Pebblebrook Hospitality Trust reported that it saw encouraging signs in its results for the first quarter of 2020.
“Improving demand trends during the first quarter exceeded our expectations, with rising confidence in travel as vaccination rates improved and travel restrictions eased,” said Jon E. Bortz, chairman/president/CEO, Pebblebrook Hotel Trust. “Same-property hotel EBITDA in March turned positive due to robust pent-up leisure demand throughout the portfolio. This rapid turnaround is a remarkable accomplishment considering the currently low levels of business transient and group hotel demand. The improvements in operating trends allowed us to reopen 10 more hotels since the end of February, including 7 in San Francisco, and one each in Boston, Portland and Washington, DC.”
He continued, “As we look forward, we are encouraged with the increased booking activity we are experiencing, which we expect to strengthen further as we near the traditional peak leisure summer season. These accelerating trends should allow us to return to profitability earlier in the second half of this year than we expected just 45 days ago. We are also pleased to report the successful sale of the Sir Francis Drake Hotel in San Francisco, generating $157.6 million of net proceeds and a taxable gain of approximately $60 million. Strategically, we anticipate reallocating the proceeds from recent property dispositions into new acquisition opportunities that we expect will generate enhanced growth opportunities for our shareholders as they may become available.”
During the first quarter of 2021, occupancy at the company’s open hotels increased from 19.3% in January, to 26.8% in February and to 34.8% in March. The company’s open hotels lost $1.8 million of hotel EBITDA in the quarter, though the numbers dramatically improved over the course of the quarter, with March achieving $6 million of hotel EBITDA. The company’s resort portfolio, of which all eight properties were open throughout the first quarter, generated $14.5 million of hotel EBITDA, with an occupancy of 40.8% and an ADR of $406.20, a rate that was 30.1% higher than the first quarter of 2019.
“The operating and financial performance of our hotels and resorts improved dramatically each month sequentially through the first quarter of 2021, and this positive trend has continued into April,” said Bortz. “Our resorts continued to outperform within our portfolio due to strong leisure demand from an extended spring break season combined with pent-up travel demand. Our South Florida resorts achieved room rates, total revenues and hotel EBITDA that surpassed comparable 2019 levels for March, and similar trends are continuing in April. As vaccine distribution expands, we expect travel to continue to increase. Our hotel teams have done an exceptional job rehiring associates and rebuilding our operating teams to get them into a position to take advantage of a strengthening environment. Our asset managers have worked closely with our hotel teams to redesign our operating models and best practices.”
He continued, “We believe this allows our hotels to be more efficient and more profitable as additional hotel demand segments return over the coming months and quarters. We expect leisure travel will increase materially with huge pent-up demand for vacations and getaways, while we continue to expect business and group travel demand will gradually improve from a very low level over the next few months. However, we are not anticipating a material recovery in business travel until after Labor Day.”
Estimated monthly cash burn
The company estimates that its monthly corporate cash burn for the first quarter averaged approximately $18 million (excluding capital investments) based on the following:
- Average hotel-level monthly cash losses of approximately $5.7 million, excluding one-time expenses
- Corporate-level monthly cash G&A of $1.5 million
- Corporate finance-related monthly cash utilization of $10.8 million, which includes interest payments on the company’s outstanding debt as well as both common and preferred dividend payments
Assuming progress is made to reduce the virus’s impact through mitigation measures and widespread vaccinations, the company expects its monthly total corporate cash burn to continue to decline, and believes it could potentially reach corporate breakeven sometime in the third quarter.
Capital investments and strategic property redevelopments
In the first quarter of 2021, the company completed $9.6 million of capital investments throughout its portfolio. The company expects to invest an additional $60 to $80 million during the remainder of 2021, including for the following redevelopments and repositioning projects that the company believes will generate significant growth and returns on its investment dollars:
- L’Auberge Del Mar (estimated at $10.5 million), a major redevelopment, including guestrooms and suites and a transformation and expansion of the luxury property’s public spaces, including indoor and outdoor event and meeting spaces, bars, the pool, the creation of an outdoor restaurant with ocean views and the addition of a coffee café. The renovation is targeted for completion in May.
- Southernmost Beach Resort (estimated at $15 million), a comprehensive guestroom renovation, including all case goods, soft goods and bathrooms, including tub to shower conversions. The renovation is targeted to commence in the third quarter and be completed in the fourth quarter.
- Hotel Vitale (estimated at $25 million), a total transformation to the sustainability-focused, mission-driven and luxury experiential 1 Hotel San Francisco, which will offer nature-inspired designs and environmentally focused aesthetics throughout guestrooms and suites, public areas and meeting and event venues. The redevelopment is targeted to commence in the third quarter. The hotel is currently closed due to the pandemic and the company does not plan to reopen the hotel until the redevelopment is completed at year-end.
- Grafton on Sunset (estimated at $5 million), a comprehensive redevelopment of the hotel’s indoor and outdoor public areas and suites and a refresh of guestrooms, estimated to commence in the fourth quarter and be complete in the first quarter of 2022 when it is renamed and becomes part of the company’s unofficial Z Collection.
As fundamentals improve, the company will evaluate commencing additional previously planned major renovation and repositioning projects later this year.
Strategic capital reallocation
On April 1, the company completed the sale of the Sir Francis Drake Hotel in San Francisco, generating $157.6 million of net proceeds after customary closing costs. Since the second quarter of 2020, the company has generated $222.5 million of net proceeds from property dispositions. The company intends to strategically reallocate these proceeds into new investment opportunities that it anticipates will offer enhanced growth opportunities, as they may become available.