Pebblebrook Hotel Trust (PEB) Q4 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Pebblebrook Hotel Trust Fourth Quarter and Year-End Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation [Operator Instructions] It is now my pleasure to introduce your host, Raymond Martz, Chief Financial Officer. Thank you, sir. Please go ahead.

Thank you, Donna. And good morning, everyone. Welcome to our fourth quarter 2021 earnings call webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. But before we start, a 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 their SEC filings and future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today, February 23rd, 2022, 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. While 2021 was another challenging year for the hotel industry and Pebblebrook, we made significant progress on a road to recovery. We thank our hotel teams and operating partners for their hard work, sacrifices, and creativity over the last two years. Our portfolio continues to benefit from their tremendous efforts as we enter the recovery and growth phase following the pandemic. For 2021, our same-property hotel revenues increased by over $280 million or 65% versus 2020, with hotel EBITDA at a positive $132.1 million. This marked a tremendous improvement from 2020 when our hotel EBITDA was negative $27.5 million. Our adjusted EBITDA finished at $88.3 million compared with negative $69.7 million in 2020, again, considerable progress from a year ago. And while we still have much work ahead, we believe we have considerable upside to come. Adjusted FFO per share ended 2021 at a negative $0.32. A substantial improvement from 2020, at -$1.46 per share. And during the second half of 2021, we generated positive Adjusted FFO of $0.22 per share, it was trading a trajectory of rapid improvement in growth that started this past summer. On the investment side, we are very active. We completed over $270 million of asset sales, comprising two hotels in San Francisco and one in Manhattan. We invested these proceeds in more into $492 million of acquisitions across four leisure focus resorts with significant upside opportunities. We're excited about the many operating, re-merchandising, and re-development opportunities at all four of these properties. On the capital side, we raised more than $740 million in 2021, increasing our liquidity and acquisition capacity. We replaced $250 million of preferred equity with less expensive preferreds, saving $1.8 million in willing preferred dividends. In addition, we extended over $1 billion of debt maturities, further enhancing our liquidity and eliminating any significant debt maturities until late 2023. At year-end 2021, we had $730 million of liquidity, including $92 million of cash on hand and nothing drawn on our $650 million unsecured credit facility. Turning briefly to our fourth quarter results, same-property total revenues of 245.4 million or 29% below the comparable period in 2019, marking our best quarter versus 2019 since the pandemic. This strength was driven by continued robust demand at our resorts and further improvements in business travel, both group and transient. Total revenues at our resorts climbed to a level 11% higher than 2019, fourth quarter, primarily due to dramatically higher room rates, which are up a whopping 43% to 2019. Our urban hotels continued to show further improvement with same-property revenues down 44% in the fourth quarter versus 2019, the best performing quarter since the pandemic. Most encouraging were the trends we saw in December throughout the portfolio despite the negative impacts of Omicron. Same property total revenues in December were down just 18% compared with December 2019, the best monthly performance since the pandemic, with same-property ADR up 20% and same-property hotel EBITDA down just 9% compared with December 2019. ADR for our urban hotels recovered by the end of December, 2021, to be ahead of 2019 -- December 2019 by 1.9%. Our monthly same-property ADR exceeded the comparable month in 2019 four of the last 6 months in 2021, despite the disruption caused by the Delta and Omicron variants. The highlight -- this highlights the increased ability of our portfolio to surpass 2019 ADR throughout 2022, earlier than we thought possible, just a few months ago. And we are increasingly confident we will reach 2019 hotel EBITDA levels later in 2022. These trends are encouraging. However, these improved expectations assume no additional, significant waves of the pandemic. Our ADR gains in Q4 compared with Q4 2019 were impressive. And many of our properties, but bears Del Mar was up 70% or $273 Marker Key West was up 53% or $179, Southernmost Key West was up 48% or $177, and LaPlaya Beach Resort Naples was up 38% or $143. Each of these resorts have been renovated recently. At our new acquisitions, ADR was up 42% or $110 in Margaritaville Hollywood Beach Resort, and up more than 36% or $77 at Jekyll Island Club. Even with these healthy increases in room rates and food and beverage pricing, the feedback from customer reviews has improved at our properties, indicating a favorable price-to-value relationship. Since the start of 2021, our portfolio-wide Tripadvisor rankings have improved by an average of eight spots. This demonstrates that despite higher prices, our guests appreciate even more the enhanced quality and experiences from our renovations. And the excellent service of our hotel level employees are providing. We thank our hotel teams and asset managers for this progress in what has been a challenging labor environment. In the fourth quarter, our best-performing properties included two of our recent acquisitions: Margaritaville Hollywood Beach Resort, which increased hotel EBITDA by over 225% versus 2019 and Jekyll Island Club increased hotel EBITDA by more than 145%. Our recently transformed San Diego Mission Bay Resort and the recently renovated L'Auberge Del Mar both more than doubled their EBITDA compared with fourth quarter 2019. In terms of markets, we continue to see healthy recoveries in Los Angeles, San Diego, Boston, and Philly and our weakest re-markets continue to be San Francisco, Washington DC, Seattle, and Chicago. These trends are continuing into 2022. On the operating expense side, despite the cost pressures most businesses are experiencing, we remain encouraged that our new operating models have made our hotels more efficient and more profitable as we climbed back to pre-pandemic levels of demand and revenues. Labor challenges has significantly reseeded and many of our properties are now well situated from a staffing perspective. The high quality nature of our properties affords the staff at our properties is the ability to earn market-leading wages and benefits which gives our teams the ability to attract the best quality associates. The combination of cross-training, technology and clustering of our management teams in markets with multiple properties managed by the same operator has provided significant permanent cost savings on an ongoing basis. And with an ability to raise prices, we feel like we are in good shape to offset future inflationary cost increases. We remain confident that we have eliminated a 100 to 200 basis points of expenses at our hotels from our wider ray of operating improvements in our operating [Indiscernible]. Shifting to Q1, 2022, operating and demand trends. We estimate that the Omicron variant significantly reduced revenues in January and February, both due to group and trends in cancellations and a material slowdown in new bookings, especially in January and early February, and especially in business travel. In late December, the JP Morgan Healthcare Conference in San Francisco, which was to be held in early January, was unfortunately canceled and went virtual, costing our portfolio over $6 million in total revenues. Fortunately, the vast majority of city wide and group meetings scheduled in Q1, they were canceled throughout our portfolio have been or are rebooking into Q2 or later in 2022 and have done so at higher rates. This indicates corporations and other businesses are in desire and need to hold their meetings in person. January same-property total RevPAR was down an estimated 43.8% versus January 2019. This was a very challenging month however, we are encouraged about the rapid improvement we're seeing for February and March. We think same property, total RevPAR for Q1 could come within one or two points of Q4 as compared to the same quarter in 2019, despite significant impact from Omicron in January and February. We currently expect March to return to recovery to drudgery that we were experiencing before Omicron and we're already seeing a significant acceleration in business travel bookings for March and beyond. This is expected to result in Q1 same property total revenue or RevPAR down 30% to 35% to 2019 with same property hotel, EBITDA between $25 and $35 million and adjusted EBITDA between $14 and $19 million. We are forecasting in Q1 adjusted FFO per diluted share loss of $11 to $0.15, which compares favorably to 2021 Q4 adjusted FFO of negative $0.42 per share. We expect the first quarter to be the only negative FFO quarter for the year, as we expect to return to profitability again in Q2, and for the balance of 2022. This is the first time since the pandemic that we're confident enough to provide a quarterly outlook indicated our increased comfort level with the visibility and stability in near-term operating trends. Of course, these assumptions assume no additional operates from the pandemic. Please note that starting in Q1, we will be adding back the amortization of non-cash stock compensation to both our adjusted EBITDA and adjusted FFO results for the current year and for the comparable period last year. We are making this change since most of the hotel rates and all of the hotel C corp's report their EBITDA and FFO in this manner. So this change will make us more comparable with industry practice. Shifting to our capital improvement program, during 2021, we completed $83.8 million in capital investments and redevelopment projects. This includes six significant renovations and re-merchandising projects representing $53.4 million of the capital we invested in 2021. Since 2018, we've invested approximately $350 million into redevelopment and transformation projects at 25 different properties. We expect these projects to generate 10% or better returns as demand returns and performance stabilizes over the next two to three years. For 2022, we have $100 million to $120 million of capital investments planned, of which $80 million accounts for the major redevelopments and smaller ROI projects. In 2022, we'll have eight significant renovations or redevelopment projects either underway or starting later this year, including the transformations of Vitale to 1 Hotel San Francisco, Grafton on Sunset to Hotel Ziggy, our next unofficial Z Collection hotel, and Solamar to Margaritaville San Diego Gaslamp District. Major repositions at our newly acquired Jekyll Island Club Resort and Estancia Hotel & Spa in La Jolla will start later this year as will long overdue major renovations and upgrading of the Hilton Gaslamp Quarter, and the second and final phase are repositioning Viceroy Santa Monica. And following whatever governmental approvals come through, the transformation and Paradise Point Resort & Spa to Paradise Point and Margaritaville Island Resort San Diego. We are very excited about these projects and expect they will drive significant EBITDA growth and value creation. With that, I will now turn the call over to Jon. Jon?

Thanks, Ray. I'm going to try to be reasonably brief and point it so that we can get to the Q&A. Demand has firmed since the January pullback. Business travel, which took a break in January from a material recovery in the fourth quarter is noticeably improving. Citywise and larger business group meetings are happening. Group lead volume, site tours, and bookings have increased substantially in the last few weeks. Most groups that canceled for January and February have rebooked and done so at higher rates. February is turning out to be much better than we expected just a few weeks ago, particularly the second half of the month. We expect same-property revenues to be down between 25% and 28% versus 2019. Pick up in March has accelerated in just the last two weeks. Both holiday weekends in February turned out well and Super Bowl in LA for u, added $3 million to $4 million as we achieved around 90% occupancy of our 1786 West LA rooms at a rate of around $800 per night for four nights. Our revenue management teams did a terrific job. We're seeing a significant increase in business transient, and group travel as Omicron recedes and masking and vaccine mandates are relaxed or eliminated. We believe there is significant pent-up business demand to aid a continuing robust level of leisure demand. And there is currently little to no price sensitivity from either leisure or business customers. We're very optimistic about an accelerating recovery in business travel over the next three to four months, and we're already seeing it for March and April. And we're extremely excited about the potential growth in occupancy and rate, in particular, over the next few years. There will be limited new supply over the next three to four years in our industry, particularly in cities and resort markets. And that will provide a great long runway for occupancy and rate growth. Hotel stats are at low levels and will be for at least another year. Rooms under construction are declining and development costs have climbed dramatically in the last two years. Any large new hotel development, like urban high-rise hotels or resorts are now taking 36 to 42 months to complete from shovel in the ground. Replacement costs have climbed dramatically from pre-pandemic levels up 25% to 35%, and 20% plus in 2021 alone. Urban and resort land costs have also climbed significantly. After a great deal of research and effort, we estimate that our portfolios replacement costs have increased to between $700 and $750 per key. When we look at performance in our portfolio, our resorts continue to lead the way. Our resorts, particularly those in the Southeast, are on pace to far-exceed their EBITDA in 2019. For Q4, those Southeast resorts exceeded Q4, 2019 by $8 million or 61%. And all 11 resorts combined are on pace to achieve a trailing 12 month same-property EBITDA by the end of Q1, of approximately $150 million. That's up $32 million or 27% from 2019 Combined EBITDA from all 11 resorts in Q4 exceeded Q4 '19 by $11.2 million or 54%, with ADR up $109 or 43% and RevPAR climbing $37 higher or 20%. We continue to be very focused on taking advantage of pricing power and a lack of pricing resistance, not just for rooms, but for F&B, banquets and catering, parking, resort fees, and service and administrative charges. This will help us get back to 2019 bottom line numbers sooner, though we clearly still have our ways to go. July, 2021 was the first month we exceeded 2019 rates. Q4 2021, was the first quarter we exceeded 2019 rates. And now, we're increasingly confident, 2022 will be the first full year, will exceed 2019 rates. Even as we regain occupancy from business travel throughout the year. In Q1 January as estimated to have beat in 2019 same-property ADR by over $25 and over 10%. February ADR is on track to exceed 2019 by approximately $50 or 20%, with about $16 or seven points of it due to Super Bowl. March is looking like it could also exceed 2019 by 10% or more. Our acquisitions have far exceeded our underwriting and the annualized 2021 returns were terrific. A 7.2% NOI yield for Margaritaville, an 8% NOI yield for Jekyll Island Club Resort, and 3.4% for Estancia La Jolla, which we acquired on December 1. When we look at the trailing 12 months through Q1 this year, we're forecasting Margaritaville at 8.4%, Jekyll at 8% and [Indiscernible] at 4.6%. This is all before any physical improvements, but it does include benefits from operating changes we've already implemented with our operators. As Ray said, we've invested almost $350 million in transformational redevelopments and major renovations in 24 properties since 2018, including 16 properties acquired through the Lasalle transaction in late 2018. This is a big deal and was a lot of work. The increased performance from these projects will substantially increase our performance over the next few years. And we're already seeing it at our resorts where we've seen demand recovers. In addition to these major projects, we also have numerous smaller ROI projects throughout the portfolio, such as converting the pool on the rooftop of Revere in Boston to additional indoor-outdoor event space and adding a resort pool to Chaminade Resort in the Santa Cruz mountains to continue the transformation of this former conference center to a more amenity-focused, leisure, and group destination. We're adding a new lease restaurant at Mondrian in West Hollywood, completing the property's recent $19.5 million redevelopment to return it to its former glory on Sunset Boulevard. And we're undertaking a comprehensive rooms renovation at Viceroy Santa Monica to complete a $115,000 per key or $19.5 million repositioning of this iconic luxury urban resort. We're also adding five keys at Le Méridien Delfina Santa Monica, creating them out of unused storage rooms and offices. And then there are two major multiyear projects we've been working on now for several years. And both involve the master planning of significant unused acreage at former conference centers. Skamania Lodge in the Columbia River Gorge and Chamine Resort in Santa Cruz. With the incredible success of the outdoor pavilion and six tree houses we added at Skamania in the last five years. And the trend of consumers looking for increasingly experiential lodging alternatives. We believe we have the potential to add as much as a couple of 100 units of alternative lodging at both properties, including tree houses, glamping, spaces for luxury RVs, cabins, villas, farmhouses, and additional outdoor activities. This year it's Skamania as the first step in this master plan, with a $10 million to $12 million investment. We expect to commence adding three more Treehouses, five luxury glamping units, a multi-bedroom villa, and a large outdoor pavilion that will host additional business and social events adjacent to our recently completed and already very popular 18 hole putting course. So I'm sure you can tell we're feeling some good vibrations. So now we'd like to move to the Q&A portion of our call. So Donna you may now proceed.

Thank you. Ladies and gentlemen the floor is now open for questions. [Operator Instructions]. In the interest of time, we do ask that you please limit yourself to one question and one follow-ups. [Operator Instructions]. Our first question today is coming from Gregory Miller of Truist. Please go ahead.

Thanks. Good morning. I look to start off asking about San Francisco, as investors remain focused on your exposure there. Jon, I learned yesterday evening that you were with Park Hotels CEO, Tom Baltimore, meeting with city leaders. Could you share your latest views on the hotel market and your portfolio there?

Sure. Hey, thanks, Greg. So yes, Tom Baltimore and I went out to San Francisco in mid-December for a meeting arranged by the California Hotel and Lodging Association. And we met with the Mayor and we met with the chief of police, and we met with the head of economic development for San Francisco, and had a lot of conversations both before and after that. Went in to the meaning extremely skeptical with a concern that the focus the rejuvenated focus by the Mayor related more to the issue of the smash-and-grabs that took place -- the mass smash-and-grabs that took place in Union Square in early December. And concerned that they were not really focused on the issues that had been increasing over really the last five years or so related to the quality of life on the streets in San Francisco. And I would say that both Tom and I, but I won't speak for Tom, but I think we walked away, all of us who are at the meeting, thinking there -- I guess maybe a little like AA, alcoholics anonymous, that the first step in solving your problem is recognizing that you'd -- that you have a problem. And I think we walked away not only thinking that they'd made the first step and that the Mayor was highly focused on fixing San Francisco and turning around the deterioration that have taken place in the last five years in the environment there. But they understood the issues and had the courage to take some bold steps and was particularly impressed that I would say the Marriott kind of said she'd had enough. And I think she got that message, frankly, from the local population where people were fed up and had an up and the city was -- perhaps could be defined as maybe a little like Gotham City in the Batman comics and movies. And so two weeks later, she came out and announced the state of emergency for the Tenderline District. In order to have a freer set of hands to make changes, both from mental health assistance, to deal with the drug issues and to deal the crime issues in policing so that her hands weren't tied by -- weren't tied by sort of local bureaucratic administrative rules. And then two weeks later, she came out with a supplemental budget request for additional police, which she had made in the original budget, but which had been reduced by the board of supervisors. And so I think she gets it and I think the Police Chief, who is shorthanded, certainly gets it and has become even more active. as a result of the state of emergency she announced in the Tenderline District. And I think the politics are changing in the market, so -- in the city. I mean, people really have had enough. They're expressing that. I think that hopefully leads to approval of those -- of the additional funding for additional police by the board of supervisors, which is a vote I think that comes up in the next few weeks. Certainly we're advocating for that, the business community is as well as the local population. But you've seen a change in sort of the politics, the beginning of a change in politics. You have three progressive members of the board of education who were recalled in a vote in San Francisco. Very, very encouraging. And then there were enough signatures gained to put the district attorney to vote on a recall in June. So we're very encouraged by the change of attitude. There are significant dollars out there that are in the budget for mental health, for homelessness. Additional dollars for policing will help. And so it's going to take a while to get back to where we were. It took a while to get the city -- for the city to get to where it is right now, but we think the underlying economy is so strong. I mean, there were almost a 100 IPOs. I think there were 95 IPOs through direct listings, IPOs or specs in the Bay area last year. 10% of the IPOs in the country were in the bay area. I think 40% to 50% of the venture capital money went into the bay area, including San Francisco last year. So the continuing growth of the technology industries and all the industries that are incorporating technology. And the ultimate beauty of the city and the weather really. As I said last quarter, make us feel like it's a great place to be long-term, provided they fix their issues, which we're encouraged about the direction at this point. And the first steps in that direction. So I wouldn't bet against the city and I think we feel we feel very good about the recovery there, which has started to happen in a more robust way, particularly as businesses go back to the office in the market. And particularly as they've eliminated most of the restrictions from COVID in the marketplace. So we're pretty encouraged, but it's going to take a while and San Francisco will be a slower to recover market as well a few of our other markets like Seattle and Chicago and even DC, which of course has the strength of the federal government here, who in many cases is yet to come back to the office. Hopefully that helps Greg.

It does. I think it was very, very helpful for all of us to get an update. Switching gears on my follow-up question. I thought also I'd ask you about the margin discussion that was in your prepared remarks and related to ADR growth. The significant room rate growth that you have spoken to for several quarters is clearly materializing. I did sense from the prepared remarks that the 100 and 200 bases point margin gains above pre-pandemic levels appear to be driven more from operating savings, not from the profit flow from room rate gains, and maybe you could correct me if I'm wrong. to for those of us who are trying to model, the puts and takes. Could you provide your latest inside and how we should balance out top line growth particularly from room rates of with your long-term profit expectations.

Sure. So it's probably one of the most complicated questions there is because of course, the whole idea of talking about margins compared to 19. It's a moving target, right? With a lot of variables that are moving around, including inflationary increases in costs increases in wages, and then the pricing increases that we've been able to take in all different products and services, including in room rates at this point. But I think what we're trying to get across as it relates to costs because we none of us know what the future is going to bring and what kind of price increases we will ultimately achieve over the next few years. And what the cost increases are going to be over that period of time. But what we do know is we took I think between a hundred and two hundred basis points of cost permanently out of the operating models of our hotels. So what is that mean? It means the clustering that we did probably took 50 basis points or more. The collecting the executive teams and in some cases, even middle management across two or more properties managed by the same property in a market have had big reductions. I mean, if we want example in Boston, we clustered, if you will, the Westin Copley and the W in that market under one executive team. And in many cases, one set of middle managers now. And that's provide, we believe it took out a million dollars of costs permanently, so long as we own the properties, out of operating those two properties on a combined basis. And we have that throughout our portfolio, some of which we started doing pre-pandemic. but the annualized nature of those cost reductions had not yet been fully achieved. So -- and we've gone deeper into the executive teams because where we started was sort of GMs and maybe directors of sales and marketing. We've moved to revenue management, engineering, finance, accounting, HR, food and beverage in many of these markets. And so it's allowed us to hire better quality people and it's allowed us to take costs permanently out of the operating structure, cross-training that we've been doing within the portfolio which increases the skills of our staff, allows them to climb the career ladder, make more money over time, and allows us to be more efficient in the staff that we hire at any particular moment, or that we need, particularly in seasonally slow periods where we have a much greater ability to flex now because we have more staff that's cross trained, including managers in the portfolio. So you take the combination of that and you include the benefits of technology, the removal of a lot of collateral materials, the elimination of services that we've now looked backed on, where we got fat when things were good and looked at them and said, you know what, there wasn't an ROI on this expenditure, we permanently eliminated it. So that's what we mean by improving the operating model by 100 to 200 basis points of revenues. Its cost taken out of the system. Where margins go? Gosh. In any given year, I mean, I can't imagine how hard it is for you to model. It's very hard for us because it's very hard for us. I would say obviously we know that rate flows better than occupancy, I mean, we think rate flows maybe at 75% and occupancy flows at about 65% or even 60% depending upon the property. And frankly, bigger rate flows even more, right? If a $100 increase as a percentage at the same percentage is way more valuable than the same percentage off of rate, that's much lower because it's just able to absorb more cost increases. So we've been modeling on a sequential basis. We've talked about this in the last couple of quarters. And you can see in January where we went negative and hotel EBITDA that there's a certain level of fixed costs. And we've been bringing back costs as we've been anticipating this acceleration in the recovery on a post-Omicron and Delta basis. So we've been bringing back those additional sales and banquet and catering people and managers and conference service managers within the portfolio. And that has a negative impact on negative revenues like January, but will ultimately have a very positive impact on our ability to drive revenues higher throughout the portfolio and ultimately better bottom line. So I can't really help you with overall margins as we move forward. I do think if this is a reasonably normal length of macroeconomic growth cycle, we will peak at both higher margins and more importantly higher profit per key at the peak of this next cycle versus where we were in the last cycle, which also piqued higher than the cycle before, which also piqued higher than the cycle before that.

Greg, just to add to Jon 's comments, our focus is really more as you think about your modeling, none of the margin side, but the hotel EBITDA side. How do we grow EBITDA and ensure we are confident we can eliminate 100 to 200 basis points from our operating model? But that's from a bottom-up buildup approach versus a top-down approach. So we really look at it more in the hotel EBITDA, how do we expand that? The margins or function of the revenues and expenses, that's not what's driving it, it's how do we grow that? How do we remerchandise the underutilized space? What can we do to add additional rooms or other restaurants in there? Because that ultimately grows EBITDA, which is ultimately what's the biggest focus for us, and not the ultimate margin that's a result of that.

And those are very fair points. I appreciate the detailed responses, especially on these complex topics. Thanks.

Hey, thanks, Greg.

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

Good morning, guys. I got one for Ray and one for Tom, assuming Tom's in the room. John earlier brought up the topic of resort fees and I'm just curious if you could tell us the total resort fee income in 2021, how that compared to 2019, how you kind of think about the growth in resort fees going forward. And I guess how important is resort fees and the growth of resort fees in the margins of growth fees to you achieving that goal of 100 to 200 basis points of higher margins this cycle?

Anything related to resort or guest amenity fees has nothing to do with 100, 200 basis points, that's separate. Overall, it's an important part of overall revenue. But again, we're a little bit different as you look at a lot of our properties. We have a host of other different amenities and services and asset. That's part of what we look at the guests many fees and driving all that side and their expenses certainly associated with that as well. So it's a host of different areas there, but we don't want [Indiscernible] again to it, specific details of providing that, but I think what the positive is we are seeing the brands become more receptive to this, so between Marriott and others are being more open to having this. So this is becoming more standard throughout the industry, which I think it'll be a good sign as we enter this new cycle here.

And apps become our accepted. Perhaps grudgingly, but certainly more accepted by the customer. So and the customer is getting value, I think -- look we can't speak for others but at our properties, we try to create these in a way where there's four or five times worth of value for every -- for every dollar of that guest amenity fee, whether it's in a resort market or it's an urban property, or sort of an urban resort property of like properties we have in Santa Monica and in West LA, where the pool complex as an important part of the amenities being provided.

Jon, were resort fees 20% of your total revenue last year or what's -- do you have a number and maybe a comparison to 2019?

No, we don't split out those revenues, just like we don't split out a lot of the different revenues. But it's an important component but it is a relatively small percentage of overall revenues. I think billing it maybe is in 3%-4% range of revenues.

Okay. Jon, one of the comments we get from investors is that there's pretty good clarity on what's going on in Sunbelt Resort market trades, but very little activity so far in urban markets. And I'm just wondering what you're seeing from a prospective buyer perspective, I guess, and you being a prospective seller of some urban assets and what's going on with valuations at interest level on the more typical urban assets side.

Yeah. Well, thank you, Bill, and good morning. I think clearly there is becoming a transition and a pivot from the investor universe where obviously it was all about leisure destinations and resorts over the course of the last 12 to 18 months. The conversations that I'm having directly with investors and with brokers is that that still remains a very critical piece for people, but obviously you're looking at COVID premium pricing for those assets. And I think people are looking at, where are the markets, supply demand dynamics in terms of the urban markets where we can get in? And there's kind of been of -- I don't want to say it's necessarily contrarianship, but there's a lot of capital out there that's chasing deals. They're looking at it for where can they get the best risk adjusted returns, and they're turning to the cities because I think that they think that maybe the worst is behind us. And there is a little more optimism and there is -- maybe it's not called the stress, but there's certainly some opportunity in terms of a basis play from where the urban markets have been to where the potential upside is now. And so we're seeing from a number of the private equity funds and a number of other high net worth that transition to urban. Now, there's not enough data points, so I would say the conviction level is emerging, but we'll see more and more of what I'll say pipeline in the urban markets coming through over the course of the year.

And where the urban markets are a little different than the resort in Sunbelt markets are. Urban markets are still a challenge to obtain debt. It is still a much more difficult in urban CBD locations to get enough deep lending pool for having the transaction. So I look there's lot of capital out there so a lot of these P buyers were maybe could be buying with all cash that that's one thing. But if you need financing to get the transactions, it certainly works in the resort in Sunbelt states. Plenty of lenders out there to provide bids there at reasonable spreads. But once you start getting urban side, it sends out pretty quickly and you're left a lot of debt funds and those terms you're more owners. And it's a lot more expensive.

Pushing the color guys. Thanks.

Thanks, Bill.

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

Hi, thanks. I just wanted to ask you what you are seeing and doing on the housekeeping side [Indiscernible] that's a fairly large piece of expenses. And maybe you could talk about what you're doing in non-branded hotels and what the message has been at branded hotels. It seems to me like it's going a little bit inconsistent on the branded side. I was just wondering if you're seeing that or what you're hearing from that side.

I think generally, first of all I think at our higher-end properties, any of the luxury properties, any of the resorts that are -- that have pretty healthy rates, we have full services back and in fact, they've been back for quite a bit. The customer who's paying $500 or $800 or $1,000 or more is looking for that service while they are there and we're providing it. Things like -- interestingly, people talked about the demise of room service. Room service came back with the pandemic at our properties. Now, it came back in slight -- in many cases in a different form. It was a little bit more like a typical delivery. Although, again, even at the luxury properties like LaPlaya, we brought back, in fact, I don't know that we ever eliminated regular room service. So what we've been trying to do, Smedes, is gear the services for what the customer wants and what they're willing to pay for. And I as -- I think the brands have some standards, the brands are not all the same. They've -- some have taken an opt-in approach for service during your stay. Some have taken an opt-out approach. Sometimes it varies by city and market as well. And I think it's not surprising, it is perhaps a little bit more confusing when you're looking at the brand properties. I think that our portfolio, I think we've done a really good job of gearing the service towards the customer desires. And I think it's evidenced by the trip advisor reviews that we get and the fact that pretty consistently across our portfolio. I think Ray mentioned, we've climbed 8 spots in our portfolio, which is pretty significant on average with many properties climbing significantly more than that. So it's a little bit all over the board. Again, I think when we think back to the earlier question of costs and margins if you will, we've not been under the impression that on an exhaustive basis those services wouldn't come back. We fully expected them to come back in better quality properties. And I think in sort of the, the mid-scale and down, I'm not sure it does come back. We don't really have properties in those categories. And then in -- between luxury and mid-scale, so you get to upscale or upper upscale, I think it's going to vary by the market by rate and by the property.

Okay. That was it from us. Thank you. Appreciate it.

All right. Thanks, Smedes.

Thanks, Smedes.

Thank you. Our next question is coming from Michael Bellisario of Baird. Please go ahead.

Thanks. Good morning, everyone.

Morning.

I guess two-part question. 1. I assume you're $30 to $35 per share NAV, that still holds. But my real question on follow-up to that is [Indiscernible] your replacement costs estimate. How do you triangulate that $700,000 to $750,000 key number versus what's implied by your -- the estimate, call it mid to high 500s? Really what I'm asking is what does your placement cost tell you and how does that drive your view of value?

Sure. Mike, as it relates to the NAV range, yes, you'll notice we didn't change it. We do think it's probably a little late right now, particularly on the leisure-oriented properties, given not only where the cash flows have moved, but where the transaction market has continued to move and follow that cash flow. But two, we'd like to get a little bit more, to use your word, triangulation, a little more data on the urban market transactions. Of course, we've had a few on our side, but we think the market has moved in the last three to four months. Particularly we think it will move even further over the next couple of months. As we see this, what we think will be a fairly rapid acceleration in the recovery of business travel. In particular, over the next few months. So from that perspective, I think if anything, we might be a little light, but what we hope will be able to feel comfortable updating it next quarter as it relates to what is the replacement costs mean? It's sort of means what it the way we think about it, is it has a lot to do with the protection from new supply in a particular market now, keep in mind, people don't have to provide the same properties in that market. If you're providing select service into an urban market, it's not relevant to giving you protection on the full-service side because those rooms will still be competitive. On the other hand, the fact that these costs have gone up by 25% to 35%. Interestingly, in some markets, the cost of select service is now equivalent to where the full-service was pre-pandemic. So I think, we think of it as a big positive for the space, both in terms of protection of new supply and also ultimately the way people look at values in the transaction market compared to, what can I buy something for on a price per pound basis versus what does it cost to recreate that product if it's worthy of being recreated?

That's helpful. Thank you.

Thanks, Mike.

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

Thanks for taking my question, guys. Just getting back on the NAV question a little bit more. Clearly, there's been a lot more comfort from investors on the resort side and I guess from some private equity guys on the select service side. How sustainable in your -- is the rise in resorts values in your view? And what can we expect to happen to the growth in values there? Is that going to plateau or is it will continue to go up if you're able to continue to push the rates there?

Yeah. I think there's -- there are -- God, there's so many things going on, right, Floris? I mean, just even by the nature of your question, there's a lot of variables that are moving around then. And I mean, we'll give you our perspective, but again, it's only our perspective. It certainly factors into how we view values and risk adjusted return perspective and how that drives what we buy and what we sell. But I think from an underlying operating perspective, I think we feel that certainly a significant part of the growth in -- and recovery in cash flows in resorts and leisure-focus properties, some of it is a structural repricing. Pricing doesn't -- outside of economic recessions, it doesn't often turn down and often. And often, in economic recessions, if it does turn down, it doesn't turn down much. So there are some unique variables here and it's really hard to measure some of the compression that's happening because of a lack of alternatives or alternatives that have been eliminated for some period of time. But there have been a lot of gains made in the leisure focus side, the resort side, related to -- you look at our properties in terms of quality, there is I think we said a third of our gains related to rate have been share gain in rate. That's permanent, that's a reflection of the investments that we've made over the last four years in the resorts. Every one of these resorts has been materially renovated or in many cases re-positioned up within the portfolio. So for us we think most of it sticks not all of it, but we still have inflation, we still have growth that's happening. When we look at this year, we didn't go into the year with a lot of past generational rates on the books, which actually caused the rates last year to be below market, if you will, like retail would be. We had non-market rights on the books going into the year. And that really -- our rates would've been higher but for that, given what the customers have been willing to pay. It's not the case for this year. We didn't have a lot of business on the books, but perhaps for a couple of properties we bought like Jekyll and like Estancia, where there was significant group business on the books and even transient business on the books at prior lower rates. And we'll roll through that over the course of the year and we'll still have significant increases moving into '23 because we've brought those rates, if you will, up to market. I think in the overall market in general, I think values are going to follow cash flow, but I think what's happened is your cap rates are higher than they were pre-pandemic on those cash flows. And they can be if these luxury resorts we're trading at 5 to 5.5 caps pre-pandemic on forward numbers, or even on trailing numbers, you're probably looking at something that's more in the 6.5 to 7.5 range in the current market. And I think that's a reflection of sort of risk associated with some of this rate. or perhaps the growth rate beyond '22, maybe it will be more muted than some of the other segments of properties. So I don't know. That's sort of the way we've been thinking about it. I think the market probably seems to be thinking about it the same way. And as Ray said, certainly as it relates to private capital, some of the values get influenced by the availability of financing, which is more heavily weighted to properties with cash flow versus those that are haven't seen their cash flows recover as significantly.

Thanks John. Maybe one quick follow-up. Does that mean that you're going to be allocating capital more capital towards resorts? You have been doing that and pivot more away from the urban markets or will you try to be sort of counter and potentially do the opposite? How, how do you think about that?

So we've simplified sort of that thinking. And because we're purely a risk, a return adjusted investors, so we have our views of what risks are and what returns should be for those risks. But by type of property by-market about we focusing on individual properties. And so, no different than when people looked to buy stocks, the values of those underlying assets have an impact on what we ultimately buy. And so let's wait and see how other people value those risks and returns. Do they have similar views of those risks? The returns that are required? And then as it relates to us, for us, we've said this consistently. We tend to be more focused on properties where we can change the property, where we can upgrade it, we can reposition it both operationally and physically, and create value beyond looking at things like a commodity which are not the kind of assets we buy anyway.

Thanks, Jon. Appreciate it.

Thanks, Floris.

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

Hey, everyone. Thanks for putting me on Sue. Ray Jon, I just want to ask a little bit about what you're seeing on business rates versus leisure rates. So I think your comments have been pretty clear on the broad rate environment, what you've been able to get there. But can you can you just give us any color there about like what you're seeing maybe on forward pricing. The one relative to the other, and how strong is the mix positive as you typically get business rate back now, or is it more? I mean, I think we know it's about filling in the mid-week gaps, but sort of trying to figure out what that pricing does to overall mix. Thanks.

Yeah. It's a really good question and it's all a moving target, right? But what we're -- what we've been seeing, Shaun, is we've -- and we talked about this a little bit last quarter and the quarter before that, we're seeing a recovery in all rates, all segments, whether it's a business transient, whether it's group, whether it's leisure. When we look at our urban properties, we've seen rates continue to recover. And I think as we might have mentioned in the call, but to reiterate, when we got to December, which gets influenced by the last week of the year, there was a really strong two weeks of business travel. We saw our weekly urban rates end up at almost 2% higher than December of 2019. That was coming from in October, which is a pretty good business month as well even better than December, which was down 11.5%. When we look at just weekday, again, we're trying to isolate the best we can from the sort of the anecdotal stuff and look at the data. When we look at weekday ADR for our urban properties, it went from down 15.7% in October to down 4.6% in December. Now again, there are weekdays during the holiday week, and that helps, but it's a pretty continuous -- when we look at these by quarter, every quarter has improved from a rate perspective in each of its markets, whether it's San Francisco or it's South Florida, they're just doing so at a different pace. So all the rates are climbing at this point, which is why we're so bullish, if you will, of where we think pricing is going. And frankly, we've been saying this for over a year now as it relates to pricing. So we have even more confidence today as we see business transient pricing rise. As we see group get re-booked and get booked at higher rates than in 19. And then versus last year and it's and we continue to see leisure rates increase as well.

That's perfect, Jon. And then the follow-up would be same ilk, would be over President's Day weekend, any signs of let's call it rate fatigue on the part of the consumer? I think your numbers have continued to be very consistently strong, but just anything at the very margin that suggests that whatever you're pushing isn't sticking or that the service levels required to reach those rates are changing materially? Just want to get a sense of the vibe out there because we know these rate increases have been substantial and obviously, when you're getting the numbers that you talked about, I mean, obviously there was Super Bowl, but the $800 number 6 in my head, there is a different customer in the building, they are expecting a different level of service. So just what's your thought there coming on at President's Day?

I mean, President's Day was a blowout from really all perspectives. I mean, rate was up significantly. I mean, we published the weekly numbers, the weekend numbers were huge. And it came with occupancy. So we if we if you check back in those numbers, I mean, we saw if there's fatigue, Shaun, there's still enough of the well-off willing to spend customer to fill our hotels that are charging those rates. And so I think we ran 69.9% for the whole portfolio over Saturday night. I think we ran in the 60's for both Friday and Sunday night. And then the rates were pretty strong, not as strong as New Year's. And for the President's Day isn't traditionally, as strong as well. But they were really healthy, particularly when you consider that Omicron was still an impact on demand as was Valentine's Day, and still being impacted by Omicron demand the weekend before.

Which also mean Shaun, if you haven't booked spring break yet, you really I would like to resorts host.

Ray. I don't get a lot. Right. My life but I booked spring break 14 months ago because I saw.

Well you're one of those below market customers that we're just we're just happy if you cancel

Yeah guys you are waiting for me to cancel. I get it. Thank you guys.

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

Hey. Good morning, guys. Thanks for squeezing me in. Just a quick one on the guidance. And I commend you guys for putting a stake in the ground, at least in terms of the first quarter. But just given -- if I look at adjusted EBITDA, there's a $5 million range from top to bottom. Small dollar amount, but large in percentage terms. And so I think we've got five or six weeks left in the quarter here. What factors would cause you to hit the low-end versus the high-end or even materially underperform or materially outperform the range that you've given? Just trying to understand the landscape that we're all playing on here.

It's a good question, and I would say from -- as we talk to our property teams, it's really hard for them to manage the business right now because it's moving so much. And you go from a period where we ran 30 -- 33% or 34% in January to running close to 50% in February, and maybe in the upper 50s to 60% in March. And you get these weeks and weekends that are up and down pretty dramatically, way different than pre-pandemic. And so there's a lot of things going on. We're adding staff back at our properties. We may or may not be able to hire those people when we think we're going to hire them. So it impacts our costs. We don't know how much spend is going to be. We've got a lot of groups. We don't know how much they're going to spend, how much more they're going to spend, how many people call out for COVID, how much overtime we have to run. It's a very difficult environment to forecast the overall business. I mean, revenues are hard enough. Expenses are even harder right now. So we're doing our best to estimate what we think flow is going to be. And it goes back to the comment which I made earlier about, I can't imagine how hard -- it's even harder for you all. And we know that's incredibly hard because it's really hard for us right now to forecast and because they're just so many moving pieces and unpredictable pieces, even on a weekly basis. So we're doing our best. We took a shot at outlook. We gave a wide range just because we have so many variables that are moving around and honestly, we've never been through a pandemic before, so we don't have any history to look back on.

Okay. Either way, that's helpful. Thank you.

Yup.

Thank you. Our next question is coming from Anthony Powell of Barclays. Please go ahead.

Hi, guys. This is Allison on here for Anthony. So you talked about urban transaction values and Sunbelt Resort. What are you seeing regarding trends for urban hotels in the Sunbelt? We've seen more transactions in markets like Austin and you previously were in Atlanta. So could you build up more exposure here this year? Thanks.

Listen, the Sunbelt is certainly the flavor of the day. I mean, I think when you look at some of the demographics and certainly the headlines, I think that people have looked at markets like Charleston, like Savannah, like Austin. Certainly a lot of that investment activity, I think they're also -- you also kind of follow what's happened just in terms of easing of restrictions and flexibility and businesses are open from that perspective. I think they'll continue to be an attraction to those markets. But I also think that there's probably a feeling up. Is there a maxing out of those markets? And therefore, I think there's going to be a pivoting towards maybe some of the more traditional markets or other markets in the Midwest or in the Northeast or on the West Coast where as we said before, as it relates to replacement costs, maybe there's kind of a better feeling as it relates to a discount to replacement costs as opposed to potentially paying up in those markets given how competitive it's been.

And I think the -- just so you understand how we think about it, I mean, the Sunbelt markets are certainly part of the group of markets that we're evaluating and looking at assets to potentially purchase. The -- traditionally, the challenge of some of those markets is there just aren't any supply constraints in those markets. And so while you have continuing population migration and business migration into the Sunbelt, which has been going on for over 100 years at this point, the challenge has always been that values don't rise as much in those markets and don't have the potential to go up as much because supply more quickly, traditionally has come into those markets. So we look at that from a risk perspective, and that's part of the evaluation, Allison. And so yes, we may end up buying in those markets, but it'll be because we find an asset that probably we can do something with in terms of repositioning it and where we think there are some kind of supply constraints or protection. When we went into Nashville and we bought the Union Station Nashville Hotel, we felt like it had some kind of a moat because it was an incredibly unique asset in that marketplace. And while we substantive. And when we sold it in the summer of 2020, I think we -- it would be that kind of asset, I think, where it's more unique than maybe a typical branded property in the market.

Thanks for the time. Thank you. Our last question for today will be coming from Chris Darling of Green Street. Please go ahead.

Thanks. Good morning. Just took a quick one from me. And going back to the ROI projects that you highlighted earlier, which now sound very promising, I see that several are taking place at hotels subject to a ground lease. So with that in mind, I was hoping you could just help me understand how you think about allocating capital in those instances and when it may or may not make sense to do so.

Sure. So it depends how long the remaining ground lease is, the number of years left on it, and also who the owner of the ground is. So we have a lot of -- frankly, most of our ground leases are with governmental authorities, whether it's the GSA, whether it's the city of San Diego, whether it's the National Park Service at the Oregon, etc. And so traditionally, what we've done is we -- many of those are limited in terms of the term they can have at any point in time. So some of those markets, as an example, are limited to 49 years. So traditionally, when those ground leases get to a point where we feel like we're getting near a point where a buyer couldn't finance them. We'll go back to the governmental authority. Typically alongside of our renovation. And we will get an extension and that has happened at a number of the properties that we've owned when I was Atlas Sal that we continue to own. And that's the history of properties like that in many of the markets I gave an example before we bought Jekyll Island, every property of every kind on Jekyll Island is on a ground lease with the Jekyll Island authority, which is owned by the State of Georgia. They extended every ground lease in that market, whether it was for Jekyll Island Club, whether it was for any of the other hotels on the island, whether it was for the retail, whether it was for the restaurants, or the residential units that are all on the island, they were all extended and they were all extended by the same amount of term. So we're really conscious when we look at assets and then when we invest additionally in those assets to buy assets where we believe there is either a very extensive term. So we're going to get the value back for the investment that we make and the return on that value, or 2. There is an extension that is highly likely to happen because that is the normal process with those ground leases.

Got it. Thank you.

Chris.

Thanks, Chris.

This brings us to the end of our question-and-answer session, I would like to turn the floor back over to Mr. Bortz for closing comments.

Hey, Donna, thanks very much for overseeing our call and thanks everybody for participating. We look forward to updating you about our first quarter and that's just 60 days away. And also will continue to provide those monthly updates that we established during the pandemic.

Ladies and gentlemen, thank you for your participation and interest in Pebblebrook Hotel. You may disconnect your lines of all golf. The webcast at this time and enjoy the rest of your day.