Pebblebrook looking ahead to opportunities in recovery
Pebblebrook looking ahead to opportunities in recovery
08 MAY 2020 3:28 PM

While Pebblebrook Hotel Trust executives don’t expect much improvement through the rest of 2020, the company’s CEO explains how the real estate investment trust is positioning itself to make the most of the recovery.

BETHESDA, Maryland—While Pebblebrook Hotel Trust executives are projecting the second quarter to be the most difficult portion of an arduous year, they believe the company can take steps to weather the weakened demand environment and be ready for the opportunities that open up.

During the company’s first-quarter earnings call, Pebblebrook Chairman, President and CEO Jon Bortz said the recovery will be dictated by the coronavirus and the world’s ability to mitigate it. Predictions will be difficult based on current understanding, but he expects a significant disruption to most of the demand segments for the rest of the year.

“We currently expect that the second quarter will be the worst quarter, with April being the worst month, and the third and fourth quarters providing a slow but positive improvement,” he said.

While no one knows how things will play out, it’s likely the situation will improve from here, Bortz said. The company projects leisure travel will be the first demand segment to recover, followed by business transient, small groups, larger groups and citywide events. Group, specifically large groups, will be the hardest hit and not likely to return this year without an effective health solution.

“We've counseled our property teams to assume that none of the group (business) on the books will materialize and they should plan and staff accordingly,” Bortz said. “It's uncertain when government restrictions on gatherings will moderate, but most state and local governments have already indicated that large gatherings are likely to require significant health advances before being allowed. Even if they are allowed, it's unclear how willing individuals will be to congregate in large groups without substantial physical distancing and other requirements, like masks and testing.”

Most companies will be cautious and limit their employees’ travel to only essential trips, Bortz said. That will eliminate much of the demand from business, so hotels can’t count on the corporate tranche and business previously on the books. Pebblebrook does expect a healthier recovery from some small businesses, such as service providers, vendors, consultants and others for which travel is more critical to their businesses.

International travel will likely remain fairly minimal for the rest of the year given not only governmental restrictions but travelers’ anxiety about getting on a plane and visiting another country, he said. Domestic leisure travel, however, is one segment likely to return in a hopefully meaningful way.

Thoughts on the recovery
Resorts should be the biggest beneficiary of the recovery, particularly drive-to resorts, Bortz said. Resorts represent about 20% of Pebblebrooks’ historical earnings before interest, taxes, depreciation and amortization, and travel leisure demand represents more than 80% of the historical demand at its resorts.

The company expects its resorts will be among the first of its properties to reopen, even as soon as later this month with others to follow over the next month or two as states reopen and demands return, he said. The resorts are on large pieces of land with significant amounts of space for guests to spread out and feel safe, he added.

Pebblebrook will reopen all of its properties one at a time based on demand and only when they can be operated in a manner that, at a minimum, results in the company losing less money than if they were to remain closed. That means they have no choice but to bring back hotel associates slowly as well, he said.

While leisure will lead the recovery, the rebound will be relatively modest because of health risks and economic issues, Bortz said. Many leisure demand generators are on hold now, including sporting events, festivals, concerts, marathons, entertainment parks and other attractions. Most cities have closed all of their cultural and tourist facilities as well, but they are expected to reopen over the next few months, he said. Older travelers can be expected to be more cautions as they travel. Some leisure headwinds will be offset by Americans who would have vacationed abroad but will stay in the U.S. instead.

As the industry moves toward a post-lockdown environment, Pebblebrook will have enhanced cleaning protocols through an industrywide certification it is working on with the American Hotel & Lodging Association, Bortz said. The cost of these additional protocols will be covered by reductions in services and amenities, such as in-room housekeeping during a guest’s stay. There will be significantly more cross-training and job sharing and shift work by managers, particularly until occupancies rebound to more normal levels.

Food and beverage, when it does return, will likely be “materially simplified,” with more preparation and less cooking to help reduce costs, he said.

Finding opportunities
As a result of the pandemic, new-construction starts should quickly slow to a trickle because there won’t be much financing available, Bortz said. He believes many hotels under construction will have development stop permanently as financing backs out. In markets that were previously challenging, such as New York and Chicago, many hotels and rooms will likely fail to reopen or be converted to affordable housing or homeless facilities.

“We don't expect much in the way of new hotel starts for the next three to five years, given how long it's likely to take for positive economics for hotels to return,” he said.

Operations will likely become more efficient as seen through previous black-swan events, he said. Some services and amenities will be reduced or eliminated thanks to changes in restaurants, in-room dining as well as banquets and catering. High-touch will become low-touch or even no-touch.

The crisis has relieved labor pressures in just one month, Bortz said. Labor should become more flexible, wage rate increases will abate, and unions will become more flexible on work roles and other matters, he said.

“This industry will need all the help it can get to reopen and recover,” he said. “Leverage will surely shift to a better balance between employers and employees.”

Pebblebrook’s properties should outperform their markets in the recovery years, Bortz said. Before the pandemic began, its hotels were in better condition on average than their competitors, with 40 of its 54 hotels having undergone major renovations, redevelopments or transformations in the last five years.

“Many of our private-sector competitors are likely to lack the capital to maintain their hotels in the years to come, widening the advantage we already have,” he said. “We expect hotel conditions will rule with the customer base, as they have in prior recessions, and in the early years of prior cyclical recovery these following significantly harmful events.”

There should be significant opportunities over the next few years to acquire distressed properties due to a prevalence of cash-strapped and over-levered owners and properties that will go to lenders, he said. Pebblebrook began in late 2009 following the tail end of the Great Recession, allowing it to quickly and aggressively assemble a unique portfolio of high-quality hotels and resorts at attractive prices.

“Given our ability to operate our properties more efficiently than the vast majority of buyers and our unique strength and redevelopments and transformations, we believe will have a significant advantage as opportunities arise over the next few years to create long-term value for Pebblebrook,” he said.

Quarterly results
During the first quarter, Pebblebrook achieved $42.1 million in net income, according to the company’s earnings release. Same-property total revenue amounted to $255.8 million, a 23.1% year-over-year drop. Adjusted earnings before interest, taxes, depreciation and amortization came to $35.9 million, a 60.3% year-over-year drop.

Same-property revenue per available room was $141.71, a 25.5% year-over-year decrease, and same-property total RevPAR was $213.58, a 24% year-over-year decrease. Same-property occupancy amounted to 56.7%, a 24.9% year-over-year decrease, while same-property average daily rate was $249.94, dipping 0.8% year over year.

As of 31 March, Pebblebrook’s cash on hand amounted to $746.8 million. Its net debt to trailing 12-month corporate EBITDA was 4.9x, and its net debt to depreciated book value was 34.3%. The company is in negotiations and should reach an agreement soon on a waiver of financial maintenance covenants with its bank and private placement groups for its unsecured debt agreements. Pebblebrook does not have any secured debt obligations and no debt maturities until November 2021.

As of press time, Pebblebrook’s stock was trading at $11.36 per share, down 57.1% year to date. The Baird/STR Hotel Stock Index was down 42.3% for the same period.

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