Greetings and welcome to the Pebblebrook Hotel Trust Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Chief Financial Officer. Thank you. Please go ahead.

Thank you, Donna and good morning everyone. Welcome to our second quarter 2022 earnings call and webcast. Joining me today are Jon Bortz, our Chairman and Chief Executive Officer; and Tom Fisher, our Chief Investment 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 our SEC filings and future results could differ materially from those implied by our comments today. Forward-looking statements that we make today are effective for today, July 27, 2022, and we undertake no duty to update them later. We'll discuss non-GAAP financial measures on today's call and we provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com. Last night, we reported our very favorable Q2 results. Faster growth than we expected in business travel, both group and transient, coupled with continuing robust leisure demand allowed us to significantly exceed our expectations from 90 days ago. Our urban properties led the upside. Second quarter adjusted Funds From Operations of $0.72 per share was $0.09 above the top-end of our outlook and 83% of Q2 2019s AFFO. This represents a dramatic improvement to both last year when we had negative AFFO of $0.10 per share in Q1, which was just 23% of Q1 2019. This strong performance was driven by the hard and intelligent work of our hotel operating teams, management companies, and asset managers. We thank each of them for their great effort and achievements in the quarter. On the revenue side, same-property RevPAR came within 5% of Q2 2019, even though occupancy was down 20% showing a sizable demand recovery opportunity we still have ahead. Average daily rate climbed a very strong 18.7%, compared to Q2 2019. Non-room revenue…

Thanks, Ray. As Ray indicated, the trends are very positive coming out of the second quarter and heading into the third quarter. For Pebblebrook, we're almost back to 2019 levels for both revenues and hotel EBITDA. This recovery and the prior recoveries following the great financial recession, the 2001 recession and the events of 9/11, the great real estate collapse of the early 1990s and the Fed induced recession in the early 1980s have clearly demonstrated the incredible resilience of the hotel industry. After each recession, recoveries have led to record highs in hotel revenues and profits. This industry, while obviously much more volatile than other real estate sectors, always bounces back, sets new records relatively quickly, and due to its one day leases and secular demand growth has forever followed inflation and replacement costs higher. We see no reason for any different outcome this time and this year's recovery firmly demonstrates our industry's incredible resilience. With replacement costs for our portfolio currently estimated in the $750,000 per key range, and with supply growth severely restricted by the pandemic, very limited availability of construction financing and generally challenging economics for new builds, our industry and company have a very long runway to not only fully recover, but to again grow and hit new revenue and bottom line records. We expect the supply constrained environment to last four or five years. And whether we soon have an economic slowdown or recession, it's just a matter of time before we hit these new records given these supply restricted fundamentals. In addition, our performance is and will be further bolstered by the benefits coming from the significant investments we've made in our portfolio in the last several years, where we redeveloped, transformed, and repositioned properties, mostly from the LaSalle portfolio to higher quality…

Thank you. [Operator Instructions] Our first question today is coming from Dori Kesten of Wells Fargo. Please go ahead.

Thanks. Good morning, guys. How are you thinking about your dividend, the [2023] [ph] debt maturities and share repurchases as you consider a range of recession or slowdown scenarios over the next year? And in addition, the dispositions you just talked about.

Sure. Well, first of all, as we think about the dividend that's more of a 2023 story than something this year, as you know, we had some net operating losses that we're carrying forward the last couple of years, which we have the opportunity to burn off of that. So that's one thing about the dividend. So think about that more about 2023. And it also depends on the outlook of the economy at that point in time and other sales as well. On our debt maturities and we look at this on a long-term basis, not just our 2023 maturities, but maturities beyond that, we feel very confident we'll be extending all those. As you know, we have great relationships with our banking group. They extended out a billion dollars of our debt during the pandemic. So, you should expect that we'll do the same as we have historically, and many of these big relationships we've had for decades. So, that's also certainly a positive. And certainly right now, the world – for the bank segment right now towards the hotel space. It's very positive. It's much better than it was 12-months ago. So, we have no concerns about those, sort of any of those debt maturities upcoming now or in 2024.

And just the last piece of share repurchases.

Sure. Well, as we go through it, as Jon noted, you should expect us to be funding the acquisitions that we completed this year with our dispositions. So, in addition to The Marker and the three coming up, we may have some additional sales. So that's funding the acquisitions and beyond that we’ll use that to reduce debt and then evaluate share purchases, again depending on what the environment is and how our share price is at the time. We have about $150 million in share buyback that's been authorized by the Board and we'll evaluate that, but similar to what we did in 2016 and 2017 when we compare some sales with debt paydowns and or stock repurchases, you should expect some similar procedures this year [and extra] [ph].

Okay, great. Thank you.

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

Good morning. Probably ask about 2023 for what you can share, I know it's early, but I was curious about peak season winter 2023 for some of your warm weather leisure markets. You have benefited from considerable room rate growth post-pandemic, and I’m thinking about South Florida in particular, based on the current macro today, do you anticipate room rates in these leisure market will rise at or above inflationary levels or operating cost levels in this upcoming winter? Thanks.

Hey, thanks, Greg. So, it's interesting when we look at what's on the books already in Q1 for South Florida, rates are up significantly on both the transient and the group side. Now, we don't have a huge amount of business on the books, but we do have a healthy amount of business in the first quarter, a lot of people go to South Florida, that go to LaPlaya, that go to the Inn on Fifth, kind of re-book as soon as they leave for the following year. And so, certainly, it's very encouraging what we're seeing already in terms of rates in South Florida and frankly for the whole portfolio next year. And one of the things we noted in the last call, but it's worth emphasizing again because the group rates for next year continue to increase, but particularly at the resorts, we've had a very wide gap created in the last year between transit rates and group rates. And what that's led to is pretty confident meaningful increases in group rates as we look into next year for those properties. So, we do feel pretty confident that rate increases are going to continue well into next year, if not all of next year. And we do think that's going to happen in the Southeast as well.

Thanks, Jon.

Thanks Craig.

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

Hey, good morning. Thanks. Hey, Jon. I think in the hindsight, it's pretty easy to see that e-commerce spiked during the pandemic and is now in the process of normalizing and, kind of a painful normalization, I guess? Is lodging going through the same thing? Are we just having a post-pandemic spike that is going to normalize whether it's 2023 or 2024?

Well, there's, I guess, you mean, is it a pull forward of…

Spending and lodging in particular on the rate front, are we just getting more than our fair share as a part of the economy and we're going to give that back to more normalized travel spending as a part of the overall economy going forward?

Yes. I don't think so, Bill. I think in fact, what we're partly dealing with right now is pent-up demand from people who haven't traveled, but if you look at the overall demand levels, they're not at 2019 levels yet. In fact, we're nowhere near 2019 levels on both the business travel side and the international travel side. So, I think actually we will be normalizing over the next year to 18 months, but we think it's more normalizing to higher demand levels, which will actually continue to put pressure on rates and pricing. Particularly as you look at this environment, not only over the next two years, but the point I was trying to make in my comments, we have a pretty long runway of opportunity to grow rates in this industry due to a severely supply constrained environment over that period of time. And the more difficult the debt markets have gotten, the more difficult it's gotten to get construction financing to start anything new even if one can make sense out of those economics with these much higher development costs today. So, I don't think it's the same, but we'd love to have the same boom over the next 18 months that they had on the e-commerce side over the last 18 months.

Yes. Okay. If I could just follow-up, it was a question for Ray. I think Ray in your prepared remarks, you talked about responsible guidance for the third quarter. I guess given the macro clouds up there. I think that's what you said. I'm just curious, you've got July, pretty much in the books August seems like it should be just leisure driven pretty good month. So, is it really September, which is the biggest contributor I believe to the third quarter that causes you consternation or how much conservatism is there in your 3Q outlook?

Sure. Well, yes, as we get to August, as you know, down in Florida, you guys started to go to school in early August now these days. So, it's a flipping…

Same on the West Coast.

West Coast too is early. So, there's a lot of – there's a transition from a leisure focus heavy in the first half of all of July and half of August today in transitioning to back to business travel, back to school and those things. So, that's where August we expect will give up a couple of points of occupancy, three to four versus where I think we'll be at for July, but then we'll come back with September, coming back into a little late Labor Day this year, but what we're seeing right now in business travel is very encouraging. So, part of this is just to be, you're right, be conservative in an environment that there is uncertainty. Again, we're not seeing any change in booking behavior or pullback on pricing. So, again, it's encouraging for what it's worth. Realize we have a pretty short booking window here where most of its inside of like 30 days and 60 days, but given what we're seeing right now, you should not refer that because of our outlook there, our RevPAR looking 5 to 8 that we’re expecting any decline in overall demand trends as it's a transition and seasonality as we get into the good fall season.

Hey, Bill. The other thing I'd add and it's totally appropriate question. I'm sure others might have asked it, is July benefits from five weekends this year compared to 2019 when it had four? And the weekends are clearly stronger and they're particularly stronger in July, which is the strongest leisure month. And then we move to August. As Ray said, we're moving back to normal seasonal patterns, both from a seasonality perspective and from a weekday pattern perspective. And so August flips the other way. We actually had five weekend in 2019 in August and we only have four in August of this year. So, the double flip, kind of hurts on a comparative basis a little bit. The other thing is September has a slightly late Labor Day, which historically has hurt business travel return. And as we've indicated, we've gone back to these normal patterns where the weeks around holidays are actually softer because of the impact on business travel, which was typical pre-pandemic. And so, the holiday doesn't help September. And then we have a Jewish holiday in September, which was not the case back in 2019 when we had two of them in October. So, we're just being prudent as it relates to how the comparisons work to 2019 and October would benefit from that holiday shift. So, outside of Halloween, you want to technically call that a holiday, which it is because it impacts business travel. October should be better than 2019. And our view of the fourth quarter that we've indicated before is, we do think in the fourth quarter that will exceed 2019 numbers both top line and bottom line.

Great color. I appreciate it. Thank you.

Thank you. The next question is coming from Neil Malkin of Capital One Securities. Please go ahead.

Hey, everyone. Good morning. Thank you. My question is on the capital allocation decisions, specifically the urban hotels you mentioned you were selling. So, obviously, you've been cycling significantly into resorts exclusively, and then selling urban hotels. You know, you talked about three additional hotels coming up. Look like the [indiscernible], I saw some news about that one being one of them. I was wondering if you can give any color on the source of hotels or markets that the other two are going to be in and, you mentioned potentially another set later in the year? Can you just maybe talk about that? And then really what does that say, Jon, about your view on urban either recovery or a longer-term operating dynamic versus, sort of domestic leisure just based on where you've been putting your money?

Sure. So, can't provide you any additional color on either the markets or the individual properties that constitute the three that are under contract or what else is on the market right now. When we will provide you that color along with the math and the financials when those transactions actually close. So, we're trying to be sensitive to the buyers and our responsibilities under our agreements in these particular cases, but we'll give you all that detail soon enough when those transactions ultimately close. I think the overall capital allocation question brings us really to what we've been talking about or trying to find a more even balance between business travel overall and leisure travel overall, which – both of which we believe will continue to grow over the long-term, but we – when you think about the resorts that we bought, it's not that they're all leisure focused, they're not. In fact, many of them do a very large amount of group business, of which a significant part is business travel. So, it's not as if we're assuming properties that cater to business customers. It's not the case, but we are trying to get more to a 50/50 balance of segmentation within our portfolio because we think on a risk basis, the portfolio will perform better through the ups and downs of the cycles.

Okay. So, it's less about a call on a specific market or the drivers within those markets or the fundamentals that would support travel pre versus post-COVID and more of that mix is being at the top of the list of rationale for the decisions?

Yes.

Is that fair to say? Okay.

Yes. That's fair to say.

Okay. All right. Thank you.

Thanks, Neil.

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

Thank you and good morning. Maybe just following up on that last question, if you can talk a little bit about what's happening with pricing in the transaction market and if you could tie that into the [indiscernible] cap rate in your NAV, which remained unchanged overall even if there were some markets that change a little bit here or there?

Sure. Tom, you want to handle the first part of that?

Yes. I mean, I think as it relates to pricing, I mean, I think you got to be careful to talk just in general terms. I mean everything right now, there's a lot of capital available in the system. It's a very market-by-market, asset by asset focus. I think when you look at it, for example, Jon, Ray, and I spent a lot of time on our NAV. We made adjustments to that. We made adjustments downward in markets that are, kind of later to recover, including San Francisco and in DC, while we've made some minor increases in markets like San Diego, which is probably one of the most attractive investment markets today. I think given the fact that the debt markets aren't challenging. Obviously, what you're seeing is many lenders out there, more of the debt funds, it's maybe lower proceeds, higher debt costs, higher coupon cost, but what you're seeing is more conviction in the operating recovery. So, there's that friction where I think people are having, you know are feeling better about the future and they're factoring more normalized financing moving forward as it relates to their underwriting. I think generally though, if there is an impact on pricing, you're not really seeing it on select service or resorts, you might see it in some of the urban markets, but it's anywhere from, quite frankly, very nominal from 1% to maybe a massive 5%.

Yes. So, it's a headwind and a tailwind, Aryeh. It's the tailwind from consistently improving performance, particularly big jumps in the urban markets against a more expensive debt market until it stabilizes. So – and still likely to stabilize at a more expensive level than where it was 12-months ago.

Okay. Thanks. And then just real estate taxes, it was higher than we had expected, what kind of outlook are there moving forward?

Yes. We're going to have a lot of fun in some of these cities in places like Chicago where they actually have the values go up in the middle of the pandemic, which makes absolutely no sense. But we're going to be very aggressive in each of these. We get some of these silly tax bills, we're going to appeal them, and – but look a lot of cities have been using this, the pandemic has an opportunity to fund their other losses through that. So, it's going to be [choppy] [ph] in some of the areas that typically have had the tax challenges like Chicago will continue to appeal those and battle those, less of an issue in markets like California because of [Prop 13] [ph]. We have to keep that in mind, but we'll watch that. So, it's a little spiky here and there, but hopefully we'll get some progress in some appeal within this as we – in the coming quarters ahead.

Appreciate it. Thanks.

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

Hi, thanks. I just wanted to ask a little bit about, sort of margin expectations since next year, and I'm just looking specifically, you broke out from May and June results. And it looks like as occupancy continues to normalize, it's sort of outstripping rate growth and the June, you know, implied hotel margin declined a little bit from April. I don't want to get into like you know monthly modeling, but I'm just thinking into next year, do you expect, sort of more that the RevPAR growth to be just more driven by occupancies versus rate and so maybe that has some, kind of margin implications or maybe just kind of talk to that a little bit?

Yes. I mean, I think you're going to see, I mean, we haven't provided an outlook for the fourth quarter and our views going forward are a little more challenged than a normal environment, obviously. But I think in general, Smedes, what I'd say is, you're more likely to see both recovery and occupancy, further recovery in demand and occupancy, particularly in the urban markets, though we still have a little ways to recover in the resorts as well, but I think we'll continue to see significant rate increases. I don't think at the level that we're seeing this year necessarily, but I certainly think they're likely to be fairly significant next year. And like previous recoveries, particularly when supply ultimately becomes constrained. I think over the next few years, you're going to – you'll see margins continue to improve and get to record levels pretty rapidly, particularly as likely, compared to prior recoveries.

And also, Smedes, and this is one of that, we caution you about too much month-to-month data because there's a lot of factors that could go on. We could have a property tax appeal within some of those months that influences margins on the bottom line to a lot of factors, but overall, the trend we feel good. The other side is you also have to look at the revenue and how that's being driven. We talk about a lot of the non-room spend which is a very healthy 20%, 25% plus in the quarter. Actually our food and beverage revenue in the second quarter was above second quarter of 2019 and that's with 20 points less occupancy. So, food and beverage as you know have lower profit margins in rooms, but it does flow to the bottom line. So, again, the margins are an indicator that we look at overall, but ultimately it's hotel EBITDA, which we're trying to drive. It's very encouraging that we're having not just increases in the room side, but the non-room spend less profitable, but contributes to EBITDA growth.

Well, in a significant to add to that. I mean, as discussed in my remarks, the redevelopments often include components that relate to remerchandising both indoor and outdoor spaces and trying to create more revenue per square foot at our property. And again, it doesn't come necessarily at a higher margin level, particularly if it's food and beverage focus, but it does drive more EBITDA per key. So, as Ray said, that's really what we're focused on. Margins are a result obviously of all of these things happening.

Okay. That's great. And then I just wanted to quickly ask you, are you, could you just maybe touch on what you're seeing in terms of just, sort of wages and benefits pressure at the property level?

Yes. I mean, again, it varies by market. I would say, our greatest increases are in the hourly cash categories at our properties and within the hourly categories they're more intense in housekeeping and in the kitchen, and they're less intense in other jobs throughout the property. And I'd say, overall, we're probably seeing – probably something on the order of about 5% give or take in wage increases, smaller in the cities where really either in contract or following the contracts in the market.

Okay. Thanks a lot.

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

Hey, good morning everyone. Maybe just a high level question. You’ve covered a lot of ground already, but as we think about Pebblebrook's mix overall and obviously it's been shifting between resort and urban areas, could you just talk a little bit about, sort of the remaining recovery that's left in urban and how much or would that be enough to be able to offset some normalization in leisure, some of the leisure pricing that we've seen? Because I think one thing we hear a lot from investors is, concerns around lapping some extraordinary comps and what we've seen on some of the resort markets. And Jon, we know you put a lot of capital into this. So, there are reasons that you're seeing the rate gains that you've achieved, but even if that normalize a little bit, is there enough urban recovery left for Pebblebrook here? Just help us kind of think about how those two pieces could fit together in a more stabilized 2023?

Yes, I mean, I actually think there's way more to continue to drive profitability. I think there's a misconception. There's been a misconception or misbelief in pretty much everything we've said the last two years about pricing. And I think there are a couple of things to consider. One is, I think resorts to some extent have structurally repriced. And I don't think that rate – those rates are going to be given back. I mean, we're seeing very encouraging signs of that in Southeast Florida where demand is normalized out of season, rates are not coming down, and in season, rates continue to go up. Markets like the West Coast are far away from the kinds of increases we think are available in those markets. Southern California closed for part of the first quarter this year. And then when you add to that, both the demand recovery still to happen in the resorts, particularly on the group side, which is replacing some transient, but it's coming with more food and beverage and other revenues, which continues to increase profitability. And you'll see at LaPlaya and we gave you the trailing 12 numbers, but by the time we get to the end of the year, the EBITDA numbers are going to be substantially higher than the trailing 12 numbers. And that's the case. And most of our resorts, it's how we're going from $30 million over 2019 in the first half to $50 million to $60 million by the end of the year. So, I think there's a long way to go on the resort side, and clearly, the urban has a lot to go. And take San Francisco as a good example, which is a slow to recover market or even DC, both of those markets are ahead of 2019 from a rate perspective at this point. So, the approach to pricing what customers are willing to pay, the value of the product, I think we're going to continue to see further pricing opportunity within the portfolio as we get a significant further recovery in occupancy.

Very helpful. And just maybe as a quick follow-up, just can you give us any – I know you probably want to shy away from detailed underwriting or details around the transactions on the disposition side until they're announced, but could you just give us a sense on a net basis you guys are pretty disciplined buyers and sellers over the years? Are these net accretive on an AFFO basis? Just kind of would be a helpful guidepost.

Well, it's very net accretive off of 2022 numbers. Well, on a trailing basis, on a full-year basis on probably next year basis as well. So, it just – it depends what you want to compare it to when you talk about accretion or dilution. We think the pivoting we've done out of these assets and others we've sold already into the assets we've bought; I mean Ray mentioned, the yields that we're already achieving at properties like Margaritaville, which is approaching 10%, and Jekyll Island at 8.5%, and Estancia at 7.5% etcetera. So, those are highly accretive to the assets that we've sold and that we are selling.

Understood. Thank you very much.

Thanks, Shaun.

Thanks.

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

Thanks. Good morning, everyone. Just on group, could you maybe provide where pace is for the second half of the year and then also 2023? And then is there any desire, kind of on the revenue management front to maybe group up more to potentially offset a softer transient environment over the coming quarters?

Yes. I mean, we have plenty of room for groups. So, I don't think we need to – we're not displacing anything. We're trying to drive as much group at the right prices and the right contribution to the bottom line as is out there in the marketplace. We're going to continue to maintain rate integrity. However, at our properties and our pace from a rate perspective, I think it’s up, what 6…

Yes, 3% to 5% for the second half of the year in the group pace.

One of the struggles we have now comparing back to 2019 is, we don't have good data for a bunch of the resorts Mike, that we've bought more recently. And we know obviously that pace is up substantially over 2019 at those properties, but what I can tell you is, from a booking perspective, in the second quarter, we booked more revenue in group and in fact, in group and transient in total than we did in Q2 of 2019 for – in the year for the year. So, the booking pace has picked up substantially. April was the first month we exceeded [2019] [ph] and it continued and actually improved throughout the quarter. So, the pace of activity on both group and transient is significant.

Helpful. Thank you.

Thanks Mike.

Thank you. This brings us to the end of our question-and-answer session for today. At this time, I'd like turn the floor back over to Mr. Bortz for closing comments.

Thanks, Donna. Thanks everybody for participating. Out of respect for Hilton's call at 10:30, we've made a decision to limit any further questions. So, thanks for participating. Have a great rest of the summer. We look forward to updating you throughout the quarter with our monthly updates, as well as in October when we provide third quarter performance.

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