Moscone Center project, renos test Pebblebrook in Q2
Moscone Center project, renos test Pebblebrook in Q2
31 JULY 2017 8:25 AM

The second quarter came with delayed renovations and the effects of the Moscone Center expansion in San Francisco, but Pebblebrook Hotel Trust executives expect stronger business in the coming years. 

BETHESDA, Maryland—The second quarter proved to be a challenging one, executives at Pebblebrook Hotel Trust explained during the company’s recent earnings call. However, that doesn’t mean the quarter wasn’t without some successes as well.

A delayed renovation and the Moscone Center expansion in San Francisco hurt the company’s overall performance, EVP and CFO Raymond Martz said. Same-property revenue per available room declined 2.4%, he said, and the drop came from a 1.7% decrease in average daily rate and a 0.8% drop in occupancy.

By excluding San Francisco, however, same-property RevPAR for the company grew 2%, he said. Similarly, same-property earnings before interest, taxes, depreciation and amortization grew 1.7% or $900,000 after excluding the company’s San Francisco properties.

The higher-performing properties were the Skamania Lodge, the W Boston and two Seattle Kimpton properties: the Hotel Vintage and the Hotel Monaco.

“Three out of the four performance leaders this quarter are located in the Pacific Northwest, which clearly highlights the strong demand growth we've been seeing in this area of the country,” he said. “Other hotels are hotels in Boston, San Diego and Washington, D.C., also performed well during the quarter.”

At press time, Pebblebrook’s stock was up 11.6% year to date. The Baird/STR Hotel Stock Index was up 26.2% for the same time period.

Difficult conditions
Same-property RevPAR fell 2.6% year to date, Martz said, and same-property total revenue also dropped 2.1%. The delayed renovation of the Hotel Zoe in San Francisco alone hurt RevPAR performance by 174 basis points, he said. Renovation disruptions combined with the Moscone Center expansion, Porter Ranch gas leak and the Super Bowl negatively affected this quarter’s portfoliowide RevPAR growth for a total of 560 basis points, he said.

When moving forward with a renovation, Pebblebrook looks at the market and decides whether to close the property during the project, President and CEO Jon Bortz said. Executives decided to keep the Hotel Zoe open during its renovation because of the nature of the redevelopment and how small the lobby is, he said. The inspector would not sign off on a couple of floors of rooms until the company completed other work he requested, he added.

“As a result of that, clearly in retrospect, (closing the hotel) probably would have been the right thing to do,” Bortz said.

For the time being, Hotel Zoe won’t be a positive contributor to the portfolio, he said, but it will begin to ramp up.

“On a year-over-year basis, we should be up in Q4 both from an occupancy and from a rate perspective compared to last year,” he said.

Similarly, the Moscone Center will reopen and with its return will be more convention business, Bortz said. Roomnights on the books for next year are up 15%, and citywide roomnights are up 43% next year.

“Now that's a big percentage number, but the real big numbers follow in ’19 when we’re up fifty-some percent more in roomnights, probably 20% to 25% above the prior record in San Francisco,” he said.

Compression nights are at 79 when they were at 80 in the last quarter, Bortz said. Looking at 2019, compression nights are up about 30% to 35% from the prior peak year in San Francisco.

“So ’19 shapes up very well,” he said. “Obviously, we’d love for it to come in ’18, but we have one more year before we get there in San Francisco.”

Disposition of assets
Pebblebrook completed its sales of the Dumont NYC for $118 million and the parking garage at the Revere Hotel Boston Common for $95 million during the second quarter.

Since the company announced its strategic disposition plan in February last year, Martz said Pebblebrook has completed $676.8 million in dispositions, improving the company’s geographic footprint and exiting the difficult New York market. The proceeds of the sales have allowed the company to reduce its debt, strengthen its balance sheet and repurchase its shares. Year to date, the company has bought back 3.2 million shares for $93.3 million, including 1.1 million shares bought in the second quarter, he said, and the board of directors has authorized a $100-million increase for its share repurchase program.

Pebblebrook is selective and opportunistic in how it will proceed with further sales, Bortz said. The company is continuing its efforts to achieve further dispositions, he added.

As for other non-hotel assets, Bortz said the company has retail at its Zephyr Fisherman’s Wharf in San Francisco that last year generated $4.5 million in net operating income. The company is in the midst of renovating, reskinning and “retenanting” it. In the meantime, executives are looking at separating it from the real estate to sell it separately from the property. That won’t happen this year, he said, and neither will the renovation and re-leasing.

“We would hope it ultimately is something that makes more sense to somebody else with a core discipline in urban retail than our expertise in it, frankly, because that’s not our expertise at Pebblebrook,” Bortz said.

Business mix
Business demand from group and transient remained soft industrywide during the second quarter, Bortz said, and group demand was negative in part due to the holiday shift that affected group business in April while leisure travel remains healthy in the quarter.

“Transient outperformed group overall for the industry in the second quarter and (has) outperformed for the whole year so far,” he said.

Pebblebrook experienced similar trends, Bortz said. Group business was soft, mostly in San Francisco, with leisure staying healthy across most of the portfolio.

When asked whether he believes softer business transient demand will indicate any trouble ahead for leisure transient, Bortz said he’s not observed that at this point.

“It continues to be pretty healthy across the portfolio,” he said. “I mean we see changes from month-to-month either holiday, schedule-impacted or perhaps weather-impacted but generally speaking leisure continues to be very healthy across the industry and our portfolio.”

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