It was by no means an easy year, but executives at Pebblebrook Hotel Trust see some signs of promise from developments in the U.S. hotel industry and the economy in 2017.
BETHESDA, Maryland—Despite the improving economy, 2017 was more of a challenging year than previously hoped, Pebblebrook Hotel Trust Chairman, President and CEO Jon Bortz said during his company’s fourth-quarter and full-year 2017 earnings call.
Business travel did not improve last year, he said, but group spend did increase at Pebblebrook hotels during the second half of the year, especially in food and beverage. That trend has continued into the first couple months of 2018, he added.
Leisure travel shows strong growth as consumers are generally well-employed and wages are growing faster than inflation, Bortz said.
“The secular trend of people wanting to collect experiences versus things continues to benefit travel,” he said.
The same trends are continuing into 2018, he said.
There has been “spotty improvement” in business travel and short-term group bookings not witnessed in the past few years, Bortz said, and there has been less attrition in group blocks. While those initial signs are good, he said, that doesn’t make it a trend. The signs haven’t been consistent across the customer base or markets.
Pebblebrook’s net income in the fourth quarter was $11.9 million, down $6.5 million from the same period in 2016, according to the company’s earnings release. However, its full-year net income grew $26.3 million year-over-year to $100.3 million. Pebblebrook’s full-year same-property revenue per available room decreased 2.2% year over year to $207.33, but by factoring in non-room revenue, the company’s total RevPAR only fell 0.3%.
In the fourth quarter, same-store property RevPAR fell 0.1% to $188.54, EVP and CFO Raymond Martz said, but non-room revenue increased 9.5% year over year and F&B revenue grew 7.3%, resulting in total RevPAR growing 2.9% to $281.14.
As of press time, Pebblebrook’s stock was trading at $35.46, down 4.6% year to date. The Baird/STR Hotel Stock Index was up 2.6% for the same time period.
Pebblebrook sold two properties in 2017: the 252-room Dumont NYC for $118 million and the 826-space parking garage at the Revere Hotel Boston Common for $95 million. The company has raised $676.8 million through its strategic disposition plan over the past two years.
The company almost sold a third property, Bortz said, as a buyer with a significant number of hotels in the U.S. approached Pebblebrook about a potential transaction. He didn’t name the property, but he said it was significantly larger than the potential buyer’s normal acquisition. The buyer was confident in getting the capital together, he said, but at one point had to request an extension for which it would pay Pebblebrook $2 million.
“When the time arrived, they still didn’t have the capital available,” he said. “We pulled the deal, and we ended our discussions with them.”
Pebblebrook has some minor interests for selective dispositions within the portfolio, Martz said, and company executives will continue to look favorably on offers it might receive for various properties.
“At this point, our activity level is reduced as it relates to our overall interest in sales,” he said.
Pebblebrook is in the early stages of looking at acquisitions again, Martz said. Martz was unsure if the company would be successful in doing so this year, and he doesn’t believe it will be particularly aggressive. However, Martz said he feels more comfortable on the acquisition side given the company’s movement of stock valuation closer to its NAV range of $36.50 and $41.
Pebblebrook closed its LaPlaya Beach Resort & Club in Naples, Florida, because of damage from Hurricane Irma, Bortz said, but the property recently reopened in January. The property was in the midst of a renovation when the storm hit, so the property is essentially undergoing a second renovation. The cost of remediation, replacement and repairs ranges between $12 million and $15 million.
“We’re working closely with our insurance carriers so they are fully aware of the total amount of those losses,” Bortz said.
As a result of business interruption from the LaPlaya’s closing, the property lost about $5 million in earnings before interest, taxes, depreciation and amortization, not including the cost of cleanup , and Bortz said he expects to resolve talks with the insurance carriers over the next few months.
The company is also forecasting another business interruption to complete its repair work, he said, but that is scheduled for the offseason to minimize the business-interruption claim.
The company has not included business-interruption proceeds in its 2018 outlook until all claims are settled.
Over the past few years, Pebblebrook has had a number of properties undergoing renovation for various improvements and repositioning. In 2017, the company spent $80.8 million on renovations throughout its portfolio, including $21.7 million at the Revere Boston Hotel, $12.5 million at the Hotel Zoe San Francisco, $4.7 million at the Hotel Palomar Los Angeles Beverly Hills and $11.1 million at the LaPlaya Beach Resort & Club in Naples.
In 2018, the company has plans to invest $11 million in the Mondrian Los Angeles, $6 million at the Hotel Zelos San Francisco, $5.5 million at the Hotel Zephyr Fisherman’s Wharf Zephyr Walk and $3.5 million of continued work at the Revere Hotel Boston Common.
It usually takes about three to four years for properties to stabilize after a renovation, Martz said. In year one, the goal is to get back what was lost during the disruption, and in the second year, the company aims to get more than half of the gain.
“And sometimes, it works, depending on when we completed a project during a year,” he said. “But as an example with the ones that were done in 2016, we got more than we were expecting in 2017 back. But for the properties the year before, we got less than we thought we'd get back in the first year. So it really does vary. But I mean, in general, it's along the lines of what I just mentioned.”