Pebblebrook Hotel Trust (NYSE:PEB) Q4 2022 Earnings Call Transcript

Pebblebrook Hotel Trust (NYSE:PEB) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Greetings and welcome to the Pebblebrook Hotel Trust Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Chief Financial Officer. Thank you. Please go ahead.

Raymond Martz: Thank you, Donna, and good morning everyone. Welcome to our fourth quarter 2022 earnings call and webcast. Joining me today are Jon Bortz, our Chairman and Chief Executive Officer. But before we start, a quick reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings. Future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only today, February 22, 2023, and we undertake no duty to update them later. We’ll discuss non-GAAP financial measures during today’s call, and we provide reconciliations of these non-GAAP financial measures on our Web site, at pebblebrookhotels.com.

Okay. In 2022, we made significant progress on our road to a full recovery. We want to thank our hotel teams and operating partners for their hard work, sacrifices and creativity. Our portfolio continues to benefit from their tremendous effort, as we continue on the path of recovery and growth following the pandemic. Our adjusted EBITDA finished at $356.7 million compared with $99.8 million in 2021, a very significant progress from a year ago. And while we still have much work to do, we believe, we have considerable upside ahead. Adjusted FFO per share ended 2022 at $1.69, a substantial improvement from 2021 at a negative $0.23 per share. On the investment side, we were very active. We acquired two leisure-focused resorts for $330 million and sold four urban hotels for $261 million.

Since 2020, we have acquired six leisure-focused resorts for over $820 million while selling 11 hotels in slower to recover urban markets for a total of $957 million. Between acquisitions and dispositions, since 2020, we have recycled almost 30% of our portfolio, representing a dramatic transformation of our company. As a result of these investments and divestitures, we have increased our market segmentation from leisure, both group and transient to roughly 50%, and we are extremely excited about the many operating, remerchandising and redevelopment opportunities at our recent resort acquisitions, some of which are already underway, which Jon will discuss later. We expect that these major projects will generate outsized growth over the next several years.

For the fourth quarter, same property total revenues of $310.6 million were 94.1% recovered in 2019. And this was driven by continued solid demand at our resorts and further improvement in group and transient business travel. And these results exclude apply a beach resort due to its closure from Hurricane Ian, which negatively impacted our same property RevPAR growth by approximately 150 basis points and an estimated $16 million in property revenues and $12 million of same property EBITDA. In terms of markets, we continue to experience solid demand in Los Angeles, San Diego and Boston. And encouragingly, we are seeing the demand recover accelerate in our slower to recover markets, including San Francisco, Chicago and Washington D.C. Shifting to Q1 2023, demand and operating trends have generally been in line with expectations, excluding the impact of the severe winter storms we have experienced to-date in the first quarter.

The significant rainfall in northern and southern California disrupted leisure travel to these markets and then cold temperatures in Boston disrupted business travel and caused some water damage resulting in an estimated $1.1 million in additional operating and capital expenditures, which also includes estimated costs to remediate and clean up following these multiple storms. On the demand side, despite the numerous layoffs announced across many industries, we have yet to experience any notable changes in demand, booking activity or increase in cancellations. Leisure demand remains healthy despite concerns about the consumer becoming more cautious. Except for some softer demand in Key West, which was robust and relatively price sensitive in 2021 in Florida was one of the few states to fully open for business.

These are already in demand is maintaining its strength. Demand started in the year on an encouraging note in San Francisco with a JP Morgan Healthcare Conference in early January. Compared with 2020, the last time, JP Morgan was held in person, demand at our hotels was at 76.8% of 2020 levels, with ADR up 9.7% and overall revenues at approximately 84% of the 2020 conference levels. This is a very positive start to the year for San Francisco, which we expect will continue with a much improved convention calendar this year. Overall for the Company, January same property RevPAR was up a very strong 49% benefiting from easy comparisons to the Omicron impacted January last year. We anticipate same property RevPAR for Q1 to be 15% to 18% higher than Q1 last year.

Not surprisingly, the quarters RevPAR growth was slow substantially from January’s growth rate versus last year as Omicron ease as the quarter progress. Our Q1 operating results would be negatively impacted from the closure of apply for repair and remediation work due to Hurricane Ian, which will reduce our Q1 hotel revenues by an estimated $25 million and same property EBITDA by approximately $14 million. In addition, we will experience displacement due to several major transformational projects underway. This is expected to negatively impact Q1 RevPAR by approximately 225 to 300 basis points, and overall same property EBITDA by 4.5 million to 6.5 million. These include the comprehensive redevelopments at Hilton Gaslamp San Diego, Solamar as a convertible Margaritaville in downtown San Diego, Estancia La Jolla, Jekyll Island Club Resort Viceroy Santa Monica.

Combined the disruption of apply for hurricane Ian and our redevelopments will negatively impact Q1 same property EBITDA by approximately $18.5 million to $20.5 million. Shifting to our capital improvement program for 2023, we are targeting to invest $145 million to $155 million into our portfolio, including several major redevelopments that we’re very excited about and we expect will generate healthy returns on our investment. Jon will discuss this year’s strategic redevelopment projects and overall programs in more detail later in our remarks. Also, as we detailed last night’s press release, we’ve made substantial progress in repairing and restoring the LaPlaya. We reopened the property as Bay Tower and expected to partially open the Golf Tower shortly.

The Golf Tower houses the lobby, restaurant, bar and club areas. So, it’s a significant component of the resort. We’ll also have opened with some one of the three poles and a temporarily relocated spa and fitness center. The beach has been cleaned and reopened and we’ll be providing full beach services to our resort and club guests. Our beach house however is still undergoing restoration work, which we expect to be substantially completed in the fourth quarter. We received $25 million so far from our insurance providers to complete the necessary repair and remediation work. We expect additional proceeds from our insurance for the work needed to fully restore this fantastic resort shortly. Upon completion, it will be better than ever, and we expect it will be quickly returned to its pre-hurricane performance.

We’re also expecting the first winter installment of business interruption proceeds in this case $7.2 million for last business during the fourth quarter of 2022, which is net of our $2 million BI deductible. This has been incorporated into our Q1 outlook and will hit other income and benefit adjusted EBITDA and adjusted FFO. We expect to receive additional BI proceeds for Q4 2022 and 2023 later in the year or by the time we reach a final settlement, and we’ll update you quarterly as we progress in this area. Turning to our balance sheet and other capital uses, since the start of the fourth quarter of 2022, we have utilized proceeds from prior dispositions to repurchase 5.5 million common shares with just over 4% of our outstanding shares at a weighted average share price of $15.12, a roughly 51% discount to the midpoint of our recently updated NAV.

In addition, we repurchased 1 million shares of our Series H preferred equity at a 36% discount to par or $16 per share, compared with the $25 per share par value. We also use deposition proceeds to pay down debt last year. Our board has authorized an additional $150 million common share repurchase program, which combined with the remaining unused portion of our prior authorization implies we have $224 million available for common share repurchases. The board also approved $100 million preferred share repurchase program. As we sell additional properties, we will evaluate how to best utilize our proceeds including reducing debt and additional share repurchases depending on our outlook on the economy and how our performance progresses. If we do utilize some portion of the proceeds for repurchasing our stock, which we believe is currently trading at approximately 50% discount or at net asset value, we do so only, while reducing our debt no worse than a leverage neutral basis.

And we have been comfortable taking advantage of the public the private valuation arbitrage for several reasons. First, our net debt is at 43% of the net book value of our assets, which we believe is very reasonable. Assuming the $750 million of convertible notes which comprises about one-third of our total debt are converted to equity before the maturity in late 2026. This would drop the 29% of debt to net book value. Second, our net debt to our estimated NAV is also a reasonable 33%. And third, most of our debt over 90% of fact is unsecured bank debt or notes largely held by our bank group, with whom we’ve had relationships for many years and several decades for some of them. These relationships go well beyond just a lender borrower relationship, whether it’s investment banking, substantial cash deposits, credit card processing and many other services, we were very attracted client to our banking partners.

And as we’ve seen during the depths of the pandemic, relationships do matter. We were one of only a handful of hotel REITs that did not have to secure our debt during the pandemic. This highlights of the competence and trust our banks have in us. In addition, only 229 or less than 10% of our debt is secured proper level of debt, of which only 162 million will mature before 2028. That is very manageable. Finally, our existing liquidity is very substantial. We have more available than we did before the pandemic. Our $650 million unsecured credit facility, which is largely undrawn, provides flexibility while reducing any refinancing risk. And our average debt cost is currently just 3.5% perhaps the lowest in our industry. And this of course enhances our cash flow and our fixed charge ratio which reduces risk.

In addition, 75% of our debt is fixed through the end of 2023 and 63% is fixed within 2024. And we use a very attractive window the market in January to complete $400 million of swaps for two to three years to effectively extend swaps that expire this year. So the cost of service our debt is very predictable and manageable, even if interest rates surprised to the upside. And on that positive note, I’d like to turn the call over to Jon. Jon?

Jon Bortz: Thanks, Ray. I’m going to focus my comments on two important topics. First, our setup for 2023 and what we’re seeing in the market. And second, the EBITDA bridge we laid out in our investor presentation, where we are, where we are going, and how we’re going to get there. It is far easier to predict long-term value creation than it is to forecast short-term performance, especially in highly uncertain times like today. As Ray indicated, we have not yet seen any material impact from the macroeconomic slowdown that is either occurring or that many are forecasting. Group, business transient and international inbound travel all continue to recover and leisure travel remains very healthy. But we are not so naive to think that we won’t see an impact or that we are suddenly no longer a cyclical industry.

And we are humble and recognize we have never been through a pandemic and recovery before, let alone one where the Fed is working overtime to slow down the economy in order to bring inflation down to its target. So, it’s extremely difficult to forecast how these conflicting waves will impact each other as we move forward in 2023. All we can do is plan for different scenarios and monitor all of the macro and micro indicators very closely, and we will let you know when we see the trends changing. In the meantime, we expect our first quarter to significantly improve over an Omicron impacted Q1 2022. As Ray said, we saw healthy year-over-year RevPAR and total revenue growth in January though it’s negatively impacted by unusual weather on both coasts early in the year.

February continues to see improvement over 2022, though we had a nice benefit from the Super Bowl in Los Angeles last year. As LA is one of our largest markets, it does represent a year-over-year headwind for the month. Yet, we are seeing significant continuing improvement in LA, which is definitely mitigating a significant portion of that great four day period. Group pace is looking good for 2023. As of the beginning of February, Q1 group room night pace was ahead of last year by 54% with ADR pacing 5.6%, up to last year for a total group revenue improvement of 62.7%. Transient is also out pacing ahead of last year’s first quarter by 16.2% in transient room nights, while rate is up by 1.4%. Total group and transient pace for Q1 was ahead by 27.5% in room nights 2.1% in ADR and 30.2% in total revenues.

While Q1 is an easy comparison, we are currently pacing ahead year-over-year in group and transient in every quarter. This is partly a reflection of the ongoing recovery in demand and partly due to greater confidence on the partner group and transient customers booking further out than they did last year. For 2023, our group revenues are pacing ahead by 29.1% with rate up by 7.2%. Total room revenue on the books for 2023 was stronger by 21.3%% with ADR ahead by 4.4%. Our urban ADRs are driving our rate advantage, while our resort rates are up marginally, given by group rates that are substantially higher, while our transient rates are slightly down. We expect this will likely be the case for the year. As we look at our bridge to the short to intermediate term EBITDA upside in our portfolio, we expect our urban properties will recover to their 2019 EBITDA in total over the next couple of years, led by earlier to recover markets like San Diego, Boston and Los Angeles, followed by current recovering markets like San Francisco, Washington DC, Chicago, Portland and Seattle.

In 2022, our resorts achieved an EBITDA level greater than the high end of our $55 million to $60 million range of improvement over 2019 EBITDA that we had been forecasting. This assumes we utilize LaPlaya’s actual results for the first three quarters of last year and their forecast at the time the hurricane hit for the fourth quarter of last year. We expect the resorts are likely to generate total EBITDA that is roughly flat in 2023 versus 2022 again ignoring the impact from LaPlaya being closed. So, our resorts are already ahead of the bridge to a more normalized level of EBITDA upside that we provided in our investor presentation. In addition, we’ve already achieved the cost reductions in our property operating models detailed in the same EBITDA bridge presentation.

Though from a margin perspective, we wouldn’t expect higher margins until we regain a significant portion of last year’s almost 19 point occupancy deficit, and as total revenues continue to recover, along with that demand. And there are still more operational efficiencies available in our portfolio. And the continuing efforts of curator to bring down cost based on the growing scale of curator and the increasing use of technology will offer further benefits in 2023 and beyond. That brings us to the last portion of our upside opportunity detailed in our EBITDA bridge. That’s the upside from our multiyear extensive property redevelopment and transformation program, emanating from the LaSalle assets we acquired in late 2018 and the resorts we acquired in the last two years.

We historically have had great success redeveloping repositioning, and remerchandising properties to a higher level that we believed had significantly more potential than their prior positioning. While these projects tend to take anywhere from one to three years for planning and construction, and then three to four years to ramp up RevPAR share gains and substantially higher EBITDA. They have pretty consistently delivered high-single-digit to low-double-digit only unlevered cash on cash returns on our investments upon stabilization. Since the LaSalle acquisition back in late 2018, when LaSalle had completed three redevelopments, we have redeveloped and repositioned 13 of the acquired properties including Mission Bay Resort in San Diego, which was a former Hilton, L’Auberge Del Mar, Viceroy Santa Monica, Le Parc, Montrose, the Chamberlain and Grafton on Sunset to Hotel Ziggy, all four of which are in West Hollywood.

Chaminade Resort in Santa Cruz, Hotel Vitale in San Francisco, which is now one hotel in San Francisco, both Southernmost Resort and Marker Harbor Side in Key West, and Mason & Rook and Donovan, which are now Viceroy, D.C. and Hotel Zena both in Washington D.C. In addition to these recently completed projects, we’re in the process of a dramatic reimagining of Hilton Gaslamp and San Diego as a lifestyle hotel. And then a block away, we’re in the process of a major redevelopment of Solamar which is being transformed into Margaritaville. During the same timeframe, from 2018 to today, we also fully renovated, redeveloped or transformed eight of Pebblebrook’s properties including Western Gaslamp and Embassy Suites, San Diego Bay, downtown. Mondrian, Los Angeles, the Hotel Zags in Portland, Hotel Zelos San Francisco, Skamania Lodge in the Pacific Northwest, W Boston, and LaPlaya Beach Resort in Naples.

Of course, we also renovated or redeveloped most of our previous acquisitions, but we generally did so one or two years following their acquisition. Just as we’re doing now, with the redevelopment and transformations of Jekyll Island Club Resort in the Golden Isles of Georgia, Estancia La Jolla a hotel and spa, and Newport Harbor Island Resort, the former gurneys resort in Newport, Rhode Island. The total investment in all of these projects, both completed since 2018 and currently underway is over $520 million. And most of these properties have yet to ramp to their full stabilized potential. As detailed in our EBITDA bridge, we expect these projects to deliver $27 million of additional EBITDA over the next three to four years. And as evidence of the competence that we have in delivering this additional EBITDA, we have a sharp focus on how our customers are responding to our new products.

Since 2019, our portfolio taken as a whole has climbed from an average customer popularity ranking of 45 on Tripadvisor to an average ranking of 33 at the end of ’22, a 26% plus improvement that historically correlates with an ability to gain share through both rate and occupancy. So, it seems pretty clear to us that our investments have dramatically improved the overall quality of our portfolio, that our service levels have also improved, and that this substantial improvement will lead to significant RevPAR share gains and EBITDA gains. And we expect performance overtime to improve the value of this large investment program. As it relates to this year’s projects, the $25 million complete upgrading and reimagining of the 286 room Hilton Gaslamp Quarter, as a lifestyle hotel has been underway since November of last year and is due to be completed in the second quarter.

The $27 million redevelopment of the Solamar as a Margaritaville Hotel in downtown San Diego began in January and should be completed early in the third quarter. The $20 million plus repositioning of Jekyll Island Club Resort began early this year and should be complete late in the second quarter. The first phase of the repositioning of Estancia commenced earlier this month and is due to be complete late in the second quarter, with the final phase starting late this year and finishing in the spring of next year. The rooms’ renovation at Viceroy Santa Monica started in November of last year and should be complete later this quarter. This will complete the two phase $19.5 million repositioning of this iconic luxury lifestyle hotel on Ocean Boulevard in Santa Monica.

At Skamania, we just completed the addition of three more tree houses, bringing the number of luxury tree houses to nine. And later this year, we will complete five luxury glancing units, the first of their kind in Skamania along with a three bedroom villa and two bedroom cabins and our second large outdoor pavilion. As we test these new alternative lodging experiences out with our guests, the results will help to guide the programming for the remaining 100 acres, where we believe we can add up to another 200 lodging units. And this summer in Southernmost Resort, we will undertake a complete $220,000 per key redevelopment and upgrading of the four guest houses totaling 50 rooms. Recall that two of these guest houses were purchased in late 2021 and immediately integrated into the resort as unique and distinct products.

Finally, we commenced the first phase of the redevelopment and repositioning of Newport Harbor Island Resort in December last year and we will commence the second phase later this year in November with the completed product delivered in Q2 of next year. The total project is currently estimated as a $45 million investment. The first phase is focused primarily on deferred capital maintenance, and the second phase represents all of the improvements that we will reposition this property as a luxury resort. Taken together, this long list of major repositioning investments, along with a very substantial transformation of our portfolio, from a heavily weighted urban coastal portfolio to a more balanced business and leisure segmented urban and resort portfolio, positions us very well for significant growth in RevPAR share and EBITDA over the next three to five years, regardless of the macro environment.

And by the end of the first half of next year, with the exception of Paradise Point, we will have completed the investment portion of the strategic redevelopment program opportunity that emanated from both the LaSalle acquisition and the resort purchases we have made in the last two years, with only the significant upside to achieve and enjoy over the next few years. I’d also like to make one final announcement on behalf of myself and our Board. It is my great pleasure to inform you that, Ray Martz; our Chief Financial Officer; and Tom Fisher, our Chief Investment Officer, have both been promoted to Co-Presidents of Pebblebrook. Frankly, the new title merely reflects the much greater leadership responsibilities these two have undertaken on over the last few years, and as my longstanding leadership partners, I want to congratulate them on this long overdue recognition of their superior efforts and value to our company.

So with that good news that completes our prepared remarks. We now like to move to the question and answer portion of our call. So operator Donna, you may now proceed with the Q&A.

Q&A Session

Operator: Thank you. Ladies and gentlemen, the floor is now open for questions. The first question is coming from Shaun Kelley at Bank of America. Please go ahead.

Shaun Kelley: Hi, good morning, everyone. Thank you for taking my question and congrats to Ray and Tom on the new titles. Guys, there’s a few different places we could go, but I guess in the interest of time, maybe the right way to think about it. Is it feels like Q1 is always a really hard quarter to extrapolate too much from and obviously there’s a lot that’s idiosyncratic that’s going on with Pebblebrook’s portfolio. So can you just help us think through the balance of the year to some degree? I mean, obviously, if trends hold, and it seems like everything you’re seeing right now is pretty positive. Is it reasonable to think Jon or Ray that we can see year-over-year growth in the Pebblebrook portfolio for the remaining three quarters of the year?

If again, you know, given that we there’s a lot we don’t know about the macro right now. Because I think what we’re trying to what we’re struggling with a little bit is the bridge, Jon, that you laid out versus the absolute number and EBITDA that kind of came in for Q1 and we look back to places like 19. I think some of that seasonality and a lot of these renovations. So just trying to kind of get a sense of how to model or balance the remaining expectations for 2023?

Jon Bortz: I think the best way to answer it is, if we assume that we don’t see any material impact from an economic slowdown or recession later this year that we would expect Q2, Q3 and Q4 all to exceed last year with the caveat of LaPlaya’s impact. So, let’s set LaPlaya aside for the moment, we expect to be fully compensated for its performance or whatever would have performed had enough in the hurricane through our insurance proceeds. But yes, we would expect that, you know, continuing significant improvement on the urban side. I would say generally flat performance in our resort portfolio with ups coming from repositioned assets and continuing improvement and in the West Coast markets and probably some weakness particularly in the keys in terms of bottom-line performance. So yes, we would expect two, three and four to be improved over last year.

Operator: Next question is coming from Duane Pfennigwerth of Evercore ISI. Please go ahead.

Duane Pfennigwerth: Just with respect to the hiring environment, if you could just play back for us your experience in the fourth quarter. Was this a function of you had a bunch of open positions that were filling at a certain rate and the catch up of that surprised you? And going forward, are you at kind of a more can you just sort of qualitatively speak to kind of the number of open positions you have going forward and if you sort of fully caught up on staffing?

Jon Bortz: Yes. So, I break it into two areas, sort of the management team, team members, as well as folks who fall under the administrative and general category. So, that’s your general managers, your accounting team, finance team, et cetera., and then your sales and marketing team, your sales agents, your catering folks related to grow, and finally, your engineering team. And I’d separate that from your sort of hourly FTEs on housekeeping and on banquet and catering in particular food and beverage. So, we’ve had these open positions really since we’ve reopened the properties on the management team side, and on the sales team side. And as volume came back, we added, we sought to add people. We had a lot of struggles in the first half of last year doing that.

And so filling those open positions occurred on a much slower pace than what we would have liked. I’ll be it, as we indicated last year, helping the bottom lines from, frankly, people having to work extra shifts, managers having to work shifts, having to wear lots of hats, et cetera., within our hotels. It started to improve in the third quarter as we were having success, more success filling, open positions, but still, it was still a struggle. And by the fourth quarter, all of a sudden, it was like it turned the switch on and those positions generally got filled. So they did fill more quickly than the pace they had been on. I think that’s probably something experienced by a lot of different industries in the back part of last year. And where we still have hiring to do just relates to volume.

So I think as it relates to our management staff, our sales team, our engineering team, while we still have openings, they’re not materially different than they were pre-pandemic. We always have openings. We’re always turning over people. We always have vacancies. And we’re generally filling those on a continuous basis. Where we’re still hiring is as volume returns, we’re still hiring hourly, both in housekeeping and in food and beverage. And I’d say, it’s a lot easier than it was, but there’s still positions on the FTE side on the hourly side, that we’d like to fill that are probably still having a negative impact on some of the revenues we can generate in those areas. So, I think we’re in pretty good shape. I think our run rate for what I would call the fixed portion of the business throughout the portfolio is generally where we want it to be or at least at the very least it’s at a similar level to where it was pre-pandemic and we’re just hiring on the hourly side, as volume goes up.

Raymond Martz: And Duane on the cost side for the fourth quarter, if you’re going to model it sequentially in first, you should model it sequentially because it’s very seasonal. The fourth quarter behaves differently in the first quarter. But also in the fourth quarter this year, we had some one time bonuses for a lot of our management teams that totaled about 3.5 million or so. That was more of a one-time number, so I’m going to necessarily extrapolate that out to future quarters as you model out for 2023.

Jon Bortz: I think the one other thing to mention is, when we have indicated the EBITDA impact. But one, having LaPlaya out of service in the first quarter when in the first quarter of last year with a pretty much a full team there, our EBITDA margin was 56%. And so, between that and the negative impact on margins, when we do redevelopments, so when we do these redevelopments and we have properties that are running at, call it, 50% or 60% of the rooms available, with public areas under renovation, we still have all the fixed costs from A&G sales and marketing, accounting, engineering, et cetera. We just don’t have the revenue volume. So, there is not much ability to flex other than the hourly, which we do and it’s indicative of the negative flow on the redevelopments in the first quarter with $7.5 million of lost revenue.

We are losing $5.5 million at the midpoint of the EBITDA. So, you can see there, the flow is challenging, and so, those two combined make our — frankly make our margins in Q1 look far worse than the way the business is actually performing underneath that.

Operator: Thank you. The next question is coming from Bill Crow of Raymond James. Please go ahead.

Bill Crow: Good morning, Jon. I appreciate the detailed discussion on the renovation of repositioning program, but as you went through the timeline of three years to design and plan a year or so of construction and then three years of ramp. And you just think about where that fits within an industry that seems to go through problems every seven years or eight years. Just wondering whether the benefits of that are actually going to be found within the public markets?

Jon Bortz: Well, I mean, I can’t speak to the public markets. I can only speak to the value creation that goes on the individual property level. And whether that ultimately is recognized in the public market, I’ll leave to you and the investment community to determine. But there is no doubt, as we have done these projects and in cases where we have actually sold assets that have been redeveloped, the returns have been quite attractive. And so, building cash flow overtime in the long-term that’s our business and in the short-term, like a lot of businesses may not be recognized, I mean, there is a lot of — obviously, there is a lot of businesses out there, you still need to invest for the long-term in order to generate the most attractive returns.

Bill Crow: Okay. I’m just looking at some of your recent sales that have been flat potentially to where you bought them ex the reinvestment. So I think I’m going to follow-up on the second question for Ray. Congratulations on the new title. But given where the stock is today, it’s more difficult to make the assumption that the converts are going to be converted in ’26 and I’m just wondering whether that plays any role in your capital allocation decisions?

Raymond Martz: Sure. Well, we looked each of these decisions as we make additional progress on sales. And what to do with that, whether it’s paid on certain pieces of debt and/or reinvesting in our portfolio and stock repurchases. So when we look at each of those 2026 is still a long time from now. And we have other levers to pull. One market we haven’t accessed is the high yield market. That’s something that could evaluate down the road. After the yield curve comes down from where it’s at because right now it’s for us, it’s not that attractive. But the right now the end, there’s a potential, we could also just extended issue a new convergence in 2026 to do that, whether it’s the markets or are there we desire. So, there’s a lot of levers we can pull, that’s a lot of time between now in 2026.

Really, our focus now is on over the near-term here, on addressing various capital uses that we have planned. We have a couple of maturities coming up, nothing too significant. We only have one property mortgage that’s maturing between now in 2028. And that’s very manageable and also just a reminder, we have a $650 million line, which is basically unused, that always provides that ability to pay off his debt in short periods of time, in the capital markets aren’t accommodated for any refinancing.

Jon Bortz: I think the other thing we should not forget to put it all in perspective is a year ago the stock was over the convert price, with operating performance that was far lower than where it is today, with fewer dollars invested in the portfolio in terms of its transformation. And so, I think it has — I think where the stock prices has more to do with near-term sentiment, and the cyclicality that the overall economic cycle, and its potential impact on our industry than it does the actual value of the Company. So, sentiment can change as Bill as you’ve been around as long as I’ve been around in this industry. And when the industry when things turn positive, the industry tends to move a lot and it tends to move very fast in the public markets. So as Ray said, we’re a long way from 2026. But we do obviously look at that, and we’re not making an assumption, necessarily that it will get converted.

Operator: Thank you. The next question is coming from Gregory Miller of Truist Securities. Please go ahead.

Gregory Miller: My question between upper upscale and luxury resorts in your portfolio and competitors? Which chain scale do you think is overall better positioned on occupancy and room rates this year? Is the traditional luxury leisure customer booking distinctly from the traditional upper upscale customer?

Jon Bortz: It’s an interesting question. I’m not sure I know the answer to that. I think the actual luxury customer is in great financial shape as frankly as is the upper upscale customer. I think at the margin, what we don’t know is, how will the customer who was spending up if you will, maybe on a short-term, temporary basis or maybe it’s a change in how they allocate their dollars towards higher end experiences, but we don’t know how that’s going to react in a downturn whether people either naturally come back down and say that was a onetime experience coming out of the pandemic. I really wanted to splurge or whether on a longer term basis, the answer is, hey, this is the way life is too short. I want to have these great experiences all the time, and I’m willing to spend money on this and not buy another pair of sneakers or another sweater, whatever it might be.

So, I’m not sure I can give you a great answer to your question. I think we’re going to have to see how those sectors perform in the industry overall. I think our portfolio is more heavily weighted to the upper upscale in resorts than it is to luxury properties certainly like LaPlaya and L’Auberge at the highest end of our portfolio, certainly appeal to that luxury customer. So, we’re just going to have to see Greg, how it plays out.

Operator: Thank you. The next question is coming from Smedes Rose of Citi. Please go ahead.

Smedes Rose: I just wanted to get back you provided what sounded like a lot of good news on the group front. And that’s just wondering, if you could talk a little bit more, kind of where you’re seeing that as your larger kind of Boston Hotel, which I think does a lot more group business. Are you just seeing it evenly across the portfolio? And maybe just kind of any sort of themes in terms of what the demand is coming from, in particular versus kind of pre-pandemic levels?

Jon Bortz: Sure. So I think from a segmentation perspective, within group, I’d say it’s coming from two areas. One is corporate group, which is, I would say back with a vengeance. So we’re seeing an awful lot of group corporate groups that want to meet that need to meet for various different reasons, whether it’s bonding, whether it’s meetings with their customers, and events related to them, whether it’s incentive to reward their people, we’re seeing big increases in corporate group. And then on the association side, which of course a lot of the biggest ones come through either the big houses that we have, whether it’s Copley in Boston or Western Michigan Avenue in Chicago or Western Gaslamp and in San Diego or it’s our larger resorts like Paradise Point in Mission Bay or the Mission Bay Resort, in Mission Bay or Margaritaville in Hollywood, Florida.

They’re all benefiting from both Association and corporate group increases. And I’d say a modest moderation in the number of weddings, which I think last year, was sort of a catch up year, and this year seems more normalized in the overall wedding pace. So big increase is throughout the portfolio, and I think we’ve said this before, and it shouldn’t be forgotten. We do a lot of group in our resorts, some of them like Skamania and Chaminade that were previously conference centers, do well more than 50% of their total business in group. And I would say, pretty much throughout the portfolio group is up.

Raymond Martz: All this means we also have a pretty favorable convention calendar this year, which should benefit the urban hotels in those markets. San Francisco, the convention center room nights are doubling versus last year, which is now about the room nights are about in line to where they were in 2018 so a good encouraging increase. Boston is up about 37% year-over-year. San Diego is up 25%. Seattle is about 20%. So those are all, again, encouraging themes for travel and that really didn’t take in consideration the international inbound, which is continuing to improve from Los Angeles, especially in the West Coast, which really hasn’t benefited yet from the Asia Pacific travel, which has been very, very low for the last several years.

Jon Bortz: I think the other thing we have been seeing, which sort of doesn’t come through pace, but it comes through results is, certainly last year and earlier in this quarter, I would say, attendance versus what was on the books at either citywide or large group tended to be softer, even earlier this year with sort of the increase in number of cases. And not really people being scared about it, but frankly more people having COVID or the flu or RSV, we probably had a little more wash than what we are seeing now as things settle down on the health side, and it’s good that people are sensitive about maybe not traveling when they are sick. I hope that’s a new long-term trend that would benefit all of us. But it certainly helps attendance throughout the portfolio.

Operator: Thank you. The next question is coming from Ari Klein of BMO Capital Markets. Please go ahead.

Ari Klein: Thanks and congrats, Ray and Tom as well. I had a quick follow-up on the comment to grow EBITDA year-over-year, the remainder of ’23 x-Naples, would that include the renovation impact as well?

Jon Bortz: Yes. So it would still be growth even with the impact from the renovations.

Ari Klein: Got it. And then how are you thinking about dispositions moving forward? The markets that have challenges are also seeing that reflected in their prices. You’ve obviously sold in some of those markets. But to what extent are you willing to maybe cut bade or are you more inclined to wait it out?

Jon Bortz: I think the way we evaluate dispositions as we look at what are — what the opportunities are related to what we would otherwise do with that capital. And while it’s not as easy to sell an asset and buy an asset, as easy it is to buy a stock and sell a stock in the market. We do look at risk adjusted returns in our markets over a minimum of a five year period, and understand are there better places to put that capital, whether it’s in other markets, whether it’s in other types of assets like we have done over the last two years or whether it’s to repurchase our stock, which is trading at a 50% discount due to the leverage level that company, but a 25% to 30% discount in actual private market value compared to how that’s valued on an unlevered basis, with a company.

So we’re taking all of that into account. We obviously also are looking at what’s saleable in the market, and what might be much more challenging to sell in a market. I would say today, size is probably the biggest deterrent to a sale unless it’s a high cash flowing asset of a resort. I think, if one, we’re trying to sell up thousand room convention hotel today, and I’m not taking a shot at anybody, we have a couple of 750 and 800 room properties. It would be more difficult to sell because of the debt markets today. Now, obviously, all cash buyers can buy those, but they generally not sold to all cash buyers. So we try to take everything into account alright. But we’re looking the primary driver is what where’s the best return risk adjusted return for the shareholders, and then we have to take into account the time that it takes to do these transactions.

Operator: Thank you. The next question is coming from Anthony Powell of Barclays. Please go ahead.

Anthony Powell: I guess maybe related follow-up, looking at your NAV schedule, and in your deck, you kept kind of the mid to high-fives on a cap rate basis versus ’19 NOI. That’s pretty positive against we’ve seen other cap rates rose elsewhere in real estate. So what’s holding in against your views on cap rates value for your portfolio? Is it the unencumbered nature, smaller assets over you? There’ll be great.

Raymond Martz: First of all, it’s a whole bunch of factors. We shouldn’t look at the cap rates change to determine whether we’re either properly adjusting values or that they’re a proper reflection of where we could sell these assets. Some assets — first of all, our sector generally doesn’t trade at a cap rate. It trades at price per key. It trades in five year IRR. It’s very different than a long-term lease product, likely having a lot of the other sectors or a shorter term product, like apartments that are far less volatile. So, we have markets today where take much of our San Francisco portfolio, the biggest influencer in San Francisco, is just price per key at this point, just like New York went to price per key over a long span of period in late mid to late teens and into the early part of this decade.

So that’s a factor as it relates to valuations. The cap rates are just a mathematical result of us valuing each individual property. The way a buyer would value those properties, which as I said, is not a cap rate approach. The other thing to keep in mind is, we’ve invested, I think, last year out of the 100 million, I think you can argue that somewhere between 70 million and 80 million went into significant upgrades at the properties out of the 145 to 155 this year over 100 million is going into these transformations and repositioning so that the dollars being invested in the portfolio increased values. Now, maybe not by the amount we put in, I think that that’d be to a buyer to determine. But it certainly reduces the amount of capital that a buyer would be allocating in their own underwriting when they look at buying a property that’s been redeveloped, renovated and repositioned.

So all of these things get taken into account when we look at these values, but it’s traditionally it’s done by what do we believe a buyer would pay for that today, and outside of a market, that’s non-functioning. These are pretty, I mean, when we’re selling assets, we’re selling them within our NAV range. Sometimes, it’s at the low-end, sometimes it’s at the high-end, sometimes it’s above or below, but never by much, much of a large percentage.

Operator: Thank you. The next question is coming from Jay Kornreich of SMBC. Please go ahead.

Jay Kornreich: Just wondering if you can provide any further commentary on the underperforming urban markets, you called out in San Francisco, D.C., Chicago. How you see those improving 2023 and I guess may be conversed in the leisure side, you mentioned some softness expected in the keys. But in other markets, you’d call out there for either strength or softness that you’d expect this year?

Jon Bortz: Sure. So I mean, I think when we think of these slower to recover markets, there are obviously a number of factors that have impacted them. One being, how they dealt with the pandemic, and what impact that had on their cities. Both from a business, underlying industry perspective, change in use patterns, change in work patterns, whether people come into the office, or they don’t, whether they support their local restaurants and retailers and the impact that has on the leisure experience, and the convention experience that people would have coming to a market. So they all had, for the most part outside of the southern cities. Most of the cities have a meaningful impact from the pandemic and the issues that have been created around that.

Some of them have had quality of life issues going into the pandemic, may have worse and may have gotten better in some markets. And they’re all focused on improving that today. And we are seeing that improvement in a number of cities like San Francisco, like Chicago and even D.C., which we think is the activity on the streets is continuing to get better. So, they’re just slower to recover. We’re seeing a significant ramp and recovery in those markets, as group and transit comes back, and we shouldn’t forget. So cities like San Francisco, like San Diego, like Seattle and Portland, like Boston and D.C., these are big leisure destinations. And that leisure customer really didn’t begin to come back in those markets until the middle of last year.

So, we’re going to see significant growth in the urban markets. I think I said most of the growth in our portfolio at the bottom line this year will come from the urban markets and much of that is coming from the recovering markets. I’ll be it they’re still going to be some of them will still be below where we were in ’19 and some like San Francisco, which mainly get to about 50% of the EBITDA it was at in ’19 this year. But there is a lot of operating leverage in these markets. And we do expect them to fully recover. As I indicated in my remarks, we expect the full portfolio to get to ’19, the full urban portfolio to get there in the next couple of years, but it still may mean a market like San Francisco or Seattle or Portland may still be below where it was in ’19.

Operator: Thank you. The next question is coming from Chris Darling of Green Street. Please go ahead.

Chris Darling: Thank you. Just a quick one for me. Can you comment on how the cost of insurance is changing, particularly as it relates to some of your Southeast Resorts? And maybe just for context, if you could maybe and on how much insurance premiums maybe represent as a percent of revenue, percent of expense, et cetera?

Raymond Martz: Sure, Chris. Well, what are going on — so look part of this is, we don’t want to negotiate against ourselves with our insurance carriers. We are starting to the process of the renewals for us, our property insurance renews in June and then our deal later in the year. But all indications of what we are seeing in the market is, it is going up, but there were a lot of events last year, which we all know obviously took part of that with Hurricane Ian there, but there are other kind of losses there. So, we expect that to go up and then also the number of players in the insurance market is also strong. So it’s a double hit there. So right now on a full year basis, our kind of property and GL, that’s about 1.5% of our total operating cost there.

So, it’s a large number. We’re talking about $20 million or so, but it’s not a material number. So, we expect it to be challenges, especially in the markets on the windstorm markets like Florida. But the good thing is, we have a very diversified portfolio. So carriers like us because we have a — we have done a good job here. So, we will love them to monitor that. We will provide an update. My guess is by the third quarter of July earnings call, we will have good indication of where that came out in the renewals, and I will tell you accordingly there.

Jon Bortz: And Ray, we would expect the increase for the P&C to be greater than the GL, the general liability. I mean, we don’t see the pressure on GL that we’re seeing on piece.

Raymond Martz: Yes. Actually last year, our general liability insurance actually went down on a year-over-year basis because of the losses we have were pretty managed. But the P&C will be going, that will be the area will be increasing. And look, areas like cyber actually are also being held in check, coming down south of the year because of their ransomware and that’s much smaller than the other side, but the P&C is more of a challenge here.

Operator: Thank you. At this time, I’d like to turn the floor back over to Mr. Bortz for closing comments.

Jon Bortz: Well, again, thank you all for taking the time to join us for our fourth quarter call. We have a quick turnaround to the next quarter in late April. We will continue to provide these monthly updates as we have been doing. And we look forward to many of you for seeing you down at the Raymond James Conference and the Citi Conference early next month.

Operator: Thank you. Ladies and gentlemen, this concludes today’s event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.