Pebblebrook Hotel Trust (PEB) Earnings Call Transcript & Summary

Jon, you mentioned something pretty interesting as it relates to that ordinance in San Francisco, and it sort of hits on a broader theme that we broached on the earnings call. But I'm just curious now that you have a few more hotels up and operating, which is what have you kind of learned or seen so far in terms of the cost structures as you kind of move to reopen? And this is more of an operational question, right, just moving things around. I think early on, the response was that guests wanted a pretty normal experience and behavior. Is that continuing? Is there any difference between urban and resort properties? Or just kind of what are you seeing at hotel level margins as we put together some of the pieces a few weeks further?

Yes, it's interesting. AHLA just released a survey that they just did, and it's pretty consistent with what we're finding, which is something on the order of about 2/3 of the guests don't want anyone entering their room during their stay. I would say that's the case, whether it's a resort or an urban property. But based upon -- again, this is our anecdotal evidence, it's their survey information, but I don't think their survey tries to differentiate between resorts and urban hotels. I also think we're starting to see a bit of a change in customer behavior, where with more states coming out, either requiring or strongly urging people to wear masks, we are seeing more of that. Our properties, in most cases, do require folks to wear masks as they enter the restaurants, even the outdoor restaurants. But then, of course, when they sit down and eat, you can't eat with the mask on yet, although I've seen some new masks with little holes for straws, so probably something that was created for bars at the end of the day. But in terms of the cost, Shaun, I mean, again, we've -- our models are trying to adapt so that we are mitigating the losses that we have. And what we're doing primarily is a lot of job-sharing, where we can do it. Certainly, at the nonunion properties we're doing that. Having managers work shifts, frankly, because in many cases, they don't have a lot of things to do. Our sales agents are still -- they still have plenty of time to work shifts as opposed to do sales efforts because there's not a lot of in-the-year activity going on right now that's real. And so what we're finding is, we are running more efficient, we have to at this point in time in order to bring even the people back that we've already brought back by mitigating the losses that we have. So we are not offering cleaning during stay overs at, I think, pretty much all of our properties. And then, of course, if -- but we're providing whatever service you want. If you need extra towels, we'll bring you towels. In many cases, we have either knock and drop or we have carry out if we have a restaurant that's operating on the premises. And otherwise, you can order from -- through Grubhub or Postmates or whatever and pick it up in the lobby for delivery. So from a cost perspective, at these level of revenues, we're going to run lower losses or a more positive cash flow than we would have last year with the same level of revenue.

That's helpful, Jon. And then the other kind of question I have is just as you think about the demand side. And obviously, the -- your commentary on the bar rates and just the natural mix shift is pretty interesting. Anything else Pebblebrook's doing in terms of the ability to maybe target slightly even more long-stay type guests. I think there have been some -- some people that have been somewhat successful in targeting a little bit more of an extended stay type traveler? I mean, you basically get into almost a crossover to sort of a short-term residential component. But is there -- I'm sure you're looking at every stone, so any successes or failures in attacking a vertical like that or what some of the risks could be in doing that?

Yes. I mean, there's a few things we're doing. It's more successful in some places than others. We certainly are encouraging length of stay. And so the one place where you'll -- you might see "discounting" would be -- at the resorts would be to encourage those weekdays. But encourage them only through length of stay. So if you're staying 1 night during the weekday, there's no discount, but if you're saying 3, you might get 10% or 15% off, et cetera. The longer the stay, the bigger the discount. In some of the urban properties, we have been targeting some longer length of stay, both health care and non-health care. We've had some success with that. In West Hollywood, and we just opened our second property that is all suites, Le Parc, in addition to Montrose, which has been open the whole time. We are targeting longer length of stay, and we've had some success with that with folks staying multiple months. Some of that is -- somebody is renovating their home or building a new home or they've moved to the area, they're looking for a home and they're going to stay a month or 2 or 3, we certainly do have some of that and have been targeting it. And have the properties for it, where we have -- I mean, compared to a New York apartment, if we have 600 or 650 square feet, with a full kitchenette and a stove and microwave and et cetera, a sink, separate living room from bedroom, we are seeing takers in that regard. But it's not enough at this point to be material in any way. And I don't know -- I don't see the hotels shifting to a monthly leasing model. The one thing we have seen, Shaun, is there is demand in some of the markets for -- from the colleges. And so we are looking at, in some cases, competing for a business that might run 4 months or might run 8 months if it's 2 semesters. And that business would obviously be at lower rates, but it would be without services as well. So it would definitely be a good replacement for business that, particularly group, that we just don't expect in this year.

And Jon, that's effectively to be able to spread people out from dormitories and double occupancy, is that sort of thing in some of the really highly compressed area?

Yes. Yes, it's to reduce density and in some cases, interaction. So in one case, business we're competing for, it's a college of a university. It's hundreds of rooms. They'll actually do their classrooms on the premises, and they'll do their meals on the premises as well. So to me, it sounds a little like a jail, but hey, that's not for me to judge.

Probably not put it out in the brochure.

I don't think they'll be locked in the property, by the way.

[Operator Instructions] Our next question comes from Neil Malkin with Capital One Securities.

First off, I just wanted to say, I hope the statue in the Sir Francis Drake bar doesn't get torn down this weekend.

That will be a challenge because the hotel is closed and boarded up. So I'm not too worried about that, but thank you.

You never know, though. But yes, I know. Let's see, the other question or the first question is, on the earnings calls, all companies have kind of given initial thoughts on what talks with brands will be in the sort of new restructured operating model as we emerge from the COVID pandemic. One of the things that was talked about a lot is a pretty significant change in the F&B outlet or avenue in totality. And I'm just wondering, your non-room revenues like F&B, other, especially at some of your larger properties, how do you see that playing out? Or do you see that model sort of being re -- reconfigured to adjust for, for example, less groups, lower quantities of groups, less density, restrictions, maybe lower minimum spends, et cetera? How do you think about how that side of the business winds up shaking out as we get out of the pandemic and then maybe more, over like a long-term basis?

Yes. I mean, you have to tell me what the world's going to be like, what the health risks are going to be like. What does post-pandemic mean? And if -- but our view would be that we get to the point where COVID-19 is equivalent to the flu in terms of outcome, potential outcomes, then my -- our answer would be, it's pretty much going to go back to the way it was in terms of group business. And we don't really see any kind of secular or structural change in the desire on the part of businesses to meet. In fact, we would see a likely increase. If, in fact, there are more people working from home or people who work from home 1 or 2 or 3 days a week versus none before, there's an increasing reason to get your people together to promote your corporate objectives, your goals, your culture, which is going to be harder to do if everybody is not in the office at the same time. And so we actually would see a greater reason for businesses to get together. I think -- I do find it, I don't know, to some extent, I'm using that there's so many positive comments about technology that I think only works partly. And I think it's a great -- video can be a great replacement for a teleconference, but I don't know that it's much of a replacement for in-person, in general. And it doesn't work that well. It's not like sitting down and having a drink and it's not like going to a convention and having casual interactions that frankly are usually more valuable than the planned meetings and interactions. And so we're not really planning for things to be totally different now. We're going to take this day-by-day, week-by-week, month-by-month, as we mentioned. And we just have to see how it all plays out. We don't know. I think things will be done differently. I think that this will change some customer desires. I think people have gotten used to ordering meals online, I think we can do a lot more personalization at group meetings than having [ broad the phase ]. I think we'll be able to do that, hopefully, less expensively and provide a better quality product and service at the end of the day. I think -- so I think it's the outlets, I think it's room service. I mean, interestingly, Neil, for properties where we're still operating, call it room service, it's obviously not going to drop right now, but the demand for that, not surprisingly, is up at our properties, right? More people -- there are plenty of people who would rather have their meal in their unit or on their patio or their balcony as opposed to going into a restaurant and sitting down even if it's an outdoor restaurant in many cases. So we've seen an increase in that. We've seen an increase in parking, everybody's driving. Our parking revenue, which was on a pretty consistent decline, is now increasing at our properties. And where we've had valet, where we can, we've reverted that to self-park and put in the equipment to do that. So I mean we'll continue to make changes as we go along. I haven't seen anything come out of the brands yet. And I wouldn't expect this to say, here's how things are going to be on the other side of this, because we're still trying to figure out how things are on this side of it and how we operate. So I'd love to tell you we have the answer for your question, but we -- unfortunately, we don't.

No, I understand. It's pretty tough. I kind of -- I was just more referring to when the sort of F&B at, call it, the -- your branded properties that have a buffet or maybe a couple of outlets. We've heard shutting down nonprofitable or reducing buffet, reducing hours, reducing amenities offered as potential things that could come out of it. And I just wonder if that's the case? And you've reduced a lot of the other revenues in the hotel, doesn't that bring down EBITDA on an absolute basis, potentially for a long-term basis or permanently?

Yes. I don't think so. I think it would have -- the impact you actually were mentioning, which is the ability to reduce things that are unprofitable. I think that will increase. I think you're going to see far fewer F&B outlets in hotels in New York and many of the major cities because they're unprofitable or they're marginally profitable. And the amenity can be provided easily and quickly through delivery or carryout that people have gotten accustomed to. So I do think it's accelerated trends, just like it's accelerated online retail at the end of the day. I think we've accelerated the use of apps. If you go into many of our restaurants at our resorts, they're touchless now. Your menu is a QR code. You read it on your phone and you order off of that. So does that reduce costs? It does. I mean, we don't have to produce menus for the most part anymore. So there are going to be advances in technology that help that come out of that -- that come out of this pandemic. And there'll be more mobile check-in, there will ultimately be fewer people at the front desk. I believe in 5 to 10 years, you're likely to have almost nobody at the front desk, and it's done through a video interaction if you need it at the end of the day with a person, as opposed to with a robot.

All right. No, I appreciate that. Last one for me is, are you seeing any differences or disparities in your hotels that are open in terms of business travel, I'm sure there's very little of it. But have you noticed that potentially your smaller accounts, your more local or regional accounts, are back on the road as opposed to the larger Facebook, IBM, Googles of the world, just given the larger companies have HR, legal, ESG sort of implications, whereas Bob's Boating probably doesn't have that. Are you seeing those things play out? Or is it hard to discern those things from your data?

Well, I would say the business that we're seeing, and again, we don't know why everyone is there. Certainly, if somebody is there for multiple nights, there's likely to be some interaction, and we can find out why someone's there and who they work for, in some cases. We're not seeing much come through our corporate accounts. And we see that through our corporate rate, the rates being utilized. So that certainly is easier to see. And there's not a whole lot there. We are seeing a little bit of project business in a couple of our markets. And again, that comes through the corporate booking code. But yes, we are seeing more local accounts. It obviously is where we put more efforts. They don't have those kinds of restrictions you mentioned. They're more flexible. We're seeing business in advance of production in L.A., both in terms of some crew business -- some production crew business as well as the actual actors and performers. So that's more of the kind of business that we're seeing. If you have technology you're installing, it has to be done in person on-site, somebody's coming in for that and staying for that. So we are seeing that kind of business.

Our next question is from Gregory Miller with SunTrust.

I'd like to ask a couple of questions -- hey. I'd like to ask a couple of questions on CapEx. The revised credit agreements seem to suggest that you're still not resuming pre-COVID-19 level of our -- of CapEx spend. Do you consider the back half of 2020 or early 2021 a preferred time to take advantage of potentially lower labor and material costs versus, say, holding out and perhaps approaching the ROI CapEx in later 2021 or beyond?

Yes. So we've built into the arrangement with the banking group, the ability to do a number of projects that were part of our plan. And that is in those projects, somewhere, I think, 4 to 6 projects that we could move forward with, should we choose to. We haven't made decisions on those yet. Greg, we want to see how it plays back, how things play out. How does the recovery go? How does the health situation advance? I would tell you that, yes, costs have come down. And we -- on the other hand, we also don't expect them to increase over the next several years because we think capital investment is going to be restrained, particularly in the hotel business over the next few years. So I don't think there's a rush to do these to take advantage of lower costs. And unfortunately, in many cases, particularly as it relates to the -- to some of the urban markets, we don't think there's a rush to avoid displacement because we think there's not going to be a lot of displacement over the next at least 12 months in those projects. So we are prepared to move forward. We've been moving forward with design and approvals and permitting so that we're in a position to be able to pull the trigger and move forward, particularly with any of the closed hotels already where we had projects scheduled where we can roll right into the renovation while the hotel remains closed, do it less expensively and more quickly and not have much impact on operations. So we do have the flexibility there to move forward with a number of projects that we discussed last quarter. And we'll just have to see whether that's the right decision based upon how things play out.

And just a quick follow-up on the same topic. In the 1Q release, a lot of the projects that you had listed that were in repositioning phases were expected to be completed around the end of the second quarter. Is -- was that timing intact? Are a lot of these hotels now completed in terms of the renovations or has that been pushed back somewhat into this quarter?

So there's -- well, they proceeded. Some of them have been completed. So I just toured last week our properties down in San Diego, 3 of them are complete. The Westin Gaslamp, the Embassy Suites and the San Diego Mission Bay Resort, which we completed and then reopened on the 25th of June. So those are done. They look spectacular. Customer response seems to be pretty good. I was pretty impressed, frankly, of the quality of the work. And I think the properties look great, and that will help them moving forward. We're probably a month behind at the Viceroy in Santa Monica due to just work crews being smaller than where they were before. And -- but we don't have plans to open that hotel just yet anyway. That should be completed by July 15, so a couple more weeks. And then in DC, we have 2, the Viceroy -- the one that will be converted to the Viceroy at Mason & Rook and the Donovan, which is being converted to Zena, those are both wrapping up this month. Originally, they were scheduled to be -- Zena was scheduled to be done by Memorial Day. Again, with smaller crews and delays in delivery and other impediments that came up, slower response from the district on inspections. That will be done this month as well by mid-month, and then Viceroy, same thing. So, however, we've yet to determine opening dates as demand in the district has been fairly minimal in the market. So that's -- they'll all get done and they all get done at this point by the end of July and with no impact on operations at the end of the day.

Our next question comes from Stephen Grambling with Goldman Sachs.

I apologize if you already addressed this a little bit. But on the last call, I think you alluded to and you're kind of highlighting this again in one of the other questions. This -- on the supply side, a lack of development likely being a positive ray of light. I guess any updated thoughts on what you're seeing in either the pipeline of new construction in markets where your portfolio is? And any changes in terms of things that were in the pipeline that maybe have either been abandoned or deferred?

Yes. I mean -- well, the most obvious thing we've seen as we track supply is delays, just as I was mentioning, Stephen, with our renovations. New construction is all taking longer, crews are smaller, materials have had hiccups in coming in. A lot of materials coming from other markets, whether it's in Asia or it's south of the border or even in the United States where plants shut down, there have been a lot of delays in that regard. So we've certainly seen projects push deliveries for existing construction being pushed back anywhere from 3 to 6 months. And of course, then you still have -- even if you're done, what it's your opening decision? And is it appropriate to open? I can't say I've heard much of abandoned projects just yet. But again, I'm not sure those would be announced at the end of the day, and we're going to have to learn that through probably some on the ground research to see if work is actually happening on some sites that were underway. And then certainly, as it relates to new construction, things advancing in the pipelines, there isn't any construction financing available to speak of. And so we expect not much to roll out of the planning phases or the almost to start construction phase into the construction phase for, frankly, for a long time now. There's nothing that will be -- it won't be 0, right, because there will always be someone who finds a way, perhaps with dramatically increased equity, but, by and large, we expect new starts to shut down, and that is what we're seeing in the markets.

Our next question comes from Smedes Rose with Citi.

I was just wondering if you guys have received any sort of incremental data on conventions for next year in some of the markets where typically convention demand has been a positive for your properties in San Diego or Boston or DC. And any change in sort of overall group bookings that the core conventions centers are seeing that you could share?

Yes. I mean we continue to get updates from the convention authorities and the sales organizations for those conventions. I would say, for the most part, sales for major citywides are proceeding pretty much as normal with one exception, which is we've begun to see a few particularly smaller or corporate-driven citywides cancel in the first quarter of next year. It's not a lot, but it's noticeable. And in many ways, again, not surprising given the position some corporations have taken based upon travel policy, sort of preannounced in some cases for next year. So that's pretty much all we've seen, Smedes. And frankly, I think any of those, certainly, corporate travel policies could all be reversed if there was a health solution that occurred.

Yes. Okay. And then I just wanted to ask you, I was reading about that ordinance you mentioned earlier in San Francisco. So just I don't remember -- so your hotels in San Francisco are union or this would apply to any hotel regardless of its union status?

Well, the legislation proposed would apply to all hotels, regardless of whether they're union or nonunion. The only -- and by the way, it includes office buildings as well, although it does exclude city, state or county buildings, interesting, which, I guess, don't need to be as clean compared to commercial providers. So we find that rather curious. And not only that, but probably discriminatory at the end of the day to businesses. So our properties are a mix of union and nonunion and it would apply to all of them.

Our next question comes from Anthony Powell with Barclays.

Just a follow-up for me. In terms of Boston and Chicago and DC, what's the updated schedule in terms of getting things like museums open and other attractions? And just more broadly, how are these jurisdictions given travel and conventions right now, are they looking to try to get them back? Are they cautious about them? What's kind of the overall regulatory approach to these industries in the current environment?

Yes. I don't think -- I can't say that I'm completely up to speed by day on museums and other similar facilities in those markets, DC is a little slower to reopen. So I don't think any of the museums have reopened. Interestingly, in some of the cities like San Diego that have been on the more progressive side of reopening, they have opened the zoo. They have opened museums. And so I think in most cases, museums are on a reasonable list as opposed to live sporting activities or with fans or concerts that -- or large groups that would be sort of in the last final phase in most of these cities. So it would be encouraging to see museums open up, zoos open up, SeaWorld open up and do it in a safe way. Obviously, you're aware that Disney World opened in Orlando, but Disneyland has been postponed in Orange County in California.

Just maybe more broadly, are city governments actively trying to get travel reopened or are they just more cautious in their approach to this segment given all the news still?

I would say it varies, but most of the cities tend to be liberal. They seem to be a little more maternalistic or paternalistic. And so they've been, I would say, slower in reopening than, say, San Diego, which has a Republican mayor and maybe a less liberal counsel, which has been more aggressive or certainly at least being more active in reopening earlier.

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Jon Bortz for closing comments.

Thank you all for participating. The one thing think I would certainly encourage you to do, as indicated by our song on this time, is, if you really want to do research, you need to get out on the road, even if it's by car, and see what it's like because I could -- I would encourage you, it's actually a good experience. It's good for your souls and it's good to get out of your house or your neighborhood or your city and see what's going on in the rest of the country. And I think it's both good personally and good research in a business perspective for everyone. And so hopefully, by the time we do our second quarter call later this month, some of you or many of you will have done that research and know more about what it's like out there in the real world. Look forward to updating you guys in a few weeks about our second quarter performance. Thanks again for participating.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.