Greetings and welcome to 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Co-President and Chief Financial Officer. Thank you. You may begin.

Thank you, Donna, and good morning, everyone. Welcome to our third quarter 2024 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer; and Tom Fisher, our Co-President and Chief Investment Officer. Before we begin, please note that today's comments are effective only for today, November 8, 2024. Our comments may include forward-looking statements as defined under federal securities laws, and actual results could differ materially from those discussed today. For a comprehensive analysis of potential risks, please consult our most recent SEC filings and visit our website for detailed reconciliation of any non-GAAP financial measures mentioned today. Okay. We have a lot to cover today. So let's move to our third quarter results. We are pleased to report that despite the negative impact of two named storms on several properties this quarter, our third quarter hotel operating results were in line with our outlook. RevPAR growth was driven by occupancy increases at both our urban and resort properties, market share recovery and gains at many of our recently redeveloped properties. The ongoing recovery of business group and transient demand along with strong resort and urban weekend leisure travel fueled our occupancy gain, even as the broader industry experienced a continued normalizing of leisure travel trends. In the third quarter, same-property RevPAR increased by 2.2%, landing squarely in the middle of our outlook range and would have exceeded 2.4% if not for the impact of the hurricanes. Our outperformance significantly outpaced the industry's RevPAR growth of 0.9% and a 0.5% gain in our specific markets, highlighting our portfolio's success in growing market share. This growth is largely driven by our recently redeveloped and renovated properties and the strong recovery of our urban markets. Total RevPAR rose by 2.7% propelled by increased occupancy and strong…

Thanks, Ray. I thought I'd start with a simple evaluation of the industry's performance, provide some further insight on our performance, briefly highlight some of the significant share gains from our redeveloped properties and then provide some high level thoughts on 2025 for both the industry and for Pebblebrook. So let's start with the industry. In Q3, business group demand continued to grow and business transient demand continued to recover as return-to-office patterns improved. Leisure demand was a little more complicated. While overall leisure demand remained healthy, it was roughly flat year-over-year. This was partly due to international outbound travel, goosed by the Olympics in Paris, outpacing the inbound recovery following the pandemic. In addition, the return of leisure demand to the cities, particularly the coastal cities that suffered most during the pandemic, has negatively impacted overall industry resort demand as historical demand patterns normalized. We also continue to see a noticeable difference in demand across price segments with stronger performance at the upper end compared to the mid to lower priced segments. We talked about this before. We believe this is largely due to economic pressures impacting individuals in lower-income brackets where pandemic-related governmental support has largely phased out, personal savings have diminished and high credit card interest rates along with inflation have created added financial strength. The STR data reflects these challenges and we've heard similar comments from companies in many other industries. Encouragingly, employment remains strong and wage increases in this lower income group are solidly outpacing inflation, which should provide support for a better 2025. The unusual aspect of the hotel industry this year, at least from our perspective, is that demand has remained flat despite healthy GDP growth, a trend persisting since April of last year. This suggests that demand patterns changed significantly during and…

Thank you. The floor is now open for questions. [Operator Instructions] Today's first question is coming from Dori Kesten of Wells Fargo. Please go ahead.

Thanks. Good morning. It may be a bit early, but do you think LaPlaya should be able to exceed this year's original $24 million EBITDA expectation next year? And can you just let us know what you're able to do to change the property so that future storms might be less impactful?

Sure. Well, I appreciate your qualifier. It is a little bit early, but I would say if we're successful with the schedule that we laid out, the timeline, I do think we should be able to get back to where we were expecting to be for this year for a couple of reasons. First is, we have a lot more group on the books this coming year, in fact, much more in line with sort of pre-hurricane pace. Second, the club continues to grow there and that growth continues to add EBITDA to the property. So I do think that's a reasonable scenario for next year provided we meet the timeline that we've laid out. And then, I'm sorry, what was the second part of your question?

On the enhancements that we do.

Yeah, sure. So we did a bunch of enhancements after Ian as part of the rebuild. Systems are -- in the Beach House are out of storm surge way. They're on upper floors. We've rebuilt dunes on the beach. We've added a hurricane-proof sliders and windows and things like that. We're looking at -- we did a lot of temporary protection just around on that kept water, at least in the second storm, from getting into the Beach House in a meaningful way from the ocean side. We did have some flooding in the streets on the bay side that caused water to come in from the other side. And so we've laid out some other both permanent and temporary protections that we plan to do between now and next year's hurricane season that we think will dramatically mitigate even further the impact from storms. And --

Thank you.

We've done a lot of work with our insurance providers and advisers about what kinds of things we can do at the property in anticipation of a storm that will limit damage and speed recovery.

Got it. Thank you.

Thank you.

Thank you. The next question is coming from Jay Kornreich of Wedbush Securities. Please go ahead.

Hi, good morning. Just going back to your comments on the 2025 outlook looking much more promising for the hotel industry, can you just provide some more details as to what you expect from the leisure customer and specifically really being able to start pushing rate at the resorts?

Yeah, I mean, I think where we are with the leisure customer as we've sort of gone through this normalization process over the last 18 months to 24 months following the sort of peak demand post-pandemic in 2022, it's hard to say where average rate will end up. I think as Ray explained, as we add group and we look at group coming into next year, I mean, we're ahead in rate on our group rate. Now, we're going to do more group at our resorts next year. That's our objective. We're not yet back to where we used to be pre-pandemic. And we've also added event lawns and meeting rooms and other facilities that we think should drive additional group into the mix in these properties. So I don't know where the average rate will come. I do think ADR in terms of what we're charging for leisure guests and where we're posting it, that those are generally stabilizing at this point. And as we continue to build occupancy further, some of which does come from some lower-rated customers on international or wholesale channels, I think we'll be in a position to get more compression, have more high occupancy weekends and holidays and begin to grow rates again, as we're doing at some of our properties, particularly the ones that have been redeveloped.

Okay. Thank you.

Thanks, Jay.

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

Hi. Thanks. I wanted to ask you just a little bit about what you're sort of thinking about for wages and benefit growth and overall cost growth next year or prices sort of moderating or how do you think about that right now?

Sure. Well, we're just -- we've just begun to receive our first preliminary budgets or proposed budgets from our properties and we're just -- our teams are just starting to work through those and work with the operating teams. I think it's a little early to tell you where it's all going to come out. I think as a general perspective, I think the sort of the average wage increases from a philosophical perspective are going to be slightly lower than they were last year, given the lowered inflation rate overall. So I think as it applies to most employees throughout our portfolio, I think that will apply. In the markets where there are new union arrangements either already agreed to, which is in most of the markets at this point or likely soon to come to resolution, I think those increases are going to be larger and those are going to be -- those are going to drive the overall number up a little bit as it relates to those hourly workers in those union markets. And I think that applies whether you're union or non-union unless you really want to take the risk of either losing your employees because in many cases, labor is still reasonably tight for the positions that fall under the CBAs or you're going to risk being unionized. So our non-union properties typically follow the union agreements. And so as a result of that, I think in the cities, some of them, we're going to have a higher increase on average than we're going to have in any of the secondary markets or in the resort markets in general.

And Smedes also -- where the union.

You have said, sorry, go ahead.

Well, why don't you finish your question and I'll continue on expenses. Why don't you finish your question, Smedes?

My question was, I'm just wondering if you, I'm sure it varies by market, but if you guys just have a sense of where the union contracts are coming in, it looks like a number of them are getting settled. I'm just wondering if you have a sense of what kind of first year wage increases are as a percentage?

Yeah, I mean, I think we have a pretty good idea of where the agreements have come in because we're in some of those markets and they apply to our properties. I think the -- it varies by market. I think there are offsets in many of these markets that relate to other either reductions or credits for other categories. And I think that giving you a number at this point would be probably misleading, particularly since we have -- what we're really focused on is what are the averages going to be at each of the properties for all of our wages and benefits on a combined basis and we don't have that at this point.

And Smedes, so certainly, wages and benefits are an important part of the cost structure. I mean, it represents about 60% or so of our overall costs. But the other 40% are a lot of other input costs that we've seen come down significantly over the last 12 years as the inflation pressure subsides. So that's pressure on the food and beverage costs. Energy costs are becoming less pressured. In many cases, the inflation -- the costs are coming down the inflation are actually turning negative and a lot of the cost enhancements and technology we're using helps take out the other expenses. So certainly we focus a lot on wages and benefits because it's an important part of the overall cost structure. But the other 40% are a lot of areas that we have control over and we can have savings in. So that's why you look at the whole picture and not just one component of the cost.

Thank you. Appreciate it.

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

Thanks and good morning. Jon, you noted some of the optimism in the struggling urban markets. I'm wondering how you stack rank San Francisco, Portland, and LA from a longer-term standpoint? And then dispositions have largely focused on reducing exposure to West Coast markets, given your view on the tailwinds that you're comfortable with the existing exposure?

Sure. So I think our view on Portland and San Francisco and LA is that the underlying fundamentals of those markets, the reasons that they were successful before the pandemic will be the same reasons why they're successful after the pandemic once these cities get past their challenges that in many cases they created for themselves during the pandemic. LA is a little different because of what's going on in the entertainment industry, but it too is challenged by some of these quality-of-life issues. What we're encouraged about is, well, we just had another election. I think we made significantly further progress in these markets, in seeing much more business-friendly, moderate representatives get elected. And I think that's resulted in a change in policies and a more practical approach to addressing a lot of these issues so that the cities thrive instead of the city's suffering. So we're encouraged by that. We're encouraged that the fundamental base of -- economic base of these cities has remained in place and the educational systems, the weather, the beauty of the cities, the restaurant scene, the cultural activities, those all remain and they continue to be drivers in those markets. Sporting activities continue to pick-up, et cetera. So I think we're comfortable with the rebound in these markets. We're obviously disappointed in how long they're taking. And in some cases, it's not surprising. I think we've said it's going to take significant time to turn things around in these markets, but there'll be a point at which these become hockey-stick markets. We're not there yet. Obviously, they went backwards this past year. In terms of our position in the markets, I mean, we're going to continue to try to be active in recycling capital to take advantage of the opportunity to repurchase on our portfolio at a dramatic discount to the underlying value of those assets. What we need is a more active transaction market and we think that's -- we think that's coming in 2025. So of course, there's still uncertainty with what's going to come out of this election and what policies are going to come out of this election. And so we'll see what that does, if anything, to this recovery in the transaction markets in these markets.

And, Ari, just to remind you, since 2019, we've sold 15 hotels, largely in the West Coast markets, in markets like San Francisco, Seattle and Portland and redistributed a lot of that capital to more leisure markets and some more in the East Coast. So the portfolio has changed since 2019 and we'll make some continued progress we expect and hope in 2025.

Thanks. And then just maybe a kind of unrelated follow-up, but just on the Delfina conversion impact, did something happen there that was unanticipated? Because obviously, we knew about that before this quarter?

Yeah. Yeah, we knew that -- we knew that we were changing the brand on September 16. We expected that there would be significant disruption. You're changing all the systems, you're renaming the property. You've got to work with third-parties, OTAs, review sites, everybody. Obviously, Hyatt had a very significant staff that was focused on the property and help guide the property to getting all those things changed. Some of those things are just outside of the control of all of us that it takes longer. But two, we did anticipate significant disruption. We put in-place a lot of policies to try to fill even at lower rates during this disruption and it's just turned out to be more significant than what we thought it would be. We continue to think it's a temporary thing. It should gradually fade away over the course of the latter half of this quarter, but more significantly the first quarter and the second quarter of next year.

Thanks for the color.

Thank you. The next question is coming from Duane Pfennigwerth of Evercore ISI. Please go ahead.

Hey, good morning. Jon, appreciate your thoughts on demand and normalization over the last 18 months. It sounds like there's some optimism we could see acceleration or a pickup. I wondered if you put a finer point on it, what segments do you think have the most upside potential, which chain scales could see the biggest pickup if that view plays out?

Well, that's a little more challenging question perhaps than, I think, we can address in detail, but just from a high level, I'd say we're excited by the potential growth on the business travel side being led by group, but continuing recovery on the business transient side. And I guess, this week, we've had a few things happen. And clearly, the business world and the -- certainly, the investment world has responded extremely favorably to the national election. And I think that's encouraging for business travel next year. The forecast for increased business profits are very healthy for next year. They're very good for this year. And I think profits connect to travel and opportunities. So I think we'd be encouraged by some potential acceleration in business travel growth next year. I think we'd be very excited about the final normalization of leisure demand and the opportunity to begin to see rates stabilize and perhaps increase next year on the leisure side. The return of international inbound I think we would normally be excited that that could be significant next year. But again, the reaction in the markets to the election and the increase in the dollar, I guess, is a meaningful headwind to some of that happening. So hopefully, over time, particularly assuming the fed continues to lower short-term rates and if we get some stabilization on the further end of the curve, maybe we'll begin to see some softer currency dynamics that would help us with international inbound recovery. The other thing is we would hope to see a greater effort on the part of the administration to enhance the speed at which people are getting visas, although that might be an unrealistic expectation.

That's helpful. And then just in terms of the lagging markets and some of the changes you alluded to, changes in mayors, district attorneys, I think it's Prop 36, how long do you think it will take for those things to kind of change the perception of the markets and move the needle on your results. It certainly seems directionally positive, but is this more of a five to 10-year phenomenon than a one or two year? Thank you.

Yeah, well, I'd like to think it's not a five to 10 year. It shouldn't take that long for the truth to come out. Because I think the good news is the reality on the ground in these markets, the condition of the cities, the cleanliness, the safety side is dramatically improved. In fact, when I go to San Francisco, I think San Francisco is in better condition than it was in 2019, certainly, when we were there for Nareit back, I think, it was '18. And so I think things have dramatically improved. We've been working to try to get that news out. Sometimes there is a competing narrative that perhaps is politically driven. But I just think it takes, like anything, it takes getting people there to see the truth and to have a good experience. And I think that is what's been happening. I think people have had good convention experiences when they go to San Francisco. I think they have good leisure experiences when they go there. I think that's the case in Portland as well. It's much improved. Although I do think Portland still has a little ways to go on the ground in addition to the perception, and again, I think the elections, the Supreme Court ruling on homeless encampments, the return of staffing for police forces, the focus on the, I mean, you just saw a change in law in California on theft. And I think that's, again, an indication that the people who live there have had enough and see that the prior policies haven't worked. So I do think there are a lot of positive things happening. That's extremely encouraging. And I do think the perception will follow. It's still probably about a year behind, Duane. But I don't think it takes five years. I think it takes a couple of years.

Thank you.

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

Thanks. Good morning, everyone. I'm hoping you could provide an update on the progress and goals with Curator and items I personally think about relate to the financial performance for Curator itself and the number of hotels. And as a brief aside, I'd be curious to get your thoughts about KSL sale of Davidson and if that impacts either Curator or your hotel operations at all? Thank you.

Sure. Well, I think as it relates to Curator, we've been publishing the number of members and the number of vendor partnerships. And so you can see there we're -- we've been around 100 now for probably four quarters or so. And I think we're close to being on the verge to continue to see growth in that over the next 12 months. But it's certainly behind our goals as it relates to the size we would have hoped we would be at, at this point in time. And in some regards, I think it's a sort of a sad statement on the part of our industry where either operators or owners or both don't like to save money and create value because that's what Curator does and it's what it's done for us. It's a significant cost saver and we continue to encourage folks to take the time and put the effort into partnering with Curator because I think it's a significant value creator for their properties.

Yeah, and just to add to that, Greg, so what you don't necessarily see is because of the 100-plus hotels, Pebblebrook benefits from that. As an example, Curator just negotiated a new contract with Avendra and it's part of the scale we have not just at Pebblebrook hotels, but the Curator member hotels. So Curator is getting a better deal from Avendra because of the larger contract we just negotiated. So our costs will be in one of those areas going down or some of the rebates we're getting. So those are several of the pluses and pluses as well as the digital marketing that they are making efforts on. It doesn't always appear on -- it doesn't appear in our P&L because it's directing business to the hotels, but that's an area which does overall help. So a lot of other areas as well as the R&D areas, with Curator, they've pioneered a couple of new technologies, working with new services. There's an AI tool, a bot now that can be used at hotel to reduce service requests. That's something that before AI, you would need to be a large company to have the scale to have a tool like that. Now, individual hotels can have areas to use AI bots where guests can ask for towels or requests and those could be done. So those are these different areas that we're able to do much better and provide more bandwidth here versus if we didn't have Curator under our belt here.

And I think as it relates to the KSL sale of Davidson, obviously, we were well aware of the possibility from both Davidson and KSL that Davidson would get sold. We're pleased they executed well. They found a private equity group that's excited about the opportunity. And based upon what we know today, we don't see any impact either on our relationship with them or the relationship that either Davidson or KSL have with Curator.

Okay. Thanks, Jon and Ray. I'll leave it there.

Thank you.

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

Thanks. Good morning. Jon, you bought back a little bit of stock in the quarter, but it wasn't match-funded with the disposition. Can we read into this that you're making progress with asset sales? Or has your view changed a little bit on how you fund buybacks?

I mean, I don't think you should read anything into it from a transactional perspective. I think that will continue to be the primary source of proceeds that get used to buy our stock back. We are, as you know, generating very significant cash flow this year, $100 million or so, give or take. And you know that our dividend is still $0.01 a quarter. So it's an effort to continue to get capital back to our shareholders as a result of the significant free cash flow that we're generating. So again, we continue to try to find the balance with the way we allocate capital, the state of our income statement and our balance sheet.

Fair enough. And then just I know your redevelopments are largely done except the one that might happen in San Diego at some point. But when do you start thinking about maybe the next wave of projects and then sort of along those same lines, any initial expectations for CapEx spending in '25 ex any hurricane dollars that might need to be spent? And that's all for me. Thanks.

Yeah, so I'll address the first part. There is no next wave of projects. I mean, we've redeveloped pretty much everything in the portfolio from our acquisition of the assets. I don't, I mean, there are always small projects. There's been some ROI projects, small ROI projects that we've deferred because of better use of capital, but nothing major in the portfolio. And I think that's -- in a way, it's the good news. Not that there isn't further opportunity in the portfolio for additional investment. There is some of that, as I said, particularly smaller ROI projects, sustainability, energy, things like that. But the major projects are done. There aren't going to be another group of them and there's really just the one left potentially at Paradise Point. But the -- again the good news is we've already gone through the hard part. We've invested the dollars. We've had the disruption, and we've lived through that. And we're on the ramp-up side, where the capital's already gone out the door and the upside is what's remaining. So we feel really good about where we are, the organic growth that we're going to have over the next three or four years, and the fact that we're not going to have any material disruption as we -- forward over the next few years.

And Michael, as you then think about the CapEx uses in '25 and beyond, again, this is ex the Paradise Point potential, something in that $65 million to $75 million range is appropriate run rate. Of course, we'll have a little refresh here or there on a property that may -- we have done seven, 10 years ago, that's due for a light touch. We'll have a couple of those, but in that vicinity -- which is a lot less than the CapEx that's gone out last several year. So that's one thing about there. As it relates to any sort of hurricane restoration, as we noted earlier, the good news is because a lot of these capital investments that we've made, this is not going to be near the cost of what Ian was or the disruption. Ian, when you add the impact between LaPlaya and Southernmost and the losses there and beyond, that was in the $140 million, $150 million range. This is going to be much, much less because of those investments we made to harden the assets. So it's going to be much less significant. And again, outside of our deductibles, which depending on how that's allocated, it's a few million dollars here or there, these are recovered by -- paid by insurance. And so there's a lagging effect on that, but it's much less significant. So we're eager to get the Beach House up and running. For us, it's the -- just waiting to getting some of the permits before getting started. Our teams are ready to move forward, so you can certainly expect by probably end of the first quarter, probably we should look great and should have really good '25.

Helpful. Thank you.

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

Well, thank you all for your time and your participation. Lots of exciting things going on in the world and we look forward to seeing many of you out in Las Vegas for Nareit and then perhaps not too long after the New Year. So hope you enjoy your holidays and we look forward to being in touch in the near future.

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