Pebblebrook Hotel Trust Chairman, President and CEO Jon Bortz shared the makings of the deal his company announced in July to convert one of the REIT’s independent resorts into a Margaritaville property.
BETHESDA, Maryland—The idea of converting an iconic independent resort in San Diego’s Mission Bay area into a Margaritaville property initially faced much skepticism from executives at Pebblebrook Hotel Trust.
Pebblebrook had acquired the 462-room Paradise Point Resort & Spa as part of its acquisition of LaSalle Hotel Properties, which closed 30 November. During a Friday conference call to discuss the real estate investment trust’s second-quarter earnings, Pebblebrook Chairman, President and CEO Jon Bortz explained how representatives from Margaritaville and operator Davidson Hotels & Resorts convinced Pebblebrook to convert the resort into the first Margaritaville property on the West Coast.
“Both the Margaritaville and Davidson folks (educated) us on the value of Margaritaville, the huge national and even international customer base that the brand has through its restaurants as well as their resorts, their merchandise, their alcohol sales, their radio station; they have a pretty broad reach into a customer base that we think is the customer base in San Diego and in Mission Bay,” Bortz said. “We really thought it was a perfect fit. The numbers that we’ve seen and that they’ve provided to us give us a lot of confidence that the way to maximize the upside opportunity at this property is through Margaritaville and not through other brands or by remaining as an independent, as this property has been for decades.”
Pebblebrook and Margaritaville Holdings announced the agreement to convert Paradise Point Resort & Spa to the Margaritaville Island Resort San Diego on 15 July. The property is scheduled to open in 2020 and will retain Davidson as its management company.
Bortz said the resort’s location and the brand’s guest profile fit together too perfectly to ignore, despite earlier skepticism he and other Pebblebrook executives expressed.
“(Margaritaville) drives a tremendous amount through the projects they have in F&B and other revenues; people tend to stay on the property much longer and use the venues more so than any other brand or in fact any of the independents that we have,” he said. “That was really the rationale behind it, and I would reiterate, we had an incredible amount of skepticism when we heard the idea initially, and maybe that’s because we’re not ‘Parrot Heads’ here, but we really didn’t understand the brand and its success to date.”
When asked if any additional Pebblebrook properties are eligible to become Margaritaville-affiliated, Bortz said the REIT is focused on its first Margaritaville property and will continue to evaluate its portfolio.
“We’ll be evaluating some additional properties, we already are, for changes, and certainly Margaritaville could be a possibility as are any other brands or proprietary brands,” he said.
Asset strategy and outlook
In May, Pebblebrook closed on the sale of the Kimpton Onyx Hotel in Boston for $58.3 million, according to the company’s earnings release. In July, the company closed on the sale of Hotel Amarano Burbank in Los Angeles for $72.9 million. Year to date, Pebblebrook has sold $383.7 million of real estate as part of its disposition strategy.
Pebblebrook EVP and CFO Ray Martz said during the call the REIT has a sale pending of the Rouge Hotel in Washington, D.C., for $42 million, which he added is on pace to close in the third quarter. Pending the close of that deal, as of 30 November 2018, Pebblebrook has sold 11 hotels for gross proceeds of $1.28 billion, Martz said.
During the second quarter, Pebblebrook reported revenue per available room rose 1.4% year over year to $231.47, which was driven by a 1.7% average-daily-rate increase to $266.56 to offset a 0.3% occupancy decrease to 86.8%. Earnings before interest, taxes, depreciation and amortization was $160.6 million, mostly flat (+0.1%) from Q2 2018.
Pebblebrook’s full-year 2019 RevPAR growth outlook is between 1% and 2%; the company revised the high end of the guidance down 100 basis points from its last reported outlook in April.
When asked if cycle conditions could accelerate the pace of Pebblebrook’s asset sales, Bortz said there’s still some work to do on some of the properties before they’re put up for sale, and buyer interest remains strong.
“The kind of softness you’re seeing in the economy, which is mirrored in our industry and probably many other industries today, unless you see a recession, I don’t know why it changes your view of value at the end of the day,” he said. “The stock market is a good example of that. The market certainly in this environment with lower rates and lower short-term rates coming, that doesn’t mean that companies in general are worth less. We don’t believe and haven’t seen any evidence of any changes of perspective on the part of buyers as it relates to any of the softness that we’ve seen in RevPAR.”
Bortz said he expects the third quarter to be Pebblebrook’s weakest quarter of 2019, due in large part to softer group business that should rebound in Q4.
“June performance was a little disturbing, as March was earlier in the year,” he said. “Then we had an OK April and good May, and then June declined.”
He also pointed to U.S. trade tensions and slowing GDP growth as areas of concern, but acknowledged the next “recession” might be smaller in impact than the most recent downturns.
“Given the uncertainties we’re seeing in the economy, the slowdown in economic activity and business investment as you’ve seen is very, very soft,” Bortz said. “Corporate confidence or CEO confidence is very cautious. I think we need to see some resolutions before we see a pickup in activity in travel and the industry, and I would think our outlook is based upon what we’re seeing, not in anticipation of things getting worse.”
As of publication, Pebblebrook Hotel Trust’s stock price was $27.93, down 0.9% year to date. The Baird/STR Hotel Stock Index was up 16.6% over the same period.