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Text: These statements are subject to numerous risks and uncertainties as described in Pebblebrooks' SEC filings, and future results could differ materially from those implied by our comments.
We'll discuss non-GAAP financial measures during today's call, and we provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com.
On to the highlights of the second quarter.
Well, we're deep into the summer travel season, and it's clear that the leisure traveler is back and with a vengeance, and that business travel is gaining momentum as well.
Overall demand in the second quarter was robust and much stronger than we expected just 90 days ago.
Same-property revenues of $162.5 million were down 57.8% versus the same period in 2019.
This was a significant improvement from the first quarter when same-property revenues were down 74.7% versus 2019.
Sequentially, same-property revenues grew 95.4% from Q1 to Q2.
More encouraging is the accelerating demand that we experienced throughout the quarter.
June same-property revenues were more than 50% higher than April, and July is expected to be almost 20% higher than June, an encouraging turnaround in such a short time.
These increases are not just at our resorts but also at our urban hotels.
We have seen a resurgence in business travelers as they are clearly getting back on the road, and we expect this trend of improved business demand, both transient and group, to continue during the third quarter.
We anticipate leisure demand to slow down post Labor Day as is typical with the end of summer when kids return to school.
Obviously, the Delta variant and its impact on travel demand for the fall is hard to forecast today, but we have not seen or experienced any notable declines in booking trends or cancellations so far.
Jon will provide insight on our current post-summer booking trends later in the call.
This accelerating strength in hotel demand during the second quarter allowed us to generate $17.1 million of adjusted EBITDA.
This is a dramatic improvement compared with a negative $25 million of adjusted EBITDA for the first quarter of 2021 and demonstrates the rapid turnaround for our portfolio, and the results improved substantially every month throughout the quarter.
This is critical as we live in a sequential recovery world right now.
Adjusted FFO per share was a negative $0.12 per share, better than the negative $0.42 per share from the first quarter.
Most encouraging, we generated positive corporate cash flow in June, and we expect to generate positive adjusted FFO and cash flow in the third quarter.
Drilling down to our hotel operating results for same-property RevPAR versus the comparable period in 2019, April was down 66.3%, May was down 60.1% and June was down 51.6%.
We're forecasting July to be down 38% to 42%, continuing the very positive recovery trend.
For the third quarter, we currently expect RevPAR to also be down between 30% and 42% compared with the comparable period in 2019, which also continues the improving quarterly trend.
Total hotel level expenses of $134.2 million were reduced by 45.1% versus Q2 2019.
Expenses before fixed costs, like property taxes and insurance, were cut by 50.9%.
Our total property-level expense reduction was 78% of the revenue decline and 88% before fixed expenses, pretty incredible, frankly.
Our eight resorts generated a positive $28.4 million of hotel EBITDA in the quarter.
This resulted from an occupancy of 66% at an average daily rate of $386, which is more than $107 and a 38% increase over the comparable 2019 second quarter.
As a result, total revenue per occupied room was 17% higher than Q2 2019.
This allowed our resorts to produce $28.4 million of EBITDA in the second quarter, a 17.5% increase over the comparable period in 2019 and a $13.9 million improvement almost doubling from Q1.
EBITDA margins were up an impressive 622 basis points from Q2 2019.
Urban hotels also made great strides during the second quarter as well.
Occupancy was 33.3%, ADR reached $198 and total revenues were $91.6 million.
Urban hotels were just under the breakeven level in second quarter with a negative EBITDA of just $0.8 million.
Yet in our sequential world, our urban hotels achieved $5.3 million of EBITDA in June with a 43.5% occupancy and a $210 ADR. Impressive results considering the still low occupancy levels in our urban markets and operationally, not something we would have thought possible before the pandemic started.
We had general managers parking cars and cleaning floors, directors of sales moonlighting as front desk agents and many other managers cleaning rooms, serving guests and performing many other jobs that our hourly employees previously did.
This is not anything they signed up to do.
But with a shortage of hourly workers, our dedicated and committed hotel management teams stepped in.
Our company's management team, Board and our shareholders greatly appreciate their leadership and their self-sacrifice.
Shifting to our capital improvement program.
In the second quarter, we completed an $11.7 million redevelopment of L'Auberge in Del Mar in South California.
In early July, we completed -- we commenced the $25 million transformation of Hotel Vitale to 1 Hotel San Francisco and a $15 million comprehensive guest room renovation at the Southernmost Resort in Key West.
We expect the 1 Hotel to be completed by the end of this year and Southernmost early in the fourth quarter.
For 2021, we anticipate reinvesting a total of $70 million to $90 million in the portfolio, which is in line with our prior estimate.
Shifting to our investments program.
You may have noticed that we had a busy quarter taking care of business.
On April 1, we completed the Sir Francis Drake Hotel sale in San Francisco.
And then on June 10, we closed on the sale of our leasehold interest in the Rouge, New York.
And last week, we executed a contract to sell Villa Florence San Francisco on Union Square.
Combined with previous sales we completed since June of last year, this represents approximately $330 million of sales proceeds to reallocate into other assets.
And as we previously announced, we've already had two reinvestment opportunities that we believe would generate substantially better risk-adjusted returns for our shareholders.
In late June, we executed a contract to acquire Margaritaville Hollywood Beach Resort in Hollywood, Florida for $270 million.
This acquisition is anticipated to be funded from existing cash on hand and through the assumption of $161.5 million of favorably priced existing nonrecourse property debt.
We are targeting to complete this acquisition by the end of Q3.
And last week, we completed the acquisition of the iconic Jekyll Island Club Resort for $94 million.
Jon will provide more detail on why we're excited about this investment and the upside opportunities of this unique resort.
As a result of these property sales and acquisitions and assuming Villa Florence is sold and Margaritville is acquired, our 10 resorts will comprise roughly 23% to 24% of our 2019 same-property EBITDA.
Our San Francisco share in 2019 dollars were declined to 19% with 10 properties, and our Southeast focus will increase to 15% with five resorts and one hotel.
Of course, the world moving forward will be different, and we expect these 10 resorts will likely represent a more significant percentage of our EBITDA on a go-forward basis than they did in 2019.
Turning to our balance sheet and liquidity.
We are also taking care of business in this area.
On May 13, we raised $230 million of capital through our 6.375% Series G preferred equity raise.
On July 27, we successfully raised $250 million through our 5.7% Series H preferred equity raise, the largest preferred offering ever in the lodging space and equal to the lowest rate ever.
This raise refinances an equivalent amount of higher price redeemable preferable securities, our 6.5% Series C preferred shares and 6.375% Series D preferred shares.
This effect of $250 million swap will reduce our preferred dividend payments by approximately $1.8 million annually or $0.014 per share.
After completing our Jekyll Island Resort acquisition, we have approximately $875 million of liquidity, which includes roughly $230 million of cash on hand and $644 million available on our unsecured credit facility.
We also have approximately $235 million of reinvestment proceeds available under our current bank arrangements.
We're proud of the tremendous progress we've made strengthening 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 and how we think the rest of the year is likely to play out.
Though the path continues to be a path with uncertainty given the rise of the Delta variant.
We're certainly very encouraged by the consistent increases in demand we've experienced each month, the robust level of leisure demand that is well outpacing 2019 levels, the continuing acceleration in business travel and forward bookings, our ability to push our average rate closer and closer to 2019 levels and our ability to operate our hotels with new operating models and greater efficiencies.
In Q2, occupancies rose significantly every month on a sequential basis, even as we opened our remaining hotels in softer markets in our portfolio.
Those gains drove RevPAR higher as rates also gradually increased.
April RevPAR was 22.4% higher than March, may was 20.3% higher than April and then June rose even more, up 32.1% to May.
We think July will be up 25% to June.
We estimate that business travel doubled from the first quarter and probably recovered to about 30% to 40% of 2019 levels by the end of the second quarter.
The airlines who certainly have more visibility than our industry have indicated they believe that business travel will improve to 50% to 60% of 2019 levels by the end of the third quarter, with further improvement through the end of the year and into next year.
Their forecast seems reasonable given the bookings we've been seeing and the significant advances each month in urban weekday occupancies, which improved from 24.5% in March to 39% by June, and they look like they'll be up to around 47% or 48% in July.
Overall, urban occupancy rose from 29.5% in March to 43.8% in June, just below our overall portfolio occupancy for June of 46.4% July looks to be over 52%.
Most companies have already changed their travel policies, allowing either vaccinated employees or all employees to travel again.
Our property teams report seeing travel from most of our corporate accounts throughout our portfolio.
Businesses are definitely getting back to travel, both transient and group.
For our portfolio, we saw continuing improvement in all of our markets and at all of our properties.
But outside of our resorts, we saw the most advances in Boston, San Diego, Los Angeles, Seattle and Portland.
Chicago, San Francisco and D.C. are recovering more slowly, primarily a result of their later reopenings.
We believe the recovery is about three to four months behind the faster-recovering urban markets.
In July, looks like occupancies at our properties in San Francisco will average around 30%; L.A., 64%; San Diego, 74%; Portland, 58%; Seattle, 58%; D.C., 34%; and Boston at 66%.
Boston has recovered very strongly in the last two months.
We're also encouraged that we're seeing forward transient bookings pick up as well as the leisure customer feels increasingly confident about booking vacations and leisure trips further out.
The lengthening of the booking window gives us more visibility to schedule our staff and operate our hotels better, and it improves our ability to revenue-manage more confidently and push rate more.
When it comes to room rates, we've seen consistently strong growth in ADRs throughout our portfolio.
All eight of our resorts are achieving significant increases over 2019 levels.
Ray already discussed their combined rates in Q2, so I won't repeat that, but I thought I'd provide some impressive specifics because not only is the rate growth at our resorts a result of leisure compression and a general lack of consumer rate resistance, but it's a result of the repositioned nature of our resorts following large investments we made improving these very unique properties.
For example, ADR year-to-date at LaPlaya in Naples is up $159 or 34% from the first half of 2019.
And ADR for business on the books in both Q3 and Q4 is ahead by a whopping $250 versus same time 2019 or roughly 100% increase in Q3 and 70% in Q4.
Over the year, LaPlaya has consistently climbed higher in the TripAdvisor traveler rankings, reflecting the increasing desires of leisure guessing groups to choose our redeveloped and more luxurious resort.
And consider this, total room revenue currently on the books at LaPlaya is $5.8 million ahead of total room revenue achieved for all of 2019, and we're only in July with five more months to book into this year.
On the other side of the country, at L'Auberge Del Mar in Southern California, where we just completed a highly impactful $11.7 million luxury redevelopment in Bay.
We're booking at dramatically higher rates as we reposition this property to an even higher tier.
In June, we achieved an average rate $258 or 66% higher than for June 2019.
July is running even higher.
Rate currently on the books for July is at $878.
That's $372 or 73% higher than July 2019.
This past weekend, the resort ran 97% at a rate handily over $1,000.
At Paradise Point just down the road in Mission Bay, San Diego, Q3 ADR on the books is currently at $450 versus $269 for Q3 2019.
Transient revenue on the books for 2021 is already $2.8 million ahead of total transit revenue achieved for all of 2019.
Just across the water from Paradise Point at San Diego Mission Bay Resort, which was a Hilton when we acquired LaSalle and where a year ago we completed a $32 million multiphase transportation -- transformation of the property into a luxury independent resort, ADR is climbing as well compared to 2019.
In Q2, we achieved a 23% higher rate than Q2 2019 as we established this new independent resort and gained significant ADR share versus our market competitors.
For Q3, as we gain momentum, ADR is the books is currently ahead by $115 or 46% compared to Q3 2019.
At The Marker in Key West, we've also gained ADR and RevPAR share on our competitors following the $5 million of upgrades we made in 2019 at this small 96-room resort.
In Q2, ADR was up 45% or $143 to $459 compared to $316 in Q2 '19.
The third quarter is running $157 or 65% higher versus Q3 2019.
And I could go on and on about our other resorts as well.
But we've been pushing rates higher at our urban properties as well as leisure and business travel returns to cities.
While in most cases we haven't yet achieved rates higher than 2019, we have grown our city ADR significantly since the pandemic recovery earlier this year, even as we reopened our hotels in the slower-to-recover markets, like Chicago, San Francisco and D.C. Average rate for our urban hotels has grown every month from a low of $155 in January to $158 in February to $160 in March to $175 in April, $196 in May and finally reaching $206 in June.
In July, we look to be up again as ADR achieved at our urban properties has increased another 10% from June at $227 through July 25, and rate on the books for the fall is running even higher.
Some of our better-quality and recently redeveloped urban properties, which also have strong leisure appeal, are closing in on 2019 rates.
At The Nines in Portland, where our luxury collection hotel is the market rate leader and the only luxury property in the city, ADR in the second quarter was down just 7% in Q2 at $250 and our rate on the books is currently running 9% higher than third quarter 2019, the Nines benefits from its number one position in the city and its high-quality suites and event spaces that appeal to high-end leisure and business travelers.
We're also seeing both leisure and business travelers buy up to suites in higher-priced rooms, and that is helping us as our unique lifestyle urban properties recover rate more quickly than more typical commodity hotels in our markets.
At the Mondrian in West Hollywood, where we completed a major comprehensive renovation just two years ago, ADR in Q2 recovered to within 4% of Q2 2019.
Third quarter ADR in the books at Mondrian is currently within 1% of same time 2019 and Q4 rate is up over 10% compared to same time 2019.
Le Parc in L.A., which received an $80,000 per key upgrading and repositioning just a year ago, is also closing in on 2019 rates on its way to even higher rates.
In Q2, ADR was down just 5.5% from Q2 '19.
Q3 is looking to close the gap further and Q4 rates on the books are running ahead of Q4 same time 2019.
In Boston, at The Liberty, which is one of the most unique and popular higher-end properties in Boston, we've achieved a $332 ADR month-to-date through July 25, and it's doing this at an impressive 86% occupancy level.
While we're not yet back to the $375 rate and 97% occupancy we achieved in July 2019, The Liberty, like our other properties in Boston, has certainly come back a long way from January's 30% at $186 and April's 61% at $210.
I could provide more examples of the individual property results that are behind the urban portfolio ADR recovery we're achieving, but we must move on.
As you know, this downturn is unlike any prior cyclical downturn and it would seem that this recovery will be unlike any prior recovery.
With robust macroeconomic fundamentals, the consumer with record amounts of savings, net worth and a pent-up desire to travel and vacation and with business profits at record levels and businesses with a significant pent-up desire and need to travel, we believe it's likely that this recovery will be swift with demand returning much more quickly than we previously thought and rates recovering much more rapidly as well as evidenced by the progress we've already made on rates.
In fact, we're currently forecasting that July's same-property ADR will reach $270 to $275, which will exceed July 2019's ADR by $5 to $10.
We expect to continue to benefit from the quality and uniqueness of our properties, their strong appeal to both leisure and business travelers and the vast repositioning investments we made in the last few years, those we're currently making and those upcoming repositionings we expect to undertake and complete in the near future.
Of course, the benefit of gaining rate back quickly and gaining material rate share at all of our recently repositioned hotels and resorts is gaining an ability to drive profitability and margins much higher than 2019 and do it much more quickly than in a typical cyclical recovery.
Not only have we rebuilt our individual property business models to operate more efficiently, but gains in our rates will naturally flow much more substantially to the bottom line.
We've also achieved efficiencies from creating operating clusters in various markets, which is something we started pre-pandemic.
Because of the turnover that took place following the shutdown of our properties last year and the rebuilding this year, we've been able to cluster even more of the senior positions where we have multiple properties with the same operator in the same market.
These clustered positions often include general management, sales and marketing, revenue management, food and beverage, HR, accounting and even engineering.
Our properties in Santa Monica, San Diego, Portland, San Francisco, Seattle and D.C. have almost all been clustered, yielding significant operating synergies while optimizing performance through the increased quality of the overall clustered personnel.
These savings are permanent and run in the hundreds of thousands of dollars per clustered property.
Ray already talked about the operating cost savings achieved in Q2 versus our revenue shortfalls compared to 2019, so I won't repeat those numbers.
But when we look forward, we expect to continue to close the gap on EBITDA margins to 2019 as revenues and room rates continue to recover.
For example, in June, with total revenues down 50% from 2019, our hotel EBITDA margin was 23.7%.
But for July, with 20% sequential growth in revenues, our hotel EBITDA margin should recover to around 27% to 28%.
While this is still lower than the 35.5% achieved in July 2019, it's a heck of a lot closer in a much shorter time than we were expecting just three months ago.
In addition to transient, group is returning as well, and we've begun to see in the month for the month business group bookings in addition to an increasing volume of business group leads, RFPs, site visits, request for contracts and bookings.
While we're not yet booking at pre-pandemic levels, activity has been progressing toward those prior levels, and bookings each month for this year and next year are increasing monthly.
Yet not surprisingly, group revenue on the books for Q3 and Q4 is down about 64% and 54%, respectively, versus same time in 2019 for the same quarters.
Group on the books for 2022 has been growing.
And as of July, we had about 32% fewer group nights on the books, but it's at a 5% higher ADR as compared to the same time in 2018 for 2019.
The group deficit is not surprising given corporations are just beginning to get back to their offices and refocus on booking group meetings.
This gap should begin to shrink later this year as businesses gain confidence in getting back to normal.
We expect group bookings to be more short term until behavior stabilizes at the new normal.
Citywides are booking rooms throughout our markets in 2022, including in cities like San Francisco, where 2022 kicks off with the JPMorgan Healthcare Conference in early January where groups have been actively booking rooms at our hotels for the conference.
With June achieving positive cash flow and therefore, positive FFO, the recovery has progressed faster than we expected.
And if the Delta or some other variant doesn't drive our economy and mitigation measures backwards, we certainly expect room revenues, total revenues and EBITDA to continue to recover.
In Q3, EBITDA should continue to climb from June as previously discussed.
August is likely to flatten out or decline slightly, including in terms of its percentage recovery to '19 as the prime vacation season winds down in the second half of the month and kids presumably begin to go back to school.
While at the same time, we don't expect business travel gains to accelerate until the post Labor Day period.
September should then pick up the recovery pace, particularly after the Jewish holidays by mid-month, which should continue through the rest of the year as business travel continues its recovery and leisure travel and social groups remain at elevated levels.
When we think about 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 that leisure will continue to be robust with continuing pent-up demand for vacations and getaways, while outbound international travel probably remains more limited.
This means we don't expect rate discounting in 2022.
Again, this is the -- 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 these 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 a 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.
Importantly, the vast majority of the dollars for these projects has already been invested.
As we look at the silver lining of potential upside from the crisis, we continue to expect there will be significant opportunities over the next few years to acquire highly desirable properties at the lowest risk time in the cycle at attractive returns with significant upside opportunities for us to use our expertise to improve performance.
In this regard, as previously announced, we've been successful tying up two very unique resort properties that we believe have very significant upside from operational and physical improvements, including numerous opportunities to remerchandise them, add and enhance amenities and better utilize both indoor and outdoor areas to drive higher rates, more revenues and increased EBITDA and NOI.
We believe the Jekyll Island Club Resort we just acquired last Thursday is the quintessential Pebblebrook investment.
That being an extremely unique lifestyle independent property with an almost unlimited list of opportunities that we'll be able to execute on for many years to come.
In this case, very similar to what we've been accomplishing at Skamania Lodge over the last 10 years and with much more to come there as well.
Some of these opportunities include upscaling the rooms throughout the resort, transforming the Ocean Club property into a more exclusive resort as well as dramatically improving each of the three mansion buildings to create a more elevated and more personalized service experience that takes advantage of each building's unique historic architecture and interior finishes.
This would be similar to what we did with the two historic bread and breakfast buildings at Southernmost Resort in Key West where we consistently achieve $100 to $200 or more in rate premiums than the rest of the resort because of the higher personal service and special exclusive club atmosphere that was created and that higher-end guests find very appealing.
Jekyll Island itself has been growing as a desirable drive-to regional vacation and meeting market as the improvements on the island and those currently planned by the Jekyll Island Authority drive the increased desirability of this unique island destination.
We're extremely excited about this acquisition, bringing on Noble House as our operating partner and the vast number of improvements that we'll be planning and executing together.
As a reminder, Noble House operates a long list of independent, unique, high-end resorts and hotels, including LaPlaya Beach Resort & Club, San Diego Mission Bay Resort and L'Auberge Del Mar with us.
As it relates to the upcoming acquisition of Margaritaville Hollywood, we'll be in a position to discuss the opportunities there in more detail once the acquisition is completed.
We continue to be active in our pursuit of additional new investment opportunities, and we'll be sure to update you as and if we are successful.
We believe we have significant competitive advantages pursuing new investments 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 with that, we'd now like to move to the Q&A portion of our call.
So Donna, you may now proceed.

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pebblebrook hotel trust - qtrly adjusted ffo per share negative $0.12.
pebblebrook hotel trust - for q3 2021, sees both same-property room revenues & total revenues to be down between 38% & 42% versus q3 2019.

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