITDA margin at 41.5% for our original eight resorts and Jekyll Island Club Resort, which was included in August and September.
This is an increase of 1,018 basis points from Q3 '19.
EBITDA per key for our resorts for the third quarter alone grew to $17,000.
On a run rate basis, including Jekyll and Margaritaville Hollywood Beach Resort for the entire quarter, same-property EBITDA for the 10 resorts of $40.5 million was $13.9 million higher than Q3 2019.
For all of 2021, we're now forecasting our eight original resorts to achieve $2.5 million more EBITDA than they earned in 2019 despite being $8 million lower in the first quarter of this year.
Including Jekyll Island and Margaritaville Hollywood, which are both now forecasted to end 2021 above 2019 levels, we're forecasting our run rate resort EBITDA to be $6 million to $7 million higher than 2019 at $115 million to $116 million in total or roughly $46,700 per key.
And that's despite the 10 resort portfolio being $10.8 million lower in Q1 versus 2019.
So that compares to $86.7 million in 2019 for the original eight resorts.
These numbers do not include the two B&Bs we just acquired in Key West.
Both Jekyll and Margaritaville are also running well above our initial underwriting when we price those properties for purchase with Jekyll ahead by over $2 million and Margaritaville ahead by over $5 million.
At these forecasts, Jekyll would be a 7.4% cap rate on 2021 NOI and Margaritaville would be a 6.25% cap rate on 2021 NOI.
And both properties look to be up substantially in Q1 2022 based upon business and rates already on the books.
We also saw a significant improvement in performance in the third quarter at our urban hotels with occupancies, rates and RevPAR all rising substantially as compared to the second quarter.
While some of this improvement can be attributed to meaningful growth in leisure travel, particularly in our urban markets that are drawing significant leisure travel, such as San Diego, Los Angeles and Boston.
Much of the improvement is clearly related to the slow but continuing recovery in business travel, both group and transient.
In the second quarter this year, group room nights achieved amounted to just 13% of comparable 2019 levels in our portfolio.
But that improved substantially to 34% in the third quarter.
And based on business on the books and current cancellation and attrition trends, we expect it to exceed 40% in the fourth quarter.
In the first quarter of 2022, group room nights on the books are currently at 62% of Q1 '19 rooms on the books at the same time in 2018 and ADRs currently ahead by 14%.
For the year, group revenue pace on the books for 2022 is at 69% of the same time in 2018 for 2019 with ADR ahead by 6%.
Of course, what shows up versus what gets canceled will all depend upon what is happening with the virus.
But we're very encouraged about where we are for 2022, especially the significant rate lift that is on the books.
While I mentioned the performances of both Jekyll Island and Margaritaville, I thought I'd provide a little bit more detail.
Both resorts had terrific third quarters.
We were able to influence the performance of Jekyll Island in the quarter due to our acquisition on July 22, but we can't take any credit for Margaritaville's performance in Q3 due to our late September acquisition.
In Q3, Jekyll Island grew RevPAR by 35% over Q3 2019 with ADR increasing by 23% or $58.
At Margaritaville, RevPAR climbed 47% in Q3 versus 2019 with ADR increasing a robust 60% or $136.
Margaritaville's EBITDA in Q3 increased 131% over Q3 '19, up from $2.1 million to $4.8 million, with EBITDA margin up 1,300 basis points.
Jekyll Island's third quarter EBITDA was up 125% over Q3 '19 or $2.5 million versus $1.1 million with EBITDA margin also up 1,300 basis points.
In both cases, these are extraordinary numbers, but ones we expect to substantially exceed as we implement all of our operational changes over the course of the next year, even before any of the capital improvements that we're planning.
We're confident that both of these acquisitions will turn out to be fantastic long-term investments in addition to them being a huge positive uplift to our EBITDA and cash flow in the short to intermediate term.
as we swapped properties in slower recovery markets for properties in faster recovery markets that also have significant upside from both operational improvements and capital investments.
With the third quarter sale of Villa Florence in San Francisco, since the pandemic began, we've sold two older properties in San Francisco and one in New York City, along with some rooftop antennas and the historic Union Station Nashville for a total of $333 million.
And we've acquired two resorts in the Southeast and two small B&Bs in Key West for a total of $384 million.
We're very excited about these swaps and the upside from the new acquisitions.
Not only did these transactions reduce our urban concentration and increase our resort concentration that these trades of San Francisco, New York and Nashville, for Hollywood, Florida, Key West and the Golden isles of Georgia increase our leisure mix and reduce our business customer mix.
While it might look like we're focused on increasing our resort exposure, as discussed many times in the past, we remain opportunistic investors overall, utilizing risk-adjusted return forecasts and underwriting to determine both sales and acquisitions.
And how others value properties and what others are willing to pay definitely impacts where and what we ultimately acquire since value is a key component of our risk-adjusted return investing approach.
In that vein, over the last few months, we spent significant time evaluating the current values of our existing hotels and total portfolio.
As a reminder, the value ranges we determined for each hotel are based upon the transaction market for similar properties in similar condition with similar opportunities and similar locations in the same markets.
They're also based upon whether management and flag are available or if the property is encumbered by those contractual arrangements.
With a more active transaction market in the last three to four months, we feel there's enough real market transaction information to now establish true tradable market values.
And while these values will potentially move significantly and quickly in the next couple of years, we feel comfortable, again, publishing our overall gross and net asset values for our portfolio.
We believe that our current net asset value is in the range of $30 per share at the low end to $35 per share at the high end and $32.50 at the midpoint, and we're happy to discuss this in more detail in the Q&A or in separate conversations over the next few weeks.
I thought I'd also touch on the current labor situation and update you on our current assessment of the ongoing margin opportunity in our portfolio as a result of the implementation of new operating models at all of our properties.
In the last six to eight weeks, we believe the labor situation throughout our portfolio has improved significantly.
As expected, as kids went back to school, more people got vaccinated, child care became more available and enhanced federal unemployment benefits expired, we've seen more of our prior hotel associates coming back to work.
And with lots of hard work, our property teams have also found more qualified candidates interested and willing to fill open positions.
As a result, our properties have made significant progress in filling critical open positions and many of our properties are in good shape now with a more active pipeline for further hiring.
In addition, it seems the H2B visa program is back up and running, and we expect significant numbers of H2B qualified workers to aid our seasonal properties like LaPlaya that have historically utilized this program and Jekyll Island, where we'll be using the program for the first time beginning later this year or early next year.
We also believe those current labor pressures we're still experiencing will lessen over time as more workers come back to the labor force as the spread of the virus and cases decreased over time.
In general, we've not had to increase wages but we have made some adjustments here and there.
This has been mostly at our resorts that are in markets where either we're no longer where we wanted or needed to be in the market competitively or where we've repositioned our properties higher through renovations and redevelopments.
And we want to attract the best of the talent in the market to provide the highest level of service to match our higher rates.
Fortunately, our properties are generally at the higher end of their markets and are in a position to not only pay more as necessary but attract high-quality talent more easily because of the quality of our properties and the ability for associates to earn more money through not just wages and benefits, but higher tips and other gratuities.
As you well know, we've all been experiencing increasing levels of supply chain disruptions, including higher costs for many commodities like food and beverages, but also operating supplies in some of our services.
We've been able to successfully implement some very significant price increases throughout our portfolio for items such as food and beverage offerings, both in our outlets and through banquets and caving as well as charges for parking, event venues, audio visual equipment and services, resort and urban amenity fees, spot treatments, club dues and for other recreational activities.
These increases have ranged from 5% at the low end to as high as 25% at the high end and 15% is about average throughout the portfolio.
We've experienced little to no pushback on pricing increases so far.
It seems both the leisure customer and the business customer are in great financial shape with plenty of discretionary income or high profits.
And with prices increasing for all sorts of goods and services, our customers have been accepting of the increases.
This pricing flexibility and customer acceptance should allow us to continue to be able to grow our pre-pandemic margins by 100 to 200 basis points based upon the restructured operating models developed during the pandemic, which utilize more cross-training, more efficient labor scheduling tools and more technology, among many efforts to continue our never-ending effort to increase productivity and become a more efficient and profitable business.
In addition, curator has now completed over 60 preferred vendor arrangements with a preferred group of individual product and service providers in our industry.
As we continue to implement these arrangements throughout our portfolio, we're further reducing our overall cost of operations as we take advantage of the economies of scale being achieved by curator.
And we expect this number of arrangements to increase over 80 before the end of the year with further opportunities for savings as a result.
And as we get much closer to 2022, we're focused strategically on the year being a very strong recovery year overall.
Group should be very healthy as we believe there's a great deal of pent-up demand.
We also think leisure will continue to be robust with pent-up demand for vacations and getaways, while outbound international travel probably remains more limited.
And we're very encouraged by the decision to reopen our country in the next couple of weeks to international travelers and visitors.
We believe there is significant pent-up inbound demand that will aid both our resorts and our urban markets.
Certainly, the reports from the airlines about ticket sales to international inbound customers are very encouraging.
Taken together, this means we don't expect rate discounting in 2022.
Again, this is with the obvious caveat that we get to relatively normal behavior by the end of this year, and it remains relatively normal next year.
As it relates to the few remaining redevelopment projects we deferred due to the pandemic, we're continuing to complete plans and permitting and will likely pull the trigger on the few remaining projects as soon as the approvals are complete, and it's the right time of year to commence them.
All of our redevelopments and transformations, including the large number in the last few years and all of the current and upcoming projects will provide very significant upside for our portfolio over the next few years as the recovery rolls forward.
We're already achieving these returns at our repositioned resorts where demand is, in many cases, already recovered.
Importantly, the vast majority of the dollars for these projects has already been invested, but the benefits have, for the most part, not yet been achieved, but should be as demand recovers.
And finally, as demonstrated by our acquisitions to date, we believe we have significant competitive advantages in pursuing new investment opportunities as they arise.
These include our ability to operate our properties more efficiently than the vast majority of buyers.
The additional cost savings from the economies of scale generated by curator, our unique strength in redevelopments transformations and independent or small brand lifestyle hotels.
Our vast number of operator relationships and our high profile and very positive reputation in the industry, and we look forward to many more opportunities to come.
So with that, we'd now like to move to the Q&A portion of our call.
Hey, Donna, you may now proceed.

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pebblebrook hotel trust - unable to provide an outlook for 2021.
pebblebrook hotel trust - for q4 2021, expects both same-property room revenues and total revenues to be down between 38% and 42% versus q4 2019.

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