An unexpected increase in business and leisure demand along with newly opened repositioned hotels helped Pebblebrook Hotel Trust’s hotel performance during the fourth quarter of 2019, and company executives believe their plan for more hotel renovations should provide similar results going forward.
BETHESDA, Maryland—A combination of reopened repositioned hotels and improved demand in November and December caused Pebblebrook Hotel Trust’s performance during the fourth quarter of 2019 to be better than expected.
The rate of demand grew in both the business- and leisure-transient segments, even in the challenging month of October, Pebblebrook Chairman, President and CEO Jon Bortz said during the company’s recent earnings call. Average daily rate also managed to grow during the last two months of the year, he said.
“Perhaps eliminating or reducing trade tensions and uncertainties was the trigger for increased confidence and improvements in the last three months,” he said. “Unfortunately, with the emergence of the coronavirus and its impact on travel, we won't know whether this was the beginning of a positive trend or just a few good months.”
Industry RevPAR growth softened in 2019 compared to 2018, Bortz said. The year ended just below the low end of the original industry outlook of 1% to 3%. The urban market segment underperformed by the 100 basis points Pebblebrook estimated at the beginning of the year, and the top 25 U.S. markets underperformed by 110 basis points.
Overall supply growth for the industry remained constant at 2% growth while supply in the urban markets increased 3.2%, representing the primary reason for underperformance in those markets, he said. Pebblebrook, however, outperformed the industry in urban markets during the year by 30 basis points.
“The successful ramp-up of numerous properties that we've redeveloped over the last few years was a key factor in this outperformance,” he said. “With the exception of the unpredictable impact from the evolving coronavirus situation, we expect to continue to outperform the urban markets and perform in line or better than the industry due to the benefits from the major redevelopment projects we completed last year.”
The company will maintain this outlook through 2020, Bortz said. Industry RevPAR will likely range between a 1% decline and 1% growth with urban markets underperforming by about 100 basis points, he said. Similarly, Bortz said he expects Pebblebrook’s same-property RevPAR growth will outperform urban markets by 100 basis points in line with the industry. However, these outlooks exclude any impact by the coronavirus, he added.
In 2019, Pebblebrook invested $162.8 million in its portfolio, completing major renovations at several of its hotels, including the W Boston, the Mondrian Hotel in Los Angeles, the Sofitel Philadelphia and the Skamania Lodge, said EVP and CFO Raymond Martz. The company intends to invest an additional $165 million to $185 million into its properties this year, he said.
Pebblebrook identified 16 hotels in 2019 in its acquired LaSalle Hotel Properties portfolio that would benefit from substantial investment to reposition it to a higher competitive level and improve the guest experience as well as drive an attractive return, Bortz said. At this point, the company has gone through the majority of its brand and operator changes for its properties and expects to see less disruptive transitional performance in the near future, he said.
Of the 16 identified, the company has either commenced or completed work on eight, he said. The upcoming 2020 projects include:
- a $25-million renovation of The Donovan in Washington, D.C., which will join the company’s unofficial Z Collection as the Hotel Zena;
- an $8-million renovation of The Mason & Rook Hotel In Washington, D.C.;
- the first phase of the $23-million repositioning of the Viceroy Santa Monica;
- a $12.5-million repositioning of Le Parc Suite Hotel in West Hollywood, California;
- a $9-million upgrade to the Chaminade Resort and Spa in Santa Cruz, California;
- an $11-million second and last phase for the Hilton San Diego Gaslamp Quarter being converted to the San Diego Mission Bay Resort;
- a $5-million repositioning of The Marker Resort Key West; and
- a $12-million transformation of the Villa Florence in San Francisco.
The remaining eight projects will all be completed by 2021 and includes the recently announced $20-million redevelopment of the Hotel Solamar in San Diego into the Margaritaville Resort Hotel.
This year’s investment in its properties is expected to deliver an earnings before interest, taxes, depreciation and amortization yield of 10% or more upon stabilization in 2023 and 2024, Bortz said. Altogether, the 16 renovation projects will represent an investment of more than $260 million with an expected EBITDA yield on investment in total upon stabilization.
Market by market
San Francisco, South Florida, Philadelphia and Chicago emerged as Pebblebrook’s strongest markets during the quarter, Martz said. Contrastingly, the weaker markets in the quarter were San Diego—because of a softer convention calendar compared with 2019—and both Seattle and Portland because of supply increases, he said.
Pebblebrook’s San Francisco hotels performed particularly well during the quarter, reporting RevPAR growth of 13.5%, coming in above the 10.5% growth in the overall market tract, he said. The city benefited from a strong convention calendar as well as the shift of the Dreamforce conference to November.
The company’s Key West hotels reported a RevPAR increase of 7.1%, above the market’s 6.6%, he said. Its hotels in Chicago grew RevPAR by 3.3%, coming out ahead of the city’s central business district’s decline of 2.2%.
In Seattle, Pebblebrook’s hotels saw RevPAR drop 2.8% because of the 7.5% increase in supply in the market despite demand growing 0.2%, he said. Its hotels in Portland also reported a drop in RevPAR, dropping 2.7%, which was a bit better than the 3.7% drop in the city’s downtown tract.
Responding to a question about Oracle moving its OpenWorld conferences from San Francisco to Las Vegas for the next couple of years, Bortz said San Francisco has been moving in the right direction and the city has been making dramatic improvements to conditions there. Business there have also banded together to provide cleaning services and security services around their neighborhoods, he said.
However, Bortz said he disagreed with the notion that hotels there have unusually high rates for convention business. The hotel community in San Francisco has been working with Oracle on rates over the last two years.
“You can go to just about any other market, other than Las Vegas, and in the major markets, the convention rates of that size are pretty similar across the country,” he said.
Though Bortz said this was his own speculation, but Oracle’s conference was a citywide event that has had declining participation over the last five years and has been competing with other conferences, such as Salesforce’s, which draws in similar exhibitors and attendees.
However, Oracle’s decision to move to another city might come as a slap in the face to the city to wake it up to see the business community needs more action, Bortz said.
By the numbers
During the fourth quarter, Pebblebrook’s same-property occupancy achieved 79.4%, a 2.5% year-over-year increase while its ADR dipped 0.5% to $247.18, resulting in RevPAR growth of 2% to $196.34, according to the earnings release. For full-year 2019, the company reported occupancy remaining flat at 82% while ADR grew by 1.2% to $257, resulting in RevPAR growth of 1% to $211.
The company reported net income of $19.6 million in the fourth quarter, an increase of $118.9 million compared to the same period of 2018. For the full year, the company reported net income of $115.7 million, an increase of $102.3 million compared to 2018.
Pebblebrook sold the Topaz Hotel in Washington, D.C., for $33.1 million during the quarter, bringing the year’s total hotel disposition amount to $482.1 million. On 27 January 2020, the company announced a contract to sell the InterContinental Buckhead Atlanta and Sofitel Washington D.C. Lafayette Square for a combined $331 million with the expectation of closing the sale during the first quarter of 2020.
Since announcing its strategic disposition plan in November 2018, Pebblebrook has sold 13 hotels through the end of 2019 for a combined $1.33 billion in gross sales proceeds.
As of press time, Pebblebrook’s stock was trading at $25.00, down 6.8% year to date. The Baird/STR Hotel Stock Index was down 2.6% for the same time period.