Pebblebrook Hotel Trust - Earnings Call - Q3 2021

Transcript

Speaker 0

Greetings, and welcome to the Pebblebrook Hotel Trust Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A 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, Mr.

Raymond Marks, Chief Financial Officer. Thank you, sir. Please go ahead.

Speaker 1

Well, thank you, Donna, and good morning, everyone. Welcome to our third quarter twenty twenty one earnings call and webcast. Joining me today is John 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 are effective only for today, 10/29/2021, and we undertake no duty to update them later. We'll discuss non GAAP financial measures during today's call. We provide reconciliations of these non GAAP financial measures on our website at pebblebrookhotels.com. Okay.

So on to the highlights of the third quarter. The third quarter marked another important milestone in our recovery from the pandemic. We generated $21,400,000 of adjusted funds from operations, which was the first quarter since the pandemic that we produced positive FFO and represents considerable progress from Q2 when we had negative FFO of $15,600,000 and Q1 with negative $55,700,000 Third quarter hotel and adjusted EBITDA climbed robustly from the second quarter as well and were driven by significant increases in same property RevPAR and same property total revenues, while at the same time, costs were well controlled. Same property hotel EBITDA rose by 136% to $66,600,000 from Q2's $28,300,000 This sequential growth was driven by robust leisure travel, improving group and transient business travel and an ability to push pricing higher, particularly at our resort properties. Same property room revenues rose a substantial 51% from the second quarter and same property ADR rose 10% from Q2 and for the first time exceeded the comparable quarter in 2019, in this case by 3.8%.

Same property total revenues also rose an impressive 47.2% from the second quarter, with healthy food and beverage and other ancillary spend growing faster than occupancy. Total group room nights, ADR and revenues also grew from Q2 to Q3, with room nights and revenues more than doubling, which is a very favorable sign for the return of corporate group demand. The third quarter started strong. July RevPAR improved to down just 31% compared with July 2019, clearly better than June's minus 51.6% comparison to 2019. Lease demand throughout our portfolio at our resorts and urban hotels increased significantly from June.

It was robust and generally not price sensitive. The strength in demand continued through mid August until a surge in COVID cases from the Delta variant caused a pause in the recovery. From mid August through mid September, we experienced a rise in cancellations and near term business travel, primarily grouped for August, September and October, and softer near term booking demand as well higher attrition with many corporate groups who did hold our meetings over this period. As a result of the seasonal slowdown in leisure travel and business demand that did not pick up the slack, same property RevPAR weakened compared to 2019 for August, which was down 39.4% and also then September, which was also down 43.4%. September was also negatively impacted by the Jewish holidays, which both fell in the September.

Fortunately, as the trend of new COVID cases began declining in mid September and had been falling for six weeks now, booking trends began to reaccelerate in mid September and this improving trend has continued into October. Both transient and group business demand have picked up with volumes exceeding levels earlier in the year before the Delta variant and associated restrictions were imposed. Corporate transient is returning, led by small and medium sized businesses as well as larger companies, including those in banking, consulting, life sciences, medical, entertainment and music segments, among others. Big tech has also begun to travel, but remains slower in its recovery. For us, the most significant improvements in business demand have been in Boston, Los Angeles, Philadelphia and San Diego.

Slower to recover markets continue to be San Francisco, Washington, D. C. And Chicago, which seems to be three to four months behind the faster recovering cities. Leisure demand remains healthy heading to the fall and upcoming holiday season, which should be very good. And our positive expectations are consistent with the strong advanced holiday demand the airlines are reporting.

However, we do expect a normal seasonal slowdown in business travel levels in late November and December. Because of these improving trends and business travel demand, in particular October, is performing better than September. We're now forecasting RevPAR to be down between 3738% to October 2019, and October occupancy for our portfolio should hit or come very close to the occupancy level achieved in July. This is not something we would have expected a month ago, which really demonstrates how quickly demand trends can reaccelerate and improve when health concerns related to the pandemic decline or moderate. Considering how strong October is traditionally for business travel, we find this performance a strong indicator of the reacceleration in the travel recovery, especially for business travel.

For the fourth quarter, we expect same property RevPAR and total revenue to be down between 3842% compared with the comparable period in 2019. Now back to our third quarter performance. Same property revenues of $239,200,000 were off 36.3% versus the same period in 2019. This is a significant improvement from the second quarter when same property revenues were down 57.8% versus 2019 and continued the progress from the first quarter, which was 74.7% below Q1 twenty nineteen. Our strongest performance came from our resorts.

For our original eight resorts and Jekyll Island Club Resort for August and September, revenues exceeded Q3 twenty nineteen by 9.8%, driven by a whopping 57.1% ADR premium to Q3 twenty nineteen, which was more than offset occupancy that was down just 22.5%. Our resort occupancies would have been higher but for the rooms renovation at Southernmost Resort and the exterior work on the Gulf Tower building at La Playa. At our urban hotels, same property revenues were off 50.1% to Q3 twenty nineteen, driven by same property revenue declines of 50.4. This illustrates convincing improvement at our urban hotels in the quarter compared with the second quarter when same property revenues were down 68.6% from Q2 twenty nineteen and same property RevPAR was down 69.7%. ADR at our urban hotels also improved quarter to quarter from last quarter's minus 26.1% compared to Q3 twenty nineteen to down just 10.8% in the 2019.

Drilling down further on our hotel operating results, our same property resorts generated $34,600,000 of EBITDA, up 45.4% versus 2019. Our hotel EBITDA margins were 41.5% compared with 31.4% in Q3 twenty nineteen, over 1,000 basis points better. While some of this is a result of some continuing unfilled position, much of it is due to the significant benefit of a 57.1% or $156 rate premium in ADR to 2019 as well as higher prices for non room revenues and our new operating models at all of our properties, including our resorts. Our Overton hotels generated $29,900,000 of EBITDA in Q3, down 72.2% versus Q3 twenty nineteen. This is substantially better than Q2 when our same property EBITDA was just $2,700,000 Operating expenses at the hotel level were well controlled.

And in addition to the room rate improvements versus last year, we took price increases throughout all non room revenue items. Same property hotel expenses were down in Q3 by 29.5%, representing 81% of the 36% rate of total same property revenue declines. Excluding fixed costs, hotel expenses were down by 32.7% or 90% of the rate of decline of same property revenues. While we continue to have many unfilled positions at our hotels, we made very significant progress in the quarter filling open positions and the cost savings to 2019 represent a superb effort by our property and asset management teams working together to follow-up on our new property operating models that are delivering significant efficiencies and productivity gains. At the corporate level, after corporate G and A, we generated $55,300,000 of adjusted EBITDA in the third quarter.

This is a significant increase from the $17,100,000 of adjusted EBITDA in Q2 and a negative $25,000,000 of adjusted EBITDA for Q1. Shifting to our capital improvement program. Earlier this week, we completed a $15,000,000 comprehensive guestroom renovation of our Southernmost Beach Resort in Key West, the last of our resorts to be fully renovated or redeveloped and repositioned. And we continue to make progress with our $25,000,000 transformation of Hotel Vitale to one Hotel San Francisco. We've experienced some delays due to constraints with the supply chain in receiving FF and E items, so we now expect this renovation to be completed in the first quarter compared to last quarter's expectation at the 2021.

For all of 2021, we anticipate investing reinvesting a total of 80,000,000 to $90,000,000 in the portfolio, which is in line with our prior annual estimate. Moving to our investment activities, we continue to be active reallocating capital in the portfolio. On September 9, we sold Villa Florence, San Francisco and Union Square for $87,500,000 Since Q1 twenty twenty, we have sold seven assets, generating $664,000,000 of proceeds. On September 23, we completed the acquisition of the three sixty nine room Margaritaville Beach Resort for $270,000,000 And just last week, we purchased the 19 room Avalon Bed and Bredes and the 12 room Duval Gardens in Key West for a combined $20,000,000 We will be incorporating these two properties into the overall operations of our southernmost beach resort, and we expect significant operating synergies as a result. By providing guests of these two guesthouses with access to the higher service levels and amenities of the existing B and Bs at Southernmost and our overall resort, we expect to be able to drive rates dramatically higher than the prior owner.

As a result, we anticipate generating an eight percent to 12% cash on cash return on this investment after a 4% capital reserve on a forward twelve month basis. We'll obviously narrow this range down if you get deeper into the operations of these properties as part of Southernmost. As a reminder, year to date, we have acquired two resorts as well as two Bed and Breakfast guest houses for a combined $384,000,000 of proceeds. Turning to our balance sheet and liquidity. We have approximately $8.00 $7,000,000 of liquidity after completing our recent property transactions, including roughly 163,000,000 of cash on hand and $644,000,000 available on our unsecured credit facility.

We also currently have approximately $210,000,000 of reinvestment proceeds available under our current bank arrangements. We're proud of the tremendous progress we've made fortifying our balance sheet, reducing near term debt maturities and lowering our cost of capital through our various preferred refinancings and convertible notes offerings while also increasing our liquidity. This positions us to take advantage of additional new investment opportunities as they become available. And with that, I would now like to turn the call over to John. John?

Speaker 2

Thanks, Ray, and good morning, everyone. So I thought I'd focus on what we're currently seeing in our business, how we think the rest of this year is likely to play out, our current expectations for 2022, delve a little deeper into the performance of some of our existing properties and markets as well as discuss the capital reallocation decisions we've made in the last eighteen months. As Ray said, we're certainly very encouraged by the reacceleration of the recovery we've seen in the last six weeks, particularly as it relates to business travel and group demand. While leisure demand's recovery started early and has grown to robust levels, we all know that getting back to 2019 levels for us requires further recovery in business travel. As we stated last quarter, we believe we should get back to 2019 EBITDA levels before we get to twenty nineteen RevPAR, and we expect to consistently hit or exceed twenty nineteen ADR levels before we get back to twenty nineteen RevPAR.

We're very encouraged by the performance of rates in both the industry and our portfolio. We, of course, are aided by our concentration in drive to resorts. And as Ray said, we're achieving ADRs at our resorts that are dramatically higher than 2019 levels. Some of this is due to a lack of competitive alternatives like cruises or traveling abroad or even vacationing in cities. Some of this premium has to do with repositioning resort ADRs to higher levels and a willingness on the part of the consumer to buy up to suites and view rooms and the like.

And about onethree of the premium is due to the transformational redevelopment projects we undertook in the last few years at our resorts where we substantially repositioned them higher in quality. And as a result, higher ADRs are being achieved, generating attractive returns on our redevelopment investments. So we believe that a substantial portion of these higher rates at our resorts will be permanent. Most of these higher rates will last at least for the next two or three years, and some portion may turn out to be transitory. In the third quarter, we estimate we gained over $50 alone, just an ADR share versus the competitive market properties, with that number accelerating substantially from the second quarter.

Some of the rate premium at our resorts that historically accommodated significant group will likely be reduced as that group returns. However, that group will come with significant F and B and other profitable revenues that should more than offset any reduction in our rate premiums. In the third quarter, our resorts achieved 9.8% higher total revenues than Q3 twenty nineteen even without that group. Room revenues were up 21.9% and EBITDA was higher by 45.4% or $10,800,000 This rate with rate up so substantially, 57.1 and occupancy down by 22.5%, EBITDA margin hit 41.5% for our original eight resorts and Jekyll Island Club Resort, which was included in August and September. This is an increase of ten eighteen basis points from Q3 twenty nineteen.

EBITDA per key for our resorts for the third quarter alone grew to $17,000 On a run rate basis, including Jackal and Margaritaville Hollywood Beach Resort for the entire quarter, same property EBITDA for the 10 resorts of $40,500,000 was $13,900,000 higher than Q3 twenty nineteen. For all of 2021, we're now forecasting our eight original resorts to achieve $2,500,000 more EBITDA than they earned in 2019 despite being $8,000,000 lower in the first quarter of this year. Including Jekyll Island and Margaritaville, Hollywood, which are both now forecasted to end 2021 above 2019 levels, we're forecasting our run rate resort EBITDA to be 6,000,000 to $7,000,000 higher than 2019 at $115,000,000 to $116,000,000 in total or roughly $46,700 per key. And that's despite the 10 resort portfolio being $10,800,000 lower in Q1 versus 2019. So that compares to $86,700,000 in 2019 for the original eight resorts.

These numbers do not include the two BNBs we just acquired in Key West. Both Jekyll and Margaritaville are also running well above our initial underwriting when we price those properties for purchase, with Jekyll ahead by over $2,000,000 and Margaritaville ahead by over $5,000,000 At these forecasts, Jekyll would be a 7.4% cap rate on 2021 NOI and Margaritaville would be a 6.25% cap rate on 2021 NOI. And both properties look to be up substantially in Q1 twenty twenty two based upon business and rates already on the books. We also saw significant improvement in performance in the third quarter at our urban hotels with occupancies, rates and RevPAR all rising substantially as compared to the second quarter. While some of this improvement can be attributed to meaningful growth in leisure travel, particularly in our urban markets that are drawing significant leisure travel, such as San Diego, Los Angeles and Boston, much of the improvement is clearly related to the slow but continuing recovery in business travel, both group and transient.

In the second quarter of this year, group room nights achieved amounted to just 13% of comparable twenty nineteen levels in our portfolio, but that improved substantially to 34% in the third quarter. And based on business on the books and current cancellation and attrition trends, we expect it to exceed 40% in the fourth quarter. In the 2022, group room nights on the books are currently at 62% of Q1 'nineteen rooms on the books at the same time in 2018, and ADR is currently ahead by 14%. For the year, group revenue pace on the books for 2022 is at 69% of the same time in 2018 for 2019, with ADR ahead by 6%. Of course, what shows up versus what gets canceled will all depend upon what is happening with the virus.

But we're very encouraged about where we are for 2022, especially the significant rate lift that is on the books. While I mentioned the performances of both Checko Island and Margaritaville, I thought I'd provide a little bit more detail. Both resorts had terrific third quarters. We were able to influence the performance of Jekyll Island in the quarter due to our acquisition on July 22, but we can't take any credit for Margaritaville's performance in Q3 due to our late September acquisition. In Q3, Jekyll Island grew RevPAR by 35% over Q3 twenty nineteen, with ADR increasing by 23% or 58 At Margaritaville, RevPAR climbed 47% in Q3 versus 2019, with ADR increasing a robust 60% or $136 Margaritaville's EBITDA in Q3 increased 131% over Q3 twenty nineteen, up from $2,100,000 to $4,800,000 with EBITDA margin up 1,300 basis points.

Jackal Island's third quarter EBITDA was up 125% over Q3 twenty nineteen or $2,500,000 versus $1,100,000 with EBITDA margin also up 1,300 basis points. In both cases, these are extraordinary numbers, but ones we expect to substantially exceed as we implement all of our operational changes over the course of the next year, even before any of the capital improvements that we're planning. We're confident that both of these acquisitions will turn out to be fantastic long term investments, in addition to them being a huge positive uplift to our EBITDA and cash flow in the short to intermediate term as we swapped properties in slower recovering markets for properties in faster recovering markets that also have significant upside from both operational improvements and capital investments. With the third quarter sale of Villa Florence in San Francisco, since the pandemic began, we've sold two older properties in San Francisco and one in New York City, along with some rooftop antennas and the historic Union Station Nashville for a total of $333,000,000 And we've acquired two resorts in the Southeast and two small BNBs in Key West for a total of $384,000,000 We're very excited about these swaps and the upside from the new acquisitions.

Not only did these transactions reduce our urban concentration and increase our resort concentration, but these trades of San Francisco, New York and Nashville for Hollywood, Florida, Key West and the Golden Isles Of Georgia increase our leisure mix and reduce our business customer mix. While it might look like we're focused on increasing our resort exposure, as discussed many times in the past, we remain opportunistic investors overall, utilizing risk adjusted return forecasts and underwriting to determine both sales and acquisitions. And how others value properties and what others are willing to pay definitely impacts where and what we ultimately acquire since value is a key component of our risk adjusted return investing approach. In that vein, over the last few months, we spent significant time evaluating the current values of our existing hotels and total portfolio. As a reminder, the value ranges we determine for each hotel are based upon the transaction market for similar properties in similar condition with similar opportunities and similar locations in the same markets.

They're also based upon whether management and flag are available or if the property is encumbered by those contractual arrangements. With a more active transaction market in the last three to four months, we feel there's enough real market transaction information to now establish true tradable market values. And while these values will potentially move significantly and quickly in the next couple of years, we feel comfortable again publishing our overall gross and net asset values for our portfolio. These numbers are included in the updated investment presentation we filed yesterday. We believe that our current net asset value is in the range of $30 per share at the low end to $35 per share at the high end and $32.5 at the midpoint.

And we're happy to discuss this in more detail in the Q and A or in separate conversations over the next few weeks. I thought I'd also touch on the current labor situation and update you on our current assessment of the ongoing margin opportunity in our portfolio as a result of the implementation of new operating models at all of our properties. In the last six to eight weeks, we believe the labor situation throughout our portfolio has improved significantly. As expected, as kids went back to school, more people got vaccinated, childcare became more available, and enhanced federal unemployment benefits expired, we've seen more of our prior hotel associates coming back to work. And with lots of hard work, our property teams have also found more qualified candidates interested and willing to fill open positions.

As a result, our properties have made significant progress in filling critical open positions, and many of our properties are in good shape now with a more active pipeline for further hiring. In addition, it seems the H-2B visa program is back up and running, and we expect significant numbers of H-2B qualified workers to aid our seasonal properties like La Playa that have historically utilized this program and Jekyll Island, where we'll be using the program for the first time beginning later this year or early next year. We also believe those current labor pressures we're still experiencing will lessen over time as more workers come back to the labor force as the spread of the virus and cases decrease over time. In general, we've not had to increase wages, but we have made some adjustments here and there. This has been mostly at our resorts that are in markets where either we're no longer where we wanted or needed to be in the market competitively, or where we've repositioned our properties higher through renovations and redevelopments.

And we want to attract the best of the talent in the market to provide the highest level of service to match our higher rates. Fortunately, our properties are generally at the higher end of their markets and are in a position to not only pay more as necessary, but attract high quality talent more easily because of the quality of our properties and the ability for associates to earn more money through not just wages and benefits, but higher tips and other gratuities. As you well know, we've all been experiencing increasing levels of supply chain disruptions, including higher costs for many commodities like food and beverages, but also operating supplies and some of our services. We've been able to successfully implement some very significant price increases throughout our portfolio for items such as food and beverage offerings, both in our outlets and through banquets and catering, as well as charges for parking, event venues, audiovisual equipment and services, resort and urban amenity fees, spa treatments, club dues and for other recreational activities. These increases have ranged from 5% at the low end to as high as 25% at the high end, and 15% is about average throughout the portfolio.

We've experienced little to no pushback on pricing increases so far. It seems both the leisure customer and the business customer are in great financial shape with plenty of discretionary income or high profits. And with prices increasing for all sorts of goods and services, our customers have been accepting of the increases. This pricing flexibility and customer acceptance should allow us to continue to be able to grow our pre pandemic margins by 100 to 200 basis points based upon the restructured operating models developed during the pandemic, which utilize more cross training, more efficient labor scheduling tools and more technology among many efforts to continue our never ending effort to increase productivity and become a more efficient and profitable business. In addition, Curator has now completed over 60 preferred vendor arrangements with a preferred group of individual product and service providers in our industry.

As we continue to implement these arrangements throughout our portfolio, we're further reducing our overall cost of operations as we take advantage of the economies of scale being achieved by Curator. And we expect this number of arrangements to increase to over 80 before the end of the year with further opportunities for savings as a result. And as we get much closer to 2022, we're focused strategically on the year being a very strong recovery year overall. Groups should be very healthy as we believe there's a great deal of pent up demand. We also think leisure will continue to be robust with pent up demand for vacations and getaways, while outbound international travel probably remains more limited.

And we're very encouraged by the decision to reopen our country in the next couple of weeks to international travelers and visitors. We believe there is significant pent up inbound demand that will aid both our resorts and our urban markets. Certainly, the reports from the airlines about ticket sales to international inbound customers are very encouraging. Taken together, this means we don't expect rate discounting in 2022. Again, this is with the obvious caveat that we get to relatively normal behavior by the end of this year, and it remains relatively normal next year.

As it relates to the few remaining redevelopment projects we deferred due to the pandemic, we're continuing to complete plans and permitting and will likely pull the trigger on these few remaining projects as soon as the approvals are complete and it's the right time of year to commence them. All of our redevelopments and transformations, including the large number in the last few years and all of the current and upcoming projects, will provide very significant upside for our portfolio over the next few years as the recovery rolls forward. We're already achieving these returns at our repositioned resorts where demand is in many cases already recovered. Importantly, the vast majority of the dollars for these projects has already been invested. But the benefits have, for the most part, not yet been achieved but should be as demand recovers.

And finally, as demonstrated by our acquisitions to date, we believe we have significant competitive advantages in pursuing new investment opportunities as they arise. These include our ability to operate our properties more efficiently than the vast majority of buyers, the additional cost savings from the economies of scale generated by Curator, our unique strength in redevelopments, transformations and independent or small brand lifestyle hotels, our vast number of operator relationships and our high profile and very positive reputation in industry. And we look forward to many more opportunities to come. So with that, we'd now like to move to the Q and A portion of our call. Hey Donna, you may now proceed.

Speaker 0

Thank you. The floor is now open for questions. Our first question is coming from Dory Kesten of Wells Fargo. Please go ahead.

Speaker 3

Thanks. Good morning, everyone. I appreciate the top line guide for Q4, but I'm just trying to think through how incremental labor will hit the bottom line. So can you put the margin shift from July to September that you saw into some historic context? And I believe in 2019, margins contracted about 600 basis points Q3 to Q4.

Speaker 1

Sure. Well, it's a lot of difficult assumptions here, Dore, because we're also we have a pretty good handle, obviously, in October here. We're monthly through here. November and December, we're going to see how that looks like with demand. Historically, as you know, as we get until the holiday season after mid November, business travel tends to slow down and shut down through the end of the year.

This year, we think that will be very similar. We expect a little bit strong on the resort side. But you should expect margins overall. First of all, the portfolio is a little different than prior years. We have a larger resort component.

That's one. But it ultimately will come down to overall the demand. And we're not focused just on margins. We're focused on how do we get the profit per key. But you should expect that October should be better than September.

November is probably on a kind of profit side closer to the kind of September area range. And December, we'll see but likely December is usually always softer than November, even with our current portfolio.

Speaker 2

And Dore, I guess the way look, we don't If we had a good feel for both margins and the under the bottom line operating result, we would have provided that that that guidance. But but we don't really have a great view on that at this point. We we we don't know how many more people will get hired in the next couple of months as we as as we continue to fill open positions. But but one of the things you could use is take a look at the total revenue decline from month to month. On the way up, I think we were probably averaging about 50% of additional revenue flowing to the bottom line In the seasonal slowdown, particularly as we as as we continue to add staffing, it's probably more like 75% of of of the decline will of the decline in revenue will help hit bottom line margins.

So, you know, I think that's that's a reasonable guess. It could it could be off by as much as a third. So I I you know, I'm just letting you know and provide a contingency that it's hard to forecast at this point in time.

Speaker 3

Gotcha. And and can you walk through what you're seeing being marketed for sale or off market? We've heard more city center hotels are are coming to market in the near term versus the prior weighting towards more resorts.

Speaker 2

Yeah. So I guess it's all relative. So the the activity on the resort side has brought out a lot more resorts. Lots of resort areas that, you know, we weren't familiar with just like Jackal Island in Georgia. There are are additional properties in the cities now coming to market.

It's I think it continues to be a slower set of offerings, and there's probably a more limited number out there. And and as you know, we sold we we've sold a few properties in urban markets over the course of the last six months. So I think part of the benefit of of our offerings were that there was limited product in those markets, and and and, certainly, our properties reviewed, pretty favorably.

Speaker 3

Okay. Thanks.

Speaker 1

Thanks, Tory.

Speaker 0

Thank you. Our next question is coming from Smedes Rose of Citi. Please go ahead.

Speaker 1

Thanks.

Speaker 4

Hi, morning. I I wanted to ask you sort of two quick questions. The first of all, are you seeing any difference between your branded hotel performance versus the nonbranded? And the branded is a small smaller piece that maybe just some thoughts around that. And then could you also just maybe give a little more detail about how you're seeing the recovery in San Francisco and how you think that market could kinda perform over the next, you know, several quarters?

Speaker 2

Sure. So, you know, over the course of the recovery, our recovery has been led by our independent lifestyle properties and some of our branded lifestyle properties. And not surprisingly, some of the larger branded properties like our Westins were a little slower to recover. The independent properties have a lot more appeal to the leisure guest, which has been, as all know, the driving force behind the major part of the recovery so far. So it shouldn't be surprising at all that that that's occurred.

I think as it relates to San Francisco, it's just slower to recover. The tech the big tech companies have been slower to return to office. We all see the micro data that's put out by some of the companies that provide the security and check-in services at office buildings. And so it's definitely been slower to recover in that market. The good news is it has been recovering.

The case loads, in San Francisco are the lowest in the country, frankly. And so, we do expect, particularly with international travel, opening up again to see both some leisure and business travel recovery pick up. But San Francisco, like Chicago and DC, have struggled without conventions, major conventions in the market, and without the major part of corporate recovery in the case of San Francisco and Chicago, and in D. C, the federal government, which hasn't come back to their offices yet.

Speaker 1

Thank you.

Speaker 0

Thank you. Our next question is coming from Rich Hightower of Evercore. Please go ahead.

Speaker 5

Hey, good morning guys. Thanks for all the detail and the prepared comments. I want to drill down on the NAV analysis for a minute here. So maybe just give us a sense of, like obviously EBITDA at the resorts is surpassing twenty nineteen levels. It looks like the NAV here is geared towards twenty nineteen actuals across the board.

So what's the chance? What's the probability, let's say, that some of your your your markets or sort of non resort hotels don't get back to that level of performance for the foreseeable future? And then, you know, secondly, does it even matter? You know, are are buyers underwriting that either way, whether whether we believe it or not? And then on the cap rate side, with depressed income levels, obviously cap rates don't mean a whole lot going in.

But is there sort of an IRR target that these would suggest buyers are underwriting to over a longer period of time? Thanks.

Speaker 2

Yeah. So I'm glad you asked this question because it sort of gets to the heart of how we underwrite these values. These are not theoretical values. We didn't use cap rates to come up with these values. We used market transactions that are occurring.

And so what it tells you is, you know, how how, you know we don't know all the variables by other buyers are using. You know, when we look at buying, we're we're looking at, you know, forward cash flows. We're you know, unlike properties that have long term leases and, you know, where cap rates are sort of the the the methodology or the dominant methodology, it's not the case in in the kind of assets that that we that that we own and and buy and sell. And And so it really is based upon the buyer view of future cash flows, their required IRRs. When we buy, we look at five year cash on cash.

We look at fifth year cash on cash. We look at discount to replacement costs, which has an impact on risk in the market. We look at other risks in the market, whether it be legislative, whether it be union, whether it be brand or encumbrance, that impacts control and value. And we suspect other buyers are looking at similar items. So these are numbers not driven by cap rates, but driven by how folks are underwriting in the market.

And not just I mean, it's not just 19. As as you pointed out and and we've said, our resorts are performing well above 2,019 levels. We've done our best at kind of estimating the value improvements in those assets, but it's a hard thing to do. I mean, I'll give you an example, Rich. I mean, La Playa in Naples is gonna do 50% more EBITDA in 2021 than in 02/2019.

Now we've put significant money into that asset repositioning it up. So how somebody would underwrite, how much of the improvement is permanent, maybe all of it is, maybe maybe only a portion is, it'll vary by buyer and and sort of their view on what the what the cyclical and secular trends are for the business there. But that property is doing it without the substantial group business that it normally has and the and the profitability generated by that. So and then we've sold, I don't know, $6,000,000 of nonrefundable memberships at the beach club there, and we've averaged about two to two and a half million dollars of net revenue from the beach club, that's not in these numbers. So, again, how does somebody value that?

We take our best shot. We try to factor all these things in. It's not just looking at 19. It's looking at how it's recovering. It's it's looking at how buyers are expecting these markets and these properties to recover.

And they're all gonna be wrong. We're all gonna be wrong in one direction or the other. Right? So Yeah. It's it's a much more complicated process, and the cap rates are just a result of all of those factors.

Speaker 5

Right. And I and I guess

Speaker 2

And and we put them and we put them against 19 numbers just just because those are the only stable numbers. We could have put them against twenty twenty one resort numbers as an example, to to show you some of the differences, but it was just it was just simpler to do the whole portfolio, that way.

Speaker 5

I I get it. So either way either way, the the 30 to 35 doesn't necessarily represent a a liquidation value that Pebblebrook would be comfortable with. In reality, you know, spot in time today, I mean, it it's just kind of a helpful guidepost, I think, more than anything. Is that accurate?

Speaker 2

It's definitely a spot in time. And these numbers have gone up substantially in the last six months, not surprisingly, in our own internal calculations. But we didn't feel like we had enough transactions, actual transactions in the market to feel comfortable putting these numbers out publicly. So they're going to continue to move based upon performance and how the recoveries play out and how buyer perspectives change on the market and how much product becomes available on the market. There's just a lot of variables, obviously, that can impact values.

Speaker 5

All right. Thanks, John. I'll hop back in the queue.

Speaker 2

Sure.

Speaker 0

Thank you. Our next question is coming from Shaun Kelley of Bank of America. Please go ahead.

Speaker 6

Hey, good morning, everyone. John or Ray, you did give some color throughout, but hoping you could just drill a little deeper on the midweek occupancy improvement that you're seeing throughout the portfolio so far in October. Yes, think you said the occupancy is already back to July type levels. Sounds encouraging, but can you just give us a little bit more color on markets and industries that might be driving that and a little bit of the behavior you're seeing there?

Speaker 2

Sure. So, I mean, we've we've all seen the improvement in in a lot of the micro data. And I know, you know, BofA publishes a a lot of it. And and in in some cases, actually accumulates some of it as well. But if we look at October, as an example, for weekdays, through through October 24, the portfolio for weekdays is running at 50.7% and a rate of 249.

So, you know, that would compare to September weekdays. As an example, that ran 43.3% for the full month at a rate of $2.44. So again, continuing improvement in both rate and and occupancy. And if you go back to July, which was the peak so far in the recovery, weekdays, we ran just under 53% and at a two sixty one rate, which obviously was dramatically impacted by the much higher resort rate. Resort rate for weekdays ran $424 for our resorts.

And for our urban properties, $218 for weekdays in July. So, you know, for for urban weekdays, in October month to date, we're running at $235. So you can see that's up from the $2.18 in July and represents, you know, continuing progress we've made on rates and as business travels come back. So I would I I would say, you know, from an industry perspective, Sean, I mean, it's it's fairly comprehensive across the board. We get reports weekly with a lot of comments from our teams.

We ask them to provide comments about which of their corporate accounts are returning, even if it's one or two or three rooms, and then track that over the course of months. And we've just seen a lot more a a lot more of the typical corporate names in each of our markets, a lot more of our major accounts, albeit at much lower volumes, but but definitely traveling. A lot of volume from consulting, which has come back, you know, project business around the country, medical, pharmaceutical, bio lie and life, biomedical and life sciences. LA is is benefiting from entertainment, production, music, concerts starting back up. You know, music groups come to to LA and practice before they go out on tour, as an example.

And and so they come and their teams stay for weeks at a time before they go out on tour. Fashion is returning, commercials being made. I mean, it it's it it where we haven't seen it is just volume out of a lot of the larger accounts, which would include financial services, albeit a lot of those have are on the road again. All of our banks in our line, 18 of them are all traveling again, even though they're not back at the office yet. So that, divergence is a positive.

You know? While we do think back to the office will influence it, because we think if you're in your office, you're likely to have guests come visit you and invite people to come visit you. But but but it's definitely they've definitely been disconnected, so, in a in a positive way.

Speaker 6

Great. And maybe just as my follow-up, there's been some increasing delineation in the industry between small corporate and big corporate where we started to see, I think, small and medium sized enterprises getting back to normal a little bit faster than maybe those Fortune 500 largest kind of corporate account clients. Any way you could either break that down size wise for your portfolio? Like the do do you know do you know your exposure to to maybe, like, larger scale corporates versus a more mixed bag? Or or for the industry, if you've ever seen anything interesting there?

Just sort of a a high level question because we we we're getting this one increasingly.

Speaker 2

Yeah. I mean, we I would direct you to the brands who might have better information. I mean, frankly, again, since if you think about it, I would guess of our business travel demand, our transient business travel demand, I would guess 60 or 70% of it at least comes through noncorporate account channels. So those are being made through the GDS system, through OTAs, and and other channels, direct on our websites. And they may or may not provide a corporate name.

They may or may not be there for business. You know, it's what we've always said. We we just don't have the best tracking data. We know it comes through our corporate accounts, but our corporate accounts are a small percentage of our overall business travel. And and frankly, you know, when you have citywides and conventions, it gets even more blurred because a lot of people don't stay in the convention blocks.

They just book directly with hotels. That comes through as transient for us, but the demand driver is group. It's a convention. It's a big conference. So I wish I could provide you more better information on that, but I'd say anecdotally, you know, 80% of our business right now is probably small and medium business travelers, whereas the the larger corporations have been slower to to recover their volume from pre pandemic times.

Speaker 6

Great. Thank you very much.

Speaker 0

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

Speaker 1

Good morning.

Speaker 7

My first question is on hourly staffing trends at your hotels. I appreciate labor models may be quite varied across the portfolio, and there may be structural reasons why you're not seeing as much wage growth. One high level figure from the Bureau of Labor Statistics noted about a 13% year to date increase in hourly earnings for nonsupervisory roles and hospitality. But if I understood your commentary this morning, you're not seeing these hourly wage increases in general, perhaps excluding the resorts. So, taking a narrow view, for a housekeeper, for example, roughly how much higher is an average wage today versus earlier this year, in your resorts versus your corporate focused hotels if you're willing to share?

Speaker 2

Yeah. I mean, I I would share it if I had that information, but I but I but I don't have that information specifically. I I would say this, Greg, to to think about it in a broader context, if you don't if you don't mind. It's probably the best I can do. But, you know, in urban markets, what what we what we've done is we followed what we typically do, which is we follow either our union contracts where we're union.

Those have specific increases each year, already negotiated. In many cases, those are obviously, you know, a multiyear intermediate term contracts. You know, those have generally been anywhere from 3% to 4% a year in terms of the wage size. And the cities, the rest of the properties that are nonunion in those markets typically follow. So we would have had those increases for the most part last year.

It's possible there were properties that ended up being closed last year, and they didn't take those increases. So when we came back this year, maybe we went up 6% earlier in the year because it was a two year process, or we went up the 3%. The market moved last year, and then we caught up in July with another increase. So we're really just following the markets. Keep in mind the urban markets for the for the for the vast majority of the cities that we're in are way above where either a minimum wage legislation is or, you know, we we hear about Amazon and Costco and Walmart or Starbucks taking substantial increases.

But they're generally way below where our housekeepers are in our properties. So the the the cities just don't aren't getting impacted by that bureau of labor data, which I I don't think breaks it down between a city and a and a suburban or secondary or tertiary market.

Speaker 1

Yeah. And and, Greg, just to add on that, the the wage pressures that we're seeing and the wage challenges are more in the suburban markets and the resort markets than urban. Urban have been less of a challenge with the hourlies. Clearly, the demand is at a different level there than the resorts. It's resorts that have been in suburban markets more pressure.

And that's also where folks like Amazon and and Walmart are also hitting more too because that's a a good job in a suburban or resort market.

Speaker 2

Well, it's where the wages are lower. Mhmm. So so it's really the the it's really the secondary markets, the the some of the resort markets. And, you know, Key West has been always been a challenging market, and, we we've had some increases there. I I guess they've probably been anywhere from five to 10%.

And then we've had we've had some of the third party contractors we use for housekeeping and the keys go out of business. And perhaps they weren't paying their taxes to the federal government, so they they got put out of business. And and so we've had retention bonuses in place for new hires. You know, six months out, we might pay 250 or $500. We've had referral bonuses.

Frankly, that's fairly common practice, but but some have increased to from 250 to $500 because the best the best channel for hiring are people's friends and family, frankly, in these hourly positions. And I think the other thing to think about is at our properties that have successful outlets, food and beverage and banquet and catering, we're able to pull people from other properties that don't have the same volumes or the same pricing because those people make more money at our properties and in our outlets than they do at another property. And so I do think there's gonna be some bifurcation in the ability to hire and the ability to pay and people to earn higher wages and benefits versus in in some of these markets between higher quality properties and and lower rated properties.

Speaker 7

Thanks for all of the insights there. And I also struggle with getting to a market level perspective. I don't think VLS does it. So, it's all very, very helpful. My follow-up is related to what you were just discussing.

There's a bit of a consumer behavior and customer service question. While not specific to your hotels, across the service industry, one emerging theme as of late is that consumers are paying the same or more for services, but the service quality is getting worse. NPR had a piece on this recently calling the concept skin deflation.

Speaker 8

Yeah.

Speaker 7

I could see ramifications for PED in several ways, but one that comes to mind is consumers paying up for hotels where there is superior service, where that bifurcation that you were just talking about may be applicable. And and maybe that applies to PEP where consumers pay up for your hotels. But for other hotels where their consumers are expect expecting less service, maybe they are more likely to to just pay less. So I'm curious if you have any opinions about this topic or I'm totally off base here.

Speaker 2

No. I I I think you're you're on base, but I but I would, and we've talked about this in the past. I don't think it's just service. I think it's the quality of the product as well. And so as as we've talked about in the past, in in the recovering part of the cycles, our assets tend to gain share, which they're which they are doing now, particularly on on the rate side.

You can always hold occupancy. You just have to lower your rates to to attract people who are price sensitive. So as as we've said, we're seeing our rate our rate gains being substantial, particularly at the properties that that we've repositioned, but really throughout the portfolio. And and part of that is and we track I mean, it it's just one measure, but we track our TripAdvisor rankings, traveler rankings. And what we've been gaining over the course of the entire year, within our portfolio, we're up from pre pandemic levels, and we're up from the beginning of the year.

So we do think that translates into to better performance. And properties that are unable to either hire quality talent or enough talent or maintain their properties tend to get into a vicious circle of losing share, not generating enough cash flow to improve their properties or pay their people or have enough people. So I I do think there's a there's a lot to it, and it's why we're, you know, why we're highly sensitive to the kind of service we provide. We've opened restaurants in in facilities where we may be losing money on the restaurant right now, but it's important to gaining the the the visitor and the rates, that we're charging on on the room side.

Speaker 7

Great. Thanks, John. We appreciate all all the insights.

Speaker 2

And and if we could hold questions to just one so we can finish before the weekend. I mean, we're happy to stay, but we're just concerned that some of our listeners may may depart quickly. So and I'll try to make my answers a little more concise. So Or just ask us no questions.

Speaker 0

No. Our next question is coming from Michael Bellisario of Baird. Please go ahead.

Speaker 9

Hey, guys. Good morning.

Speaker 1

Good morning, Mike.

Speaker 9

Two part question, but kinda goes hand in hand. Maybe there's one answer. Just could we go back to risks? Just first, kinda fundamentally, what are the bigger picture risks that you're focused on as as you look out over the next twelve plus months, virus aside? And then kind of heartbeat to that is what about on the real estate side and on the transaction side and markets as you think about reallocating capital?

Where are the risks there?

Speaker 2

Yeah. So there's plenty of risks out there other than just the virus. There always have been in our industry. I think the sort of bigger macro risk we think about, we're not too concerned about today, but it potentially could go down that road is if inflation is not transitory, whatever transitory means, meaning I guess my view would be if it gets built into permanent expectations of increases and you get into that cycle of response, increased response, you know, then the Fed has to jam the brakes on and we have a recession or we have a significant slowdown and not the length of recovery that would be more typical to prior cycles. So that's probably the bigger risk we worry about.

We don't generally worry about inflation. We actually think it helps our space. And as we've indicated in our comments, right now, the customer is extremely well off and pretty insensitive to price increases right now. And and so we're we're taking those where where it's appropriate. I think on the micro side, it's dealing with the more typical risks that we had pre pandemic, whether that's quality of life in cities, the homeless issue, safety, which has become a bigger issue in many cities, including cities that didn't have

Speaker 6

a pre

Speaker 2

pandemic issue or at least to the same extent. Because when people aren't around in cities, they tend to become a little bit more active in negative ways. There's just more opportunity for crime. And so with the combination of that with the sensitivity to policing and the manner of policing, the two of those have not interacted well in some places. And so that's a risk we're trying to understand as we move forward.

How long does it take? I mean, went through this in some other cities like New York where they got to a point where the electorate rose up, elected people who were focused on those key issues. And we're beginning to see that in some cities, but we think some of the recoveries may take a little longer because a lot of travel, including conventions, are is discretionary. So that's a risk that we look at. Interestingly, there are folks on the buyer side who look at union risk, don't want to buy union properties, but we we kinda look at it the other way.

The risk is getting unionized in a market. If if a particular property hasn't kept up, which ours do from a wage and benefit perspective. But when we look at buying, we need to understand is there exposure either is there a significant wage and benefit increases that need to take place to get to union wages in those markets, which are appropriate. So to us the risk is greater, it's either financial, which you need to build in, or if you don't build it in, then that's a risk you're going to carry forward in that market. So we don't have a problem with union properties, the union paying people fair wages and providing full benefits, which we do in the industry.

But we have to understand when we buy properties what others have been doing.

Speaker 9

Got it. Helpful. Thank you.

Speaker 0

Thank you. Our next question is coming from Bill Crow of Raymond James. Please go ahead with your question.

Speaker 10

Hey, good morning. John, your scripted remarks, but I think thirty five minutes. So it's not fair to blame all questions here. But I will ask you, I'll ask you one on San Francisco.

Speaker 2

No. We would we would expect that to lead to fewer questions. So you know? Uh-huh. Okay.

But Well But that's a evidently, that's a wrong premise, and and that's okay. We we've done 90 calls, and it's always been the same.

Speaker 1

So And and, Bill, was that your question?

Speaker 2

Yeah. Was that That was Thanks, Bill. That

Speaker 10

was a statement. John, John, we find ourselves kind of what we were pre pandemic. If you look at Vegas, it seems to be really thriving here, and you look at San Francisco, arguably the worst market in the country or or one of the worst. And and I'm just, you know, wondering whether we just have kind of gone back to where we were in this this decline in San Francisco from a, you know, convention and and meeting perspective and and and, you know, continues. And, you know, in the interim, we've lost a number of of companies to other markets, in Texas in particular.

So just your thoughts on the future there and maybe how much you're willing to continue to allocate from a percentage of portfolio basis to San Francisco.

Speaker 2

Yeah. So I mean, I think betting against San Francisco in the long term would be a mistake. We we think, you know, the underlying fundamentals that have made that city great still exist. You know, it's not just the weather and the geography and the the attractiveness of of the city and the and the surrounding area. But the it's the attractiveness of the economic base that generates so many new businesses, so much economic growth, so many new jobs, so much more office demand, and and provides so many reasons for travel.

So I don't I don't think that's gonna change. A lot of that base, you know, comes from the universities. It comes from the clusters that are already there. It comes from venture huge amounts of venture capital that flow flow into that area. I mean, look at biomedical and bioscience that are exploding in the San Francisco Bay Area.

And while there are other markets where that is while that's happening, it's a fairly limited number. And San Francisco would be in the top four for sure in The US. So we don't think that changes. We're pleased with some of the near term changes adopted by the government. There's another billion dollars a year for two years going for, homeless.

There's more dollars for, the police force, for for maintaining, the the count in the police force. So so bringing on people for those who've retired or or left the force. Not all markets are doing that. There's another 300,000,000 a year for the next two years for mental health and dealing with those issues. So we think the government's coming around to addressing the issues.

And and frankly, we think San Francisco is a great long term market. It's just gonna struggle in the short term until we get past this virus and we and businesses all come back to work. People, which has already been happening, moved back to San Francisco from their parents' houses. And you can see the continuing growth. I mean, if you look at the the numbers for the companies that have gone public or been bought by a SPAC in the Bay Area.

It's not even close. It's like 70% of it of what's happened in the entire country in the last year. So I wouldn't bet against San Francisco, and we're not gonna bet against San Francisco. But we do look at relative risk and return. And we've sold a couple of assets in San Francisco.

We'll likely sell a few more, and we'll reallocate that capital to markets that we think have more attractive risk return opportunity.

Speaker 10

Thanks, guys.

Speaker 2

Thanks, Bill.

Speaker 0

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

Speaker 8

Thanks. Maybe just following up on the NAV update. With resort NOI higher in 2021, I imagine the underlying cap rates probably haven't changed that much from where they were in 2019. I guess, is that a fair way to think about it? And then if that is the case, what, if anything, does that imply about the expected durability of the strength you're seeing there, at least in the eyes of investors?

And do you think there's room for further cap rate compression?

Speaker 2

Yeah. So all good questions and all I wish I had great answers to because it's complicated and some of it is a bit unknowing. But I I would say there's no doubt that resorts would, all things being equal, I think, trade at lower cap rates today than they did pre pandemic because I think there's a view that there's less risk in resorts and more risk in urban at the very least in near term. I mean, you're buying an asset that's delivering cash yield versus some urban properties that if they are delivering cash yield are smaller. And so even that gets factored into valuations.

I think the part about and frankly, the investment brokerage community, has a premise for the hotel industry overall, which probably would be amplified in resorts, which is, yields have come down in all other product categories. You know, industrials, you know, down to 4% cap rates or less. Certainly, residential down to sub four cap rates. Health care down as well. So other product care categories also coming down.

So their argument would be, you know, if you will, cap rates. And really, cap rates are a result. You don't have stabilized income in many cases. So again, we're back to you forecast forward numbers. Cap rates seem to be more relevant in other categories where the changes from year to year are much smaller and are driven by existing contracts or leases, which is very different.

So you have a wider view of valuation assumptions, and that's what makes a market so interesting. And when we get bids on properties, it can be a fairly wide range, which is probably a little bit different than what you might see in other categories. So there's no doubt resorts would trade at lower cap rates. But on what numbers and what do people believe in terms of the stability of the existing numbers, mean, we think our resorts are gonna do significantly better next year as an example. And we already see that in the first half numbers that are on the books.

And we already see that with group coming back at our properties that also cater to group. So we're gonna run much higher revenue numbers and in many cases, higher ADRs than we did in this year where the rate growth really didn't get humming until late in the second quarter into the third quarter. So sorry. It's it's again, it's a longer answer. But and I don't know that it's that there's a right answer to it, Ari.

But but it it's the way we we we would think about it.

Speaker 1

And Ari, I'll also add that we've also renovated or redeveloped several of our resorts recently. So if you're looking at where the values were in '19 and cap rates there and comparing it there, there's a change. You have to take into consideration, for example, at La Beres Del Mar, the renovation we completed here in this recent May. Southernmost in La Playa, we've invested capital there. Mission Bay in San Diego, we deflagged it from Hilton and made it independent invested capital there.

In Eskomeda, we added some more tree houses and other amenities. So there's a lot of other factors going on in there, which should continue to grow the value of those properties.

Speaker 2

We've really redone all the resorts, and Southernmost was the last one. So they've all been they've all been fully renovated and redeveloped and repositioned in many cases in in the last three or four years.

Speaker 8

Got it. Appreciate all the color.

Speaker 1

You. Our next

Speaker 0

question is coming from Anthony Powell of Barclays. Please go ahead.

Speaker 9

Hi, good morning. Just a question on the recovery of business transient. You mentioned you needed to get that back to get back to 2019 EBITDA levels. But has the exact percentage of recovery needed changed given all the strength you've seen in in in leisure both in the resorts and and urban properties? Instead of getting back to maybe 95% or 90%, do you need to get back to a lower number if you hold on to some of these resort and, you know, urban leisure gains you've gotten this year and, if I could get next year?

Speaker 2

Yeah. I mean, it's a good question, Anthony. And and I hope our comment wasn't misinterpreted. We don't need to get back to the same exact levels we were at from a volume perspective. For the for the for some of those reasons that you provided, one, is the strength of the resorts.

Two, I think ADRs are are likely to to to run above 19 very quickly and and in many cases, blow past 19 levels in a in a even a transitory inflationary environment. Three, we we've changed our models in how we operate these properties, and and so we expect to get back, as we said, to to bottom line EBITDA numbers before even we get back to the same revenue levels, let alone the same volume, numbers. And so no doubt the the the segment that'll be, slowest to recovery is gonna be the business travel side and, and and more likely, probably a little bit more on the group side than the transient side, in in terms of timing. But we do think there's a lot of pent up demand there, and it it may happen a lot quicker than what people think, again, with the provider being what happens with the virus and do people begin to behave normally and with, you know, the vast majority of the population vaccinated.

Speaker 1

Got it. Thank you. Thanks, Anthony.

Speaker 0

Thank you. Our next question is coming from Floris Van Dykem of Compass Point. Please go ahead.

Speaker 11

Hey, thanks guys for taking my question. My question is sort of related to the NAV, but maybe if you could touch upon 16% of your assets still have Marriott managements. How are you incorporating that in your NAV? What is the upside potential? What's the timing of that of those contracts when they can be become independent or or non Marriott managed?

Maybe and also, if you can talk about the, know, the how are you capturing things like Paradise Point potentially, you know, switching to a Margaritaville?

Speaker 2

Is that is that captured in

Speaker 11

your NAV or or not? And and and Curator and and the z collection, are those those presumably are not part of your NAD collect calculation as well. If you can maybe just touch upon some

Speaker 2

of those things. I know

Speaker 11

it's a a multifaceted question, but just curious to to get your thoughts.

Speaker 2

Yeah. So so, Floris, the the specific ones you mentioned, so expiring expiring Marriott contracts, we have a couple of them. The Westin Michigan Avenue, in the 2026. The, the Westin Copley, in Boston, in the 2028. Both of those, are old contracts and have management fees that are dramatically above the market.

But we've not factored that in at all in our valuations. We've not factored in curator into our valuation, and you note no line for curator in our NAV as well, corporate NAV. And we've not factored in any of the future conversions or opportunities within the portfolio like Paradise Point to Margaritaville in the portfolio. So none of that is taken into account. I I I do think, you know, we we tend to be pretty conservative with our NAV.

The market historically still doesn't believe us even when we sell sell billions of dollars within the within the value ranges that we've provided. But it it perhaps it's again, if the company is getting valued on cash flow and and NAV doesn't matter, that that's understandable in in how a business is valued. But if the management team's willing to sell and reap those values, then you would think it it might be taken into account to a greater extent. But not for me to to comment on the stock price, but more sorry. Just trying to answer your question about the valuation of the company.

Speaker 11

Thanks, John.

Speaker 0

Thank you. Our last question today is coming from Chris Darling of Green Street. Please go ahead.

Speaker 9

Hi. Good morning. John, you touched on it on that last answer, but going back to that NAV estimate and the obvious discount there between your share price and your internal estimate of value, it does beg the question, why not look to sell assets more aggressively and try to take advantage of that disconnect? So just curious to to maybe better understand how you're thinking about that.

Speaker 2

Sure. So so when we look at valuations and we look at whether we sell or buy, there's a lot of things we have to take into account. The the long term strategy of the company, some of the opportunities that, know, Floris even asked about in terms of how much opportunity is there in in in the individual assets to to drive growth and cash flow and value. And and and you need to have a place to put those investment dollars. Many of our old properties we've owned for a while or that we acquired from LaSalle, which were owned for a significant period, also have tax issues that we have to take into account within those decisions.

And we also are in a business where some of these properties, you you might never see again in the market in terms of availability. So it's not like trading in and out of stocks, and I know that's not what you're what what you're suggesting at all. But it is it is harder to to trade these assets versus looking at them on a long term basis. But we have sold significantly in the past and when when that disconnect has lasted, and that may very well be the case as we move forward.

Speaker 9

Fair enough. Thanks for the thoughts.

Speaker 1

Thanks, Chris.

Speaker 0

At this time, I'd like to turn the floor back over to Mr. Bortz for closing comments.

Speaker 2

Well well, thanks thanks very much, Don, and thanks, everybody, for participating. We as much as we joke about it, we appreciate your your questions and the thoughtfulness of them, and and we look forward to updating you again next year, and we will continue to provide our our monthly updates in the meantime. I hope everybody has a nice holiday. Thank you.

Speaker 0

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and enjoy the rest of your day.