Pebblebrook reducing cash burn as it reopens hotels
Pebblebrook reducing cash burn as it reopens hotels
31 JULY 2020 3:55 PM

With no expectation of group or corporate business returning substantially this year, executives at Pebblebrook Hotel Trust said leisure is helping them as they methodically reopen hotels.

BETHESDA, Maryland—Pebblebrook Hotel Trust continues strategically reopening its properties closed during the coronavirus pandemic, taking advantage of the gradual increase in leisure demand in the U.S.

During the company’s second quarter earnings call, Chairman, President and CEO Jon Bortz said that when reopening a hotel, the idea is to lose less money than the hotel would if it remained closed. The objective is to reduce cash burn by $100,000 or $200,000 per property over the course of a 60-day ramp-up, he said.

One way Pebblebrook executives thought they could do that was to make sure they had business on the books, but they learned over the last three months that transient demand, which makes up about 98% of the business, “is incredibly short term,” he said.

Transient bookings are within a week or two, with resort booking out four to possibly six weeks while urban properties don’t go out that far. Pebblebrook has urban hotels that can double their occupancies in the day, for the day, increasing from 8% to 16%.

To reopen a hotel, executives have to look at the market, the relevant competitors, the reports showing demand at different price points and open based on the expectation that their hotels’ quality and locations will get them at least their market share, he said.

“So far everything we’ve opened has ramped up to a level that has reduced our burn and has gotten us to or getting us to what we think will be market share or better,” he said.

There’s a real possibility Pebblebrook will reopen additional properties in August, Bortz said. Executives are closely monitoring conditions for reopening hotels in Los Angeles as well as additional properties in Boston thanks to dorm contracts with Northeastern University. The company is also beginning to open two properties in Washington, D.C., a market that has been slower to reopen.

While Pebblebrook is reopening some properties, Bortz said he wanted to be clear the company does not anticipate any substantial improvements in business travel or travel overall given the resurgence of COVID-19 cases across the country.

“We have not gotten control of this virus,” he said.

No one should expect businesses to suddenly decide, that because Labor Day passes, they will allow travel again, he said. Unless there is significant improvement regarding the pandemic, every piece of group business other than small weddings and small social pieces of business will cancel before arrival, he said.

If the situation improves, that’s great, but it won’t be by any large amounts over the course of the rest of 2020, Bortz said. Pebblebrook has plenty of business on the books for the fourth quarter, but it’s not going to show up, he said. Instead, every piece of business will be rebooked for some time in 2021 or be canceled.

“I don’t mean to be Debbie Downer here, but we’re just trying to be pragmatic,” he said. “We’re all in the same boat. Nobody is seeing anything different.”

Financial update
Through the reopening of its hotels and increased leisure demand, Pebblebrook’s monthly hotel cash burn for May and June averaged about $10.5 million, which was $6 million better at the midpoint than the $15 million to $18 million monthly average they estimated during the first-quarter call, EVP and CFO Raymond Martz said. The estimate represented the worst-case scenario and assumed all hotels remained closed.

The combined hotel and corporate-level average monthly cash burn for May and June was $22.5 million, which includes all interest and dividend payments, he said. That total was down $5 million at the midpoint from the $25 million to $30 million monthly average previously estimated.

With 24 of the company’s hotels currently open, the estimated hotel cash burn in July will be between $9 million and $12 million and combined cash burn will be between $19 million and $24 million, he said.

In the second quarter, Pebblebrook’s revenue was $22.3 million, down 94.5% compared to Q2 2019, Martz said. Total hotel expenses amounted to $63.1 million, down 75.5% for the same time period. Excluding fixed operating expenses, operating expenses were down by 84.5%.

“We can feel as good as we can about these relative operating results in what has been the most challenging quarter we've ever experienced,” he said.

Same-property hotel earnings before interest, taxes, depreciation and amortization was -$40.8 million compared to $146.9 million in 2019, Martz said. The low point came in April with a -$17.4 million, which later improved to -$12.7 million in May and then -$10.6 million in June. July’s EBITDA has shown incremental improvement since June.

Pebblebrook’s resorts have been a bright spot in the portfolio due to their appeal to leisure travelers and their presence in drive-to locations, Martz said. The resorts generated $1.3 million of hotel EBITDA in June after operating losses in April and May. Executives expect the resorts’ EBITDA to grow in July and August assuming government restrictions don’t become more severe.

The resorts’ average daily rates in June increased 18.5% year over year with weekly occupancy climbing to 46.4% for the most recent week ending 26 July, he said.

At the end of June, Pebblebrook had $2.5 billion of debt, 100% of which is unsecured with an effective interest rate of 3.7%, Martz said. The company has $253 million available on its $650 million unsecured credit facility and $352.8 million cash on hand, which implies total liquidity of $600.6 million for ongoing operating and capital investment needs that should carry the company far into 2021, depending on the pace of the recovery and assuming there are no further asset sales or new debt.

In a recent call about ongoing trends, Pebblebrook executives spoke about the financial covenant waivers they negotiated with their banks to extend debt maturities.

As of press time, Pebblebrook’s stock was trading at $10.60, down 60.5% year to date. The New York Stock Exchange was down 10.2% for the same time period. Click here for more news about public hotel company performance, including information about the Baird/STR Hotel Stock Index, which tracks 20 of the largest market capitalization hotel companies publicly traded on a U.S. exchange.

Reinvesting in properties
During the second quarter, Pebblebrook invested $39.5 million of capital into its portfolio, most of which went to renovation and redevelopment projects, Martz said. These projects include redeveloping the Donovan Hotel into Hotel Zena Washington, D.C., the Mason & Rook Hotel into the Viceroy Washington, D.C., and upgrading the Chaminade Resort & Spa in Santa Cruz, California, into a luxury resort.

“We currently expect to invest an additional $35 million to $40 million over the balance of the year, primarily to complete this year's major redevelopment projects with this year's completed renovations,” he said.

Forty of Pebblebrook’s 53 hotels have been redeveloped or renovated in the last five years, Martz said. This provides the company with a competitive advantage in the downturn compared to other hotels that haven’t been recently renovated or have owners who don’t have access to reinvestment capital, he said.

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