Article Summary: The third quarter proved challenging at times, and the fourth quarter is expected to see RevPAR declines, but executives at Pebblebrook Hotel Trust see many signs that 2019 will be a good year.
The third quarter proved challenging at times, and the fourth quarter is expected to see RevPAR declines, but executives at Pebblebrook Hotel Trust see many signs that 2019 will be a good year.
Primary Category: Earnings Recaps
BETHESDA, Maryland—San Francisco was the star in Pebblebrook Hotel Trust’s third-quarter performance.
Most of Pebblebrook’s best-performing hotels were in San Francisco, EVP and CFO Raymond Martz said on the company’s third-quarter earnings call with analysts. The market had an improved convention calendar in the third quarter, which created more rate compression opportunities.
San Francisco hotels saw an 8% gain in revenue per available room despite guestroom renovations at the Sir Francis Drake property that started in early September, according to Pebblebrook’s third-quarter earnings release. Hotel Zoe continues to ramp up after its renovation finished in June, he said, adding that it led the portfolio during the quarter with a RevPAR gain of 24.2%. Group pace grew by almost 1,000 basis points on market share year to date through September.
Portfolio-wide, same property total RevPAR increased by 1.5% while same-property RevPAR grew by 1%, fitting within the company’s guidance of zero to 2% growth, he said. The disruption from the integration of the Marriott/Starwood and InterContinental Hotels Group/Kimpton systems negatively affected RevPAR growth by 70 basis points, he said.
A 1.1% increase in average daily rate counteracted the 0.1% decrease in occupancy. Same-property non-room revenue increased by 2.8% above room revenue growth, which has been a consistent trend throughout the year, he said.
The RevPAR outlook for the remainder of 2018 is negative, said Chairman, President and CEO Jon Bortz. Hotel renovations and other one-time events are expected to cause significant disruptions, with renovations having an estimated negative effect of 320 basis points. The company also expects further disruption from the respective integrations at Marriott and IHG, he said.
As of press time, Pebblebrook’s stock was trading at $33.28, down 10.5% year to date. The Baird/STR Hotel Stock Index was down 8.1% for the same time period.
Looking to 2019
Next year is shaping up to be a good year for the hotel industry and Pebblebrook in particular, Bortz said. The San Francisco market, which represents about 25% of the company’s forecasted portfolio earnings before income, taxes, depreciation and amortization for 2018, has a “spectacular” convention calendar in 2019 because of the soon-to-be completed Moscone Convention Center, he said.
Convention roomnights on the books in the city are up by 74% as of September, he said. The number of days with compression, defined as days with 5,000 or more rooms on the books, had a 131% increase from 39 days in 2018 to a projected 90 days in 2019, he said.
The company should also see favorable comparisons at legacy Marriott-managed properties and Kimpton Hotel & Restaurants-managed properties due to disruption from integration efforts this year, he said. The company also expects significant growth from its LaPlaya Beach Resort & Club in Naples, Florida, following its comprehensive property-wide renovation. There are eight properties that underwent renovations over the past two years that will ramp up in 2019 toward stabilization.
Economic growth is generally forecasted to continue at a healthy level in 2019, Bortz said. Record corporate profit growth in 2017 and 2018 should drive further growth in business travel and leisure travel, he said.
Group revenue is up by 22.3% year over year in 2019, he said, Group roomnights are up by 14.4% and group average daily rate is up 6%.The company has 41% of the number of group roomnights on the books compared to its forecast for 2018, he said. Transient roomnights are up 1.5% in 2019 as well, with ADR up 10.8%, leading to total transient revenue up 12.5% compared to the same time in 2018.
Pebblebrook arranged for the origination of $1.75 billion in new term loans with its bank group as part of the requirements for acquiring LaSalle, Martz said. The new term loans will be used to pay off LaSalle’s current outstanding debt and other closing costs, he said.
The deal is expected to close on 30 November.
In the eight weeks since the announcement of the deal, Bortz said the executive team has toured every LaSalle property in the portfolio and met with every property team. They’ve reviewed the recent, current and planned renovations, he said, and they’ve determined the hotels they intend to offer for sale to reposition the portfolio, which includes those already on the market. There were three LaSalle properties under hard-money contracts prior to the closing of the deal, he said, and they have added one more hard-money contract for $38.7 million that will close concurrently with Pebblebrook’s acquisition of LaSalle. Altogether, that makes more than $750 million of value on the market, he said.
“So far, we're extremely encouraged by the very positive market reception to the LaSalle properties that we’ve put on the market for sale,” he said. “The buyer market for these types of hotels remains relatively deep and robust.”
Pebblebrook executives expects to sell between $750 million and $1.25 billion in assets over the next six to nine months. Proceeds from these sales would initially be used to reduce debt to achieve the company’s long-term leverage targets, and the remainder would be used for further reductions in debt, repurchasing stock, calling preferred shares or additional acquisitions.
The repositioned portfolio will look like its existing portfolio with a few exceptions, Bortz said. The portfolio will be larger, have “terrific” individual property diversification and a similar West Coast bias. Once repositioned, the company’s West Coast EBITDA will represent 60% to 65% of its portfolio-wide EBITDA. San Francisco will remain the market with its highest concentration of rooms.
The company is driven by the underlying supply/demand dynamics of the West Coast, he said, where new construction is more difficult, takes longer and is more expensive. There are large clusters of knowledge growth industries that drive demand at a strong pace, he said, and the company expects that to continue.
“If you look at the 10 largest companies in the world, most of them are now located on the West Coast, and that's the change in the world in the U.S. compared to where it was 10 or 20 years ago,” he said.
During the second quarter earnings call, Bortz spoke of some disruption caused by the integration of Marriott International’s and Starwood Hotels & Resorts Worldwide’s sales teams. Analysts were curious to hear more about how Pebblebrook was handling this integration along with the further integration of InterContinental Hotels Group and Kimpton Hotels & Restaurants as well as the recently announced acquisition of Two Roads Hospitality by Hyatt Hotels Corporation.
Pebblebrook continues to see cooperative partners on each side of these integrations working to mitigate the negative effects to owners, he said. When a company changes the way a system works, it affects the level of volume that passes through different channels, he said, and it can immediately reduce the distribution volume when the system doesn’t do what it used to.
“The benefit of brand integration is the broader base of customers they can expose to the property and (who) will ultimately choose the property,” he said. “The challenge is that it takes longer to gain that business than it does to lose it from the channels negatively impacted.”
The company continues to push IHG and Marriott to add more resources to drive new business more quickly to its hotels, and he said they are being cooperative.
Pebblebrook executives are still educating themselves about the Two Roads transaction, Bortz said, and they are waiting to learn more about what integration means to Hyatt and Two Roads and what it will mean for the six properties in the merging Pebblebrook/LaSalle portfolio.
“It’s important … to communicate to us what are the positives at the end of the day, to give us a strong rationale of the benefits of the acquisition,” he said.
Once they have all the information they need, company executives will evaluate the situation and figure out how to mitigate any integration challenges, he said.
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Headline: Pebblebrook execs see smoother sailing in 2019
Article Date: 11/2/2018
Article Time: 4:20:00 PM