Pebblebrook Hotel Trust

NYSE:PEB

Earnings Call Transcript 2021-Q1

[Operator]

Greetings, and welcome to the Pebblebrook Hotel Trust first quarter earnings conference call. [Operator Instructions].

It is now my pleasure to introduce your host, Mr. Raymond Martz, Chief Financial Officer. Thank you, sir. Please go ahead.

[Raymond Martz, EVP, CFO, Treasurer & Secretary]

Thank you, Donna, and good morning, everyone. Welcome to our first quarter 2021 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.

But before we start this morning, a quick reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our 10-K for 2020. Our other SEC reports and future results could differ materially from those implied today and by our comments. Forward-looking statements that we make today are effective only as of today, April 30, 2021, and we undertake no duty to update them later. Our SEC reports and our earnings release contain reconciliations of the non-GAAP financial measures we use, which are available on our website at pebblebrookhotels.com.

When discussing our financial and operating results, we will, in many cases, also compare our first quarter results to the first quarter of 2019. We believe this is a more accurate representation of the comparable operating and financial performance rather than comparing to 2020. We provided these comparative performance measures for 2021, 2020 and 2019 in the financial statement tables as part of our -- of the press release we filed last night.

Okay, on to the highlights of the first quarter. Last year this time, hotel demand was virtually zero. We only had 8 of our hotels open. We are burning between $25 million and $30 million of cash per month, and we also had about $450 million of liquidity. Today, about a year later, we have 48 hotels opened, 11 more than when we started the year and 8 more since last quarter.

In March, for the first time since the pandemic began, we achieved positive hotel EBITDA for the month. This exceeded our expectations due primarily to greater pickup in March from an extended spring break. Our total corporate cash burn in March was approximately $12 million, a significant improvement from January and February when we averaged over $21 million per month. And today, we have over $900 million of liquidity.

Progress on vaccinations combined with significant pent-up leisure travel demand provides us with more confidence and optimism in the path to recovery despite business travel and group demand still way off pre-pandemic levels. The crisis is far from over, but the hotel industry in our portfolio are heading in the right direction, and trends are improving monthly, which is very encouraging. As the songs from the '70s indicated, yesterday is gone and tomorrow should be better.

Same-property total revenues of $83.2 million were 74.7% below the first quarter of 2019, but marked a 12.3% improvement from the first quarter of -- fourth quarter of 2020, with revenues of $74 million. You'll recall when we spoke 2 months ago, we thought the first quarter would be slightly below the fourth quarter.

Total hotel level expenses of $99.3 million were reduced by 58.5% versus Q1 2019. Expenses before fixed costs, like property taxes and insurance, were cut by 66.6% versus Q1 2019. Our total property level expense reduction was 78% of the revenue decline and 89% before fixed expenses. This highlights the tireless efforts of our operating and asset management teams who have been focused on maintaining enhanced cleaning and safety protocols for our guests and hotel team members while also instituting cost controls and implementing new best practices to improve efficiencies.

Our hotel operating teams are also trying to overcome the challenge we are experiencing with a lack of available workers in every market. We expect this shortage of hotel workers to remain a challenge for several months, but improve in September as enhanced unemployment benefits are due to run out, children should be back in school full-time and the fear of the virus is dramatically reduced due to widespread vaccinations.

On the same-property RevPAR basis versus the comparable period in 2019, January was down 83%, February was down 76.4%, and March was down 70.2%, which represented the best-performing month since the pandemic started last March. For the second quarter, we currently expect RevPAR to be down between 66% and 70% compared with the comparable period in 2019, which continues the improving trend.

Our total portfolio generated $19.4 million of revenue in January with 37 hotels opened, $26 million in February with 38 hotels opened and $38.1 million in March with 39 hotels opened. We forecast revenues of approximately $42 million for April, slightly up from March with 44 hotels open. Now 44 excludes the additional 4 hotels we reopened near the end of the month.

Please keep in mind that as these last hotels reopen, they opened with lower occupancies, and they're reopening in lower occupancy and slower recovering markets. So ADRs also will be at lower levels. So they weighed down our overall statistics, but increased our total revenues and hotel EBITDA numbers.

For the first quarter, same-property hotel EBITDA was negative $16.1 million compared with a positive $89.4 million from Q1 2019. However, it does mark an improvement from the fourth quarter of 2020 when we had a hotel EBITDA loss of $19.1 million. By month, same-property hotel EBITDA was negative $11.4 million in January, negative $6 million in February, and positive $1.3 million in March.

Our 8 resorts have been the consistent bright spot in our portfolio throughout this pandemic, whether summer, fall, winter or spring. They generated a positive $14.5 million of hotel EBITDA in the quarter. This resulted from an occupancy of 41% at an average daily rate of $406, which was more than $93 and a 30% increase over the comparable 2019 first quarter.

Spend at our resorts was also up meaningfully over the comparable period in 2019, resulted in total revenue per occupied room higher by more than 10%. As a reminder, leisure transient portfolio-wide has historically accounted for about 40% of our demand, with corporate transient at 35% and group at 25%. Not only do our drive-to resorts benefit from strong leisure, but all of our urban markets have strong leisure components. And markets like San Diego and Los Angeles are benefiting now. Washington, D.C., Boston, Seattle, Portland, San Francisco, Chicago and Philadelphia should also benefit from this summer, assuming the amenities and tractions are open in those markets.

Our adjusted EBITDA was negative $25 million in the first quarter compared with a positive $90.5 million in Q1 2019. Despite this seasonally slower first quarter, this is an improvement compared with the negative $27.9 million of adjusted EBITDA for the fourth quarter ending December 31, 2020, and shows the positive direction of the portfolio.

Adjusted FFO per share declined to a negative $0.42 per share compared with a positive $0.46 per share in Q1 2019.

Shifting to our capital improvements. During the first quarter, we invested $9.6 million in our portfolio. About 1/3 of this capital was related to the redevelopment of L'Auberge in Del Mar, California. This transformation is expected to be completed several weeks and the new lobby, outdoor restaurant, new cafe and renovated rooms have reopened.

2020 -- for 2021, we anticipate investing an additional $60 million to $80 million for a total of $70 million to $90 million in our portfolio. We've decided to move forward on the $25 million redevelopment of Hotel Vitale in San Francisco into the 1 Hotel. We will start this renovation later this summer and target to complete it by year-end. As a result, we will keep Hotel Vitale closed for the rest of this year to complete the redevelopment and transformation with less disruption and that the hotel was open. This will also allow us to complete the renovation more quickly and at a lower cost.

We will also be moving forward on the $5 million redevelopment and renovation of the Grafton on Sunset in West Hollywood, California. We expect to start this renovation in the fourth quarter with completion in the first quarter of 2022. We will relaunch this hotel as the eighth member of the Unofficial Z collection upon its completion with the new Z name yet to be finalized.

Our decision to ramp up our reinvestment projects are a very positive indicator of our confidence in the direction of the travel recovery that is beginning to take hold and our strong overall financial condition and resources. We want our hotels to be in position to take advantage of the substantial step-up in travel and hotel demand that we expect in 2022 and beyond, which is why we are moving forward with these renovations, which are transformational and should lead to outsized cash flow growth.

Shifting to asset dispositions. On April 1, we announced we completed the sale of the Sir Francis Drake Hotel in San Francisco. We generated approximately $157.6 million of proceeds from the sale. Since the second quarter of 2020, we completed approximately $225 million of property dispositions. We intend to strategically reallocate this capital into new investment opportunities that we believe will provide enhanced returns and greater diversification for our portfolio as the opportunities become available.

Turning to our balance sheet and liquidity. With the proceeds from the recent sale of the Sir Francis Drake, we have more than $920 million of liquidity. This includes cash of $279 million and $643 million available under our unsecured credit facility. Our net debt to book value is approximately 42%. And excluding our convertible notes, which can be converted to common equity when our common share price exceeds $25.47 per share, this ratio is 27%.

We're proud of the tremendous progress we've made, strengthening our balance sheet, reducing near-term debt maturities and increasing our liquidity. This should allow us to take advantage of new investment opportunities as they become available.

With that, I'd now like to turn the call over to Jon. Jon?

[Jon Bortz, Chairman, President & CEO]

Thanks, Ray. So I thought I'd focus on what we're currently seeing in our business and how we think this year is likely to play out now that it seems we have perhaps a more predictable path, though it continues to be a path with quite a lot of uncertainty.

None of us has ever been through a pandemic. So the big variables include the progress we make against the virus, both here and around the world, and then how governments, individuals and businesses, in particular, behave as the health issues recede, assuming we have no setbacks.

We're certainly very encouraged by the reduction in our country's daily cases, hospitalizations and deaths, and the pace and general level of vaccinations. This year's recovery is being led by the leisure traveler, who continues to be most of the demand currently traveling.

While all segments will increase as the year goes on, leisure travel is a segment that is likely to remain the driving force behind the recovery for the second and third quarters as government restrictions ease, and as more and more people feel safe and comfortable traveling. In fact, we've already seen the leisure recovery pick up speed since the beginning of the year when it was at its low point. Not only did occupancy pick up in February and March, but overall bookings consistently increased through the entire first quarter, including for future months.

For us, demand consistently increased throughout all of our markets. For example, total hotel revenue per day in February averaged about 49% higher than in January, and March increased another 32% from February. And April is forecasted to be up another 17% from March based on the first 25 days of the month.

Room revenues have improved even more. Average daily room revenues increased 55% from January to February, another 35% from February to March, and we're forecasting they'll be up another 17% from March to April, again, based on the first 25 days of the month.

While the nominal numbers are still very low, averaging about $1.2 million per day in March for total revenues, the improvement in transient demand and occupancy have clearly been significant. Overall, except for periods following holidays, our total transient bookings have increased week-over-week just about every week this year.

We're also encouraged that we're seeing forward transient bookings pick up as well as the leisure customer feels increasingly confident booking vacations and leisure trips further out than they've been doing so far during the pandemic.

When it comes to rates, we've seen consistently strong growth in ADRs at our resorts, with 7 of 8 of them achieving significant increases over 2019 levels. In the first quarter, average rate at our resorts on a combined basis increased $93.88 over 2019's first quarter were whopping 30.1%. Weekday rate growth at our resorts was even stronger than weekend rate growth, up 31.5% on weekdays versus 20.6% on weekends.

The leisure customer has plenty of money to spend and a greater number are choosing upgraded and more expensive room types, including view rooms and suites, and this is helping to increase average rates.

While the same cannot be said for rate growth at our urban hotels, the strength of our resort portfolio has been so great that it dramatically mitigated the urban rate decline of 31.5%. This decline was less on the weekends than on the weekdays. Not surprisingly, given our traditional weekday high-rated business in our urban markets comes from citywide conventions, corporate group and business transient, all segments traveling in a very limited amount during the first quarter.

Yet because of the huge rate increases in our resort portfolio, the entire portfolio only experienced a 4.7% rate decline from 2019's Q1. And we continue to focus our revenue management efforts on recovering ADR in our urban markets, particularly as demand improves.

During last September and October, we saw the beginnings of a modest recovery in business travel. However, with the rise in the virus' spread, increased government restrictions and the arrival of winter, transient business travel slowed significantly in the first half of Q1. We're encouraged that we've begun to see some business travel return again. Some examples include TV, movie and music production in L.A.; consultants, health care, pharmaceutical and IT-related project travelers in various markets, including Boston; and some government as well as sports and entertainment throughout the portfolio as those event venues reopen again with spectators and fans.

We've also had some corporate groups actualize, primarily in Florida, including incentive groups and strategic planning meetings. We expect to see a gradual improvement in business travel over the course of the year, but we don't really expect a major increase until after Labor Day in early September.

Growth in business travel between now and Labor Day will likely come from private businesses and small- to medium-sized public companies. We've also hosted many social groups at our properties especially related to weddings. In fact, wedding bookings for the second half of the year continue to pick up, and we may see a record number of weddings in the second half.

In the first quarter, group accounted for 10.2% of our total room revenues. This does not include the university student business at the W Boston, but does include airline crew business throughout the portfolio, representing over 4% of total room revenues. Corporate group represented a little over 2% of total room revenues in the quarter. There are also a significant number of groups that have or intend to rebook into the second half of 2021 and into 2022 as well.

We're very encouraged about how well group is shaping up for 2022 at this point. While 2022 pace continues to be significantly behind the pace in 2018 for 2019, not surprisingly, it's down 28% in room nights. Activity has definitely picked up as meeting planners return to work and become more confident about holding meetings. There's more clarity and optimism on success against the virus with restrictions on meetings being loosened or dropped altogether, and that's providing more comfort that groups will be able to meet or hold their events after they do book their business.

Equally encouraging is that rate is holding as well. Our group rate for 2022 is currently ahead by 3.8% versus the same time in 2018 for 2019, which was our last normal pre-pandemic year.

When we look at the second half of 2021, we're definitely much more cautious about group and trying to forecast when businesses will move forward and meet in person. In the last 4 months, we're encouraged by the continuous improvement in activity related to the number of leads, site tours, discussions and group bookings throughout our portfolio. Nevertheless, overall activity levels, especially bookings, are not yet at the levels of 2019, and they certainly vary meaningfully from market to market.

Our group pace for the second half of 2021 is down roughly 45% with ADR about flat, which is very encouraging. Group rates have generally held up or been rolled forward from previous bookings, and some have even increased if they've moved from a seasonally lower-rated time of year to a seasonally stronger time of year. We certainly hope group will begin to pick up as the year moves along, and progress continues against the virus. However, we're concerned that businesses will be more cautious about meeting this year, particularly before Labor Day.

There are glimpses of hope, however, including the Concrete Citywide to be held in Las Vegas in June, it seems like a pretty scary idea, concrete in Vegas. Nevertheless, we should go forward. We have the Alice Convention scheduled for late July in L.A., which should go forward if California and L.A. reopen as announced and allow such a large conference. And I'm sure there are many other examples. So we'll get a better view of the willingness of business travelers to attend meetings, conferences and conventions later in the second quarter.

From an expectations perspective, if we assume continued progress against the virus, we believe the second quarter should be better than the first quarter. We should be able to achieve not only positive hotel EBITDA but we should be able to generate positive corporate adjusted EBITDA for the quarter. And with further progress in the second half of the year, we're hopeful that we can eliminate our operating cash burn and generate positive adjusted FFO sometime in the third quarter.

One important item about the first quarter I want to point out. Previously, we had indicated that we believed we needed to get to 30% to 35% occupancy in order to get to breakeven for the portfolio. In March, we achieved a positive $1.4 million of hotel EBITDA at an occupancy level of just 24.7%, obviously, much lower than our prior estimates. So think about that, profitability at an overall occupancy level less than 25%, pretty remarkable, I think.

This very positive result was primarily due to a pretty healthy portfolio-wide average rate of $245 as well as our new operating models throughout our portfolio. While this average rate in March benefited from prime season rates in South Florida, that will come down as we move out of high season. Our average rate will be helped by increases in rates at our other resorts on the West Coast as they move into prime season in Q2 and Q3 and as we benefit from the redevelopments that recently took place at Mission Bay Resort, Chaminade, Skamania, L'Auberge Del Mar, LaPlaya, Marker Harborfront Resort and Paradise Point. That's all of our resorts, except Southernmost Resort, which will undergo a major renovation this summer.

In addition, most of our urban markets will be moving into stronger leisure months as we move into the middle of the calendar and into and through the summer, hopefully, just-in-time for business travel to accelerate in the fall. So we're very optimistic that our overall operating model is much improved and should allow for enhanced results as revenues continue to recover.

When we think about 2022, we're focused strategically on the year being a very strong recovery year overall. Group should be as strong as we believe there's a great deal of pent-up demand, and it will also benefit from all the meetings being rebooked from 2022 -- from, I'm sorry, 2020 and 2021.

We also think leisure will continue to be robust, with a lot of pent-up demand for vacations and getaways and outbound international probably still more limited. This means we don't expect significant rate discounting in 2022. Again, this is with the obvious caveat that we get to relatively normal behavior by the end of this year, and it remains relatively normal next year.

We believe we're in a great position to take advantage of this recovery in 2022 and beyond based on the outstanding condition of our hotels and resorts. As we've reported, we're moving forward with the redevelopment of Southernmost resort in Key West this summer; Vitale into a 1 Hotel in San Francisco in the fall; Grafton into an Unofficial Z Collection hotel in West Hollywood also in the fall; and we're completing L'Auberge Del Mar next month.

As it relates to the remaining -- the few remaining redevelopment projects we deferred due to the pandemic, we're continuing to complete plans and permitting. And we'll pull the trigger on these projects when we have more clarity on the recovery and progress against the virus.

Specifically, as it relates to the $37 million redevelopment and transformation of Paradise Point in San Diego's Mission Bay into a Margaritaville Island Resort, we're still working our way through discussions with governmental authorities. At this point, we don't expect to be able to start construction until at least late this year, assuming we get the necessary approvals in the next 6 months.

All of these completed redevelopments and transformation, including the large number in the past few years, and all of the upcoming projects and improvements will provide significant upside for our portfolio over the next few years as the recovery takes hold and rolls forward. Importantly, the vast majority of the dollars for these projects have already been invested.

As we look at the silver lining of potential upside from this crisis, we expect there will be significant opportunities over the next few years to acquire properties in distress due to a large number of cash-trapped and over-levered owners and many properties that will go back to lenders. In this regard, we're actively looking for opportunities to reinvest the dollars from the hotels we've sold over the last 12 months.

We believe we have significant competitive advantages as opportunities arise over the next few years. These include our ability to operate properties more efficiently than the vast majority of buyers, the additional cost benefits from the additional economies of scale that can be generated from Curator, our unique strength in redevelopments and transformations as well as with independent or small brand lifestyle hotels, our vast number of operator relationships and our high-profile and positive reputation in the industry.

We're confident that our industry and our portfolio are currently on a path to recovery that is becoming increasingly clear. And we believe we've got the team, the portfolio, the knowledge and the experience to perform exceedingly well in this recovery. And we appreciate your patience, your support and your confidence in us.

And with that, we'd now like to move on to questions. Donna, you may proceed with the Q&A.

[Operator]

[Operator Instructions]. Our first question is coming from Neil Malkin of Capital One Securities.

[Neil Malkin, Capital One Securities]

First question, a lot of people have been talking about are there going to be people who want to come back for groups, how that's going to look, rebookings, et cetera. But there's two sides of that coin. Because the cities, municipalities also have to give the go ahead. And I'm just curious, markets like San Francisco, New York, L.A., et cetera, are you confident that, let's say, California reopens June 15, that you'll have the okay from the city to basically go and have full-scale normal capacity group events, if they are, in fact, on the books, let's say, in the fourth quarter of this year? Or do you think it will take some time for sort of headcount or density restrictions to kind of lift, therefore, providing a temporary capacity constraint?

[Jon Bortz, Chairman, President & CEO]

Yes, you're asking me to predict government and I'm not terribly good at that. I would tell you, based upon the guidelines that have come out already in California and other markets that there are many markets that -- where we do believe that hotels will be able to have good-sized meetings with appropriate safety and cleaning precautions. And -- but in terms of the big city wides, and if those are handled in the same way as they were pre-pandemic, I'm not sure I'd have a lot of confidence in that, Neil, before the end of the year. But it's really going to depend upon where the cases are, where hospitalizations and deaths are.

And so if we can look like Australia, where they haven't had a death since October of next year, and they have single-digit cases a year or 0 because people get vaccinated. And we've protected those who are at greatest risk then, yes, I see no reason why all of the governments wouldn't move forward with allowing normal behavior, normal meetings, normal commerce in their markets. And I don't think, at this point, perhaps California might be behind of Florida or Texas or some of the other Southern states in their progress, but I don't believe they're behind any of the East Coast cities, as an example, who again, I think, are being more cautious about allowing normal commerce in their markets.

[Neil Malkin, Capital One Securities]

Okay. Yes, I appreciate that. Other one for me is, it seemed like since last quarter, there's been a huge shift or pull forward in -- when you get to not even hotel, but corporate cash flow positive. And then you made the comment about being profitable at lower occupancies. But I'm just wondering, can you maybe expand upon that a little bit in terms of how that -- you see that playing out, particularly in like the third quarter, for example? I mean you're going to have essentially all of your urban hotels open at that point with lower occupancies and lower ADR, which will weigh on overall, I guess, performance?

You're going to have -- you're going to be off-season for -- on the resorts. So -- and you're going to have more demand, like more occupancy as the recovery picks up. So wouldn't that require more fixed, full-time employees, and therefore, making it kind of like that stepwise function where you kind of hit that next level of demand, and there are certain requirements from the staffing side, that would weigh on margins or profitability at that next level of occupancy?

Can you just maybe go through, especially if corporate isn't really back that strong, how you plan on -- or what gives you the confidence to get to that sort of profitability?

[Jon Bortz, Chairman, President & CEO]

Well, first of all, we haven't said we're confident we're going to get there. We've said it's possible that we could get there in the third quarter. It does depend upon the progress on the health side and the return of some travel, particularly business travel when you get to the last 4 months of the year. But we -- while we're going out of prime season, as I said in my remarks, Neil, in Florida, we are going into prime season in Q2 and Q3 with the other 5 resorts on the West Coast. And so those we'll see their rates increase. There's a larger number. And as a result of that, we should be able to maintain the kind of average rate that we've been delivering, even as we reopen these urban hotels.

So when it comes to margins, when we look at where we're at, in order to get to that corporate breakeven level, we need about $12.5 million -- $12 million, $11.5 million more monthly profit than we made in March. And in order to do that, we think we need about twice the level of revenues, which will come from both rooms and from other revenues.

And keep in mind, as occupancies do ramp up, we are achieving greater profitability in our food facilities. We'll have more banquets and catering which is more profitable than our outlet profitability. And so when we look at the overall profitability, again, we think with about 50% flow-through from the additional revenues, we'll get to corporate profitability. And so that means in all likelihood getting the overall portfolio to the low 40s in occupancy and -- with much stronger leisure through the year and business picking up gradually over the first -- over the next four months and then hopefully, a more quicker pace over the back 4 months, yes, we think it's reasonable to think that we can get there sometime in the third quarter.

[Operator]

Our next question is coming from Smedes Rose of Citi.

[Smedes Rose, Citigroup]

I was just wondering on the group bookings that you said you're starting to see some improvement on and some, albeit modest gains in business transient. Are you hearing at all besides the health care concerns any sort of pushback from businesses of looking to not spend as much going forward and sort of take advantage of the fact that no one has been traveling, yet productivity has been apparently fairly robust over the last year or so? Just kind of curious if you're hearing anything on that front?

[Jon Bortz, Chairman, President & CEO]

Yes. We're actually seeing the opposite. So we're seeing greater spend. Keep in mind, what we have right now are more limited numbers. But in terms of what folks are looking at for their activities, they're spending more on property, which is beneficial. So they're going off property less. They're providing more for their attendees. And their ultimate -- they overall expect to spend more.

So we're not seeing any hesitation on the part of groups to spend. And that translates into the rates. There really isn't pushback on rates at all at this point on the group side. So you mentioned a couple of things about productivity. And frankly, I don't know that those are lasting. But nevertheless, businesses are very profitable. They tend to be more stringent about what they spend when they're not so profitable and their business isn't good. And they tend to be pretty generous with their people.

I mean, think about this for a second. And I know with the people who work in our company, people who work at our hotels, they need vacations, they need to relax, they need to be pampered. And that's what we're seeing and hearing from businesses. We had a big incentive group down in Florida in earlier this month. And they spent $30,000 on F&B over the course of 3 days. And it was not a large group. So they were spending over $1,000 a day per person on their people. And look, that's anecdotal, but it's an indication that businesses want to reward their people when they're getting out and meeting and traveling. And that seems to be translating into the kinds of activities they're booking around their actual meetings.

[Smedes Rose, Citigroup]

Okay. That's really helpful. And then I just wanted to ask you kind of more specifically on the conversion of the Hotel Vitale. Just looking at the EBITDA results for that property, it looks like it peaks back in '15 and kind of just continued to trail down through '19. And is it your thought that with the $25 million investment you can get back to the kind of that 2015 level of $11 million? Or would you expect to surpass that, assuming kind of a normalization of business trends?

[Jon Bortz, Chairman, President & CEO]

Yes. I mean the -- looking at historical numbers has -- there's a lot of variables in those needs, particularly at Vitale, which was impacted by a few things in the market, right? You had the convention center go under the knife for the expansion and the renovation, that impacted the market overall. So Vitale was not alone in peaking near and around '15 or '16.

We also had the sale of Destination Hotels in Joie de Vivre to Hyatt. And then the changeover of operators as a result of that, which impacted the property. And then finally, you had sort of the natural part, which we do think we will make up and more, which is the property had not been renovated since it was built. So I think you're talking about 12 or 13 years, now it's 14 or 15. And so we do think we'll get a double-digit cash yield on the investment that we're making in terms of improvement in performance. But that will be dependent upon where the market goes over the next few years. And so we do think through higher rate primarily and a little bit of occupancy and events that we'll make significantly more profits and get an attractive return on those dollars.

[Raymond Martz, EVP, CFO, Treasurer & Secretary]

And Smedes, also to add to that on Vitale. As you recall, when we acquired LaSalle, all their properties, the California properties had a step-up in property taxes. So that impacted Vitale as well as any of the legacy LaSalle Hotels in California. So that explains also some of the 2019 performance relative to 2018.

[Operator]

Our next question is coming from Rich Hightower of Evercore.

[Richard Hightower, Evercore ISI]

So a couple of questions. First one, just a quick housekeeping one, I think, for Ray. Can you remind us, I think there's a $500 million unrestricted investment bucket in your current waiver package. Does the conversion of the converts change that at all? Or is there anything to look out for as that may happen in the future?

[Raymond Martz, EVP, CFO, Treasurer & Secretary]

No, the conversion of the converts has no impact other than that, in a way, have $500 million less debt, we have to worry about refinancing. But we have 3 investment baskets. One is $500 million of new investments that we can complete with any sort of equity raises. We have up to $500 million also from the reinvestments from any hotels that we sold, and we've sold about $225 million, as we've talked about. And then we have an other basket of $100 million of other investments, which can entail a bunch of other things, whether that's looking at joint ventures, but other sort of structures and other special investments.

So plenty of flexibility right now. And the good thing is in this environment right now, the banks -- our bank has been very supportive. So that's not a constraint. And with the improving trends, as we noted on our call, we will be more active in looking at some opportunities.

[Jon Bortz, Chairman, President & CEO]

And Rich -- Rich, if you have one question, go ahead. We have a pretty long queue. So I think we're going to ask people just to pick their best question and then fire away, so we can get through everybody.

[Richard Hightower, Evercore ISI]

Yes, sure. No. Feel free to take it offline.

[Operator]

Our next question is coming from Aryeh Klein of BMO Capital Markets.

[Aryeh Klein, BMO Capital Markets]

What are you seeing from a staffing standpoint at resorts where occupancy is a lot closer to pre-pandemic levels? And has there been any pushback from customers maybe being impacted in some way from lower levels of staffing? And then just separately on the Villa Florence, I think it's the only hotel in San Fran that's still not open. If you can just update us there.

[Jon Bortz, Chairman, President & CEO]

So as it relates to staffing at the resorts with higher occupancies, I mean, there -- getting labor back is a challenge. There's a few primary reasons. And we're -- frankly, we're seeing it everywhere. It's not just where we have higher occupancies. In fact, it might even be a little bit less in those properties than it is at this -- at the properties with lower -- the markets with lower occupancies. But there's really a few things inhibiting folks from coming back right now, which is why we think much of it's transitory. One is the enhanced unemployment insurance benefits and the free COBRA that have come through in the various legislation passed by Congress.

Second, when you compound that with kids, in many places, not in school, 5 days a week. And one of the parents needing to stay home to take care of those kids and help those kids learn, there are also folks who -- so that's child care related. Some have generational issues with parents they need to take care of in this period of time. And so when we look at those issues, we think those mitigate dramatically when we get into the fall and the unemployment insurance runs out.

Clearly, there have been people who've left the industry and gone into other industries. But there's still -- what we hear from the employees we call, and we have the less -- we go through the less is those issues. And the last one, which is some who haven't been vaccinated yet still fear coming back to work and interacting with their colleagues and guests in some cases who don't behave properly.

So we think those mitigate. And in the meantime, we're -- the industry is actively sourcing people from other areas, going back to colleges as an example, where many graduates are having trouble finding jobs in the hospitality or retail or other industries, as well as younger students in college who have had a hard time getting internships who can come work for the summer and learn about the hotel industry. So there's a whole host of things our properties are doing differently to source folks because it's not necessarily -- we're not getting the staff we need just from the people who've been previously employed.

As it relates to Villa Florence, it's really the same boat as Vitale. Vitale is going to remain closed through the year because of the benefits of renovating while we're closed and then reopening as a 1 at the end of the year or at the very beginning of next year before the JPMorgan Conference. And we have a redevelopment plan for Villa Florence that is not only completed, we actually purchased the FF&E sitting in a warehouse in the Bay Area. And we're just waiting until we feel comfortable that the investment makes sense.

And -- so in the meantime, we're keeping it closed because we may go through the same thing there. And we don't need to pull the trigger on the renovation yet because we already have the FF&E, which is usually your long lead item. That's why we needed to make a decision to move forward with Vitale because you've got a 16- to 20-week lead on FF&E today.

[Operator]

Our next question is coming from Michael Bellisario of Baird.

[Michael Bellisario, Robert W. Baird & Co.]

Sort of -- kind of back to that labor topic that you touched on a little bit, sort of combo labor market outlook question. But just on your view of the 100 to 200 basis points that you've talked about previously, the longer-term margin upside. How do you see that playing out in your better-performing markets like Naples, for example, versus some of your more impacted urban markets? Basically, where do you see more upside? Where do you see upside? And then how does labor affect your outlook and play into that analysis today?

[Jon Bortz, Chairman, President & CEO]

Yes. I mean, it's hard to make that differentiation between the 2 different properties because I think the same benefits accrue in both places. Obviously, bigger properties will get more benefit. But the properties are being run more efficiently. And we found different ways to do business, and we're using more technology, and we're providing the services in a way that the customer wants. And we have a lot more cross-trained people, which is good for them and their careers in terms of career development.

So I don't know, Mike, that it really varies by urban versus resort when it comes down to it. I do think -- and I think already asked this question. I mean if you've eaten in a restaurant recently, you may be a little bit unhappy with the speed of service. And that's because everybody is struggling with having enough labor to deal with the periods of time when you max or near max occupancy, whether it's cooks in the kitchen or servers or bussers or just somebody to answer the phone if you don't have the technology to do it. It's going to be at a different level, I think, for the next 4 or 5 months in the country in a lot of different businesses.

So I think we feel good about what we've said previously. We don't see this temporary labor issue as any kind of long-term issue. And we hope that all those folks who are sitting at home are going to come back to work sooner rather than later.

[Operator]

Our next question is coming from Shaun Kelley of Bank of America.

[Shaun Kelley, Bank of America Merrill Lynch]

Ray, Jon, just maybe a fairly straightforward one, but I believe there was a $200 million ATM program that was filed. Can you just comment on that? And any thoughts on potential opportunities or what that could be used for?

[Raymond Martz, EVP, CFO, Treasurer & Secretary]

Sure. Well, this is similar, we had an ATM program that we let expire several years ago. And so we just renewed, its $200 million, the last one was $175 million. This just provides us with another tool to -- for capital in the event there's an opportunity. You should not expect that because we have an ATM in place that we're going to use it, there were many quarters. There were years when we had ATM previously, and we had 0 usage on it. So it's just another tool in there. We have, as you know, sufficient liquidity right now. We have cash from the recent sales.

So in terms of uses of cash for any investment opportunities, we would likely use that first, given where we are.

[Jon Bortz, Chairman, President & CEO]

And so I wouldn't read anything into it other than it's administratively a good thing to have in place.

[Shaun Kelley, Bank of America Merrill Lynch]

Okay. And so I mean, usage for like direct deleveraging is less likely. I think you guys have been pretty cautious about using, I think, straight equity, but obviously, the stock has run. So I just want to make -- kind of make sure that, that's still largely the plan?

[Jon Bortz, Chairman, President & CEO]

It's not only less likely, it's not going to happen.

[Shaun Kelley, Bank of America Merrill Lynch]

I think that's clear.

[Jon Bortz, Chairman, President & CEO]

Yes. We -- I mean, we don't have a deleveraging issue. So we don't have too much leverage. We need EBITDA to recover. So we see no reason to lower the leverage level in a recovery from low levels already.

[Raymond Martz, EVP, CFO, Treasurer & Secretary]

And also the timing of that now as we did in concert with the filing of our Q just because we save legal fees and audit, consent fees and all those things doing it now versus doing it a month from now or 2 months from now or so. So that was the reason for the timing.

[Operator]

Our next question is coming from Bill Crow of Raymond James.

[William Crow, Raymond James & Associates]

Jon, I really want to focus on the recovery of group travel, which isn't here yet. But I'm curious when it does come back, it will probably be different for a while, especially in markets that were closed or more closed than others. And is that a disadvantage to smaller independent hotels as these meetings may fill up the host hotels first and maybe not have the same spillover or city-wide effect, that they used to have? What do you think about that?

[Jon Bortz, Chairman, President & CEO]

I think a lot of people would prefer not to stay in the host hotel for so many reasons. They tend to be large, impersonal, crowded, often inconvenient, long elevator waits, et cetera. So I don't know that, particularly as we move forward, Bill, and it'd be interesting to see how people react from a behavioral perspective to what they've been -- what they've now gotten used to, which is a limited number of people in the elevator, limited number of people in a room, in a space.

I mean I -- that's a behavioral issue, and I'm not an expert in that area, but I think it's going to be something that gradually changes. It won't happen all at once. And so -- I actually don't have any concerns about that particular issue.

[Raymond Martz, EVP, CFO, Treasurer & Secretary]

And Bill, to be clear, when we say host hotel, what it means the convention center, host hotel, not our neighbors upstairs.

[Jon Bortz, Chairman, President & CEO]

Right.

[William Crow, Raymond James & Associates]

That's correct. That is correct. And Jon, just if you could clarify for me, it sounded like you're still very, very optimistic about the acquisition opportunities and distressed opportunities. And that hasn't changed based on some of the prints that we've seen, which certainly seem fully priced?

[Jon Bortz, Chairman, President & CEO]

No. Because all you're seeing right now are the really good properties, at least those are the ones that get the newspaper headlines. There's a lot -- there's properties trading at pretty crappy numbers that nobody wants to write about other than the occasional New York story that says somebody bought this for $100 million and they -- 3 years ago and somebody new bought it for $2 million. So we're a long way from seeing volume.

And there's a lot of a lot of extensions going on right now forbearance, again, which is not abatement. And so loan levels are piling up. And liquidity is lacking. And I think as there was in the last cycle, we really bought from the middle of 2010 after we had already come out of the recession through the early part of 2015. So I think this will be a multiyear opportunity.

To buy resort properties, I don't think the opportunity is about buying at a discount. If you're going to buy a resort property, I think it's about buying a good property. I think for us, Bill, again, it continues to be where we want -- where and what we want to buy is going to be opportunistic. And I -- what we look for are properties that we can make a difference from an operations perspective, we're not into spread investing or purely cyclical investing. We want to buy assets that -- and invest in assets that we can get a better return because we can bring in expertise to those assets through redevelopment, transformation, brand change, operator change, best practices, efficiencies, those kinds of things. So not troubled at all by some of the headlines of assets that are trading. In most cases, they're not assets we have an interest in any way.

[Operator]

Our next question is coming from Jim Sullivan of BTIG.

[James Sullivan, BTIG]

Yes. Jon, just kind of following on a little bit from what -- from your answer to Bill's question. I'm curious how you think about the supply variable today versus where it was pre-COVID? And what I'm thinking of is pre-COVID, the industry appeared to be facing a situation of somewhat weakening demand growth in percentage terms. And potential -- and growth in supply in terms of hotels in construction and otherwise that was going to be running ahead of that demand growth. And we've -- we hear a lot of talk about hotels that have closed that won't reopen, number one.

And then number two, there is this -- there is this percentage of assets, and we can describe them as kind of the walking wounded, where they're not cash flowing. They're filing up deferred CapEx. They're not being maintained. And therefore, arguably, they're not going to be competitive with a well-maintained portfolio. So I just wonder, as you think about the supply-demand variable post-COVID, how are you feeling about that? And do you have a handle on how many hotels that are closed will not reopen? And maybe what percentage of the prior inventory is really not going to be competitive for a while?

[Jon Bortz, Chairman, President & CEO]

Yes. Well, I can speak pretty generally to your question, and I think it's a really good question as it relates to how. Maybe we take these things for granted that in the typical recovery the first 3, 4, 5 years, we see very little new construction delivered. And that gives the industry that historically, the long runway to recover from a downturn as we're clearly cyclical.

And in this cycle, in many ways, it's no different than others. And in some ways, it's very different. But because this was event-driven where you have an economy that actually outside of a few affected industries is really humming. And you've obviously had trillions of dollars pumped into the economy from both the monetary side and the fiscal side.

And so when you think about the next 3 to 5 years, we think about a period with little to no new supply, whereas anything that was under construction gets delivered, but you're seeing other properties, as you've said, become obsolete and leave the market, particularly in the urban markets. But you've even seen it in some urban markets, the lower end in older suite product that can be converted to residential as an example.

So I think we feel very good about it and about how things are going to go that we're not going to have supply as a headwind. In fact, we might have supply as a tailwind in terms of flat to potentially negative supply. We have very little construction financing available over the next -- certainly not very little today and likely for the next few years. It doesn't mean there'll be no starts, but there'll be very few.

And we have huge increases right now from when we talk to developers, and I'm sure you hear this in other industries, but huge increases in cost of construction in development. Whether it's steel and concrete or it's lumber, sheet board, labor, it's all working to make new development much more expensive, which will, again, provide a longer runway for the recovery of operations and values in the industry.

And we do think this recovery will be quicker because of the strength of the economy. And as I indicated, the amount of dollar -- I mean you look at the consumer today, they're in a position where you typically are at the end of a cycle, not the beginning of a cycle, with money in the bank and pent-up demand. So I think it shapes up pretty well, though. But clearly, we got to get past the health side of the pandemic and get back to a level of normalcy.

[Operator]

Our next question is coming from Gregory Miller of Truist.

[Gregory Miller, Truist Securities]

I want to follow-up also on the group front. How concerned are you that vaccination interests in the U.S. appears to be slowing in some parts of the country and that there may be a meaningful percentage of the population that intends to travel for work and remain unvaccinated?

And I particularly think of the implications to convention demands and whatever health safety measures may still need to be taken next year to ensure events can transpire with normalized attendance and for most attendees that feel comfortable with us to show up in-person before the true end of the pandemic?

[Jon Bortz, Chairman, President & CEO]

Yes. I mean, I think it's going to depend upon -- it's not just whether folks are vaccinated, but it's whether the virus is spreading in the community, right? So we know some people aren't going to be vaccinated for various reasons. And so we need to get to a level where it just -- it's not going from person-to-person in the community. And so -- and I think until we get there, you're going to continue to have and our CIO just came back from a 70 -- he said maybe 55-person meeting down in Florida. And it was an AHLA meeting of the hotel investment roundtable.

And he said that you had to take a test before, show that you didn't have the virus. You had to show your vaccination card. And so if you're 2 weeks past the supposed full effectiveness, then you didn't need to take a test. And then they also provided testing on-site in case someone wasn't able to get their test before they got there.

So I think you're still going to have protocols while the virus is spreading in the community. And clearly, that is more likely to spread less if more people get vaccinated. And so we're just going to have to see how it plays out. And hopefully, we do get to the level of spread that's very minimal and people feel comfortable. And it doesn't matter whether you're vaccinated or you're not because it's not spreading.

[Operator]

Our next question is coming from Anthony Powell of Barclays.

[Anthony Powell, Barclays Bank]

Kind of on the same topic. There's a lot of talk about things improving after Labor Day into the third and fourth quarter, but some experts, including, I think, Dr. Scott Gottlieb, have said that they expect a seasonal kind of increase or resurgence of COVID in the late kind of fall to winter time frame, let's say, Thanksgiving to February just due to unvaccinated people, natural seasonality of respiratory illnesses and whatnot.

Does that concern you? Have you heard that being brought up in any of your group conversations? Could that put things like the JPMorgan Conference at risk in January? Just thoughts about that seasonality risk that could still be around this year or next year, to be honest.

[Jon Bortz, Chairman, President & CEO]

Yes. So interestingly, none of us have gone through a pandemic, including the pandemic experts. And so we continue to be concerned about the virus. That's why we're cautious about an inability to make forecasts and provide confidence and guarantees. So we have to see how it plays out. We've seen predictions that have come through. There's going to be another wave following the holidays in November and December, and that happened. We've heard -- we heard that the last winter would be disastrous because we were going to have the flu season on top of the pandemic, the virus, and we didn't have a flu season because, of course, everybody wasn't meeting with other people, and it was hard to transmit.

So I mean, the answer to your question is, I'm not an expert on this. I think there continues to be concern on the part of businesses and individuals about resurgence, and we just have to see how it goes. It's -- right now, we're seeing increases in leads and bookings. And I think that's evidence of people being increasingly confident. But we're not at normal pre-pandemic levels, which, again, suggest that some people aren't there yet. And I think that's why this is going to take some time. And why we -- the only way to get back to a level of normalcy is to really crush this thing. And it really does mean people participating in society by getting vaccinated because what's clear is vaccinations work.

And while they're probably going to need to be boosters of maybe an annual one and ones for variants and all those things, it seems like the science is pretty confident in its ability to deliver very quickly vaccines that work against this virus. And it really comes down to humans who have to make these decisions for the benefit of society. And I don't mean to be preaching, but it's very selfish not to get a -- take a vaccine because it's for the benefit of society. And it's not just about you not getting sick, it's about you're not getting second passing it along to somebody else. So always urge people to go get a vaccine, but -- because I don't think we're going to crush this thing unless most people do.

[Anthony Powell, Barclays Bank]

Right. Agreed on that. But given the seasonality of risk, shouldn't you be trying to pull demand forward as much as you can, let's say, into the summer, if possible, as opposed to waiting for the fourth quarter, given just seasonality?

[Jon Bortz, Chairman, President & CEO]

Anthony, we're not waiting for anything. We're trying to get the most amount of demand we can get as soon as we can get it. It's -- but you need the customers. It's not like we suggest to a business customer that they have their meeting in October. You should have it in July, August, and they say, no, we're going to -- we want to have it in October. I mean, that's all we can do. So just to be clear, we're trying to fill as soon as we can and encourage people to travel, but folks are still going to make their own decisions.

[Operator]

Our next question is from Lukas Hartwich of Green Street.

[Lukas Hartwich, Green Street Advisors]

So the ESG movement has started to focus on the emissions related to business travel. I'm just curious if that's coming up in conversations with corporates and maybe just how you're thinking about that looking out a few years. I know COVID is kind of the focus at the moment, but is that something you're worried about maybe 3, 5 years down the road?

[Jon Bortz, Chairman, President & CEO]

Yes. That's a good question, Lukas. It's an issue that we're going to need to understand. We've actually asked clients that question. And some of the larger folks, in particular, are increasingly focused on thinking about how that might affect their businesses and how they run their businesses and how they meet and how they travel. I mean the -- I think I'd be a little bit more concerned if I was an airline than a hotel because one of the things we hear from folks is it may mean that we don't allow day trips on an airplane, because the biggest producer in travel is not the hotel, it's getting to the hotel, it's the airline, in particular. And so it may lead to longer stays, longer trips. But I think it's really too early to understand the dynamics of it. But it's a real issue.

We were talking to an accountant. And I haven't seen this announced, but I think we are going to see it shortly as the airline is working with a number of the major corporate travel accounts, where the corporations are committing to pay basically over current fares in order to subsidize alternative fuels for certain airline routes. So there's a lot of things that we're going to see. They inquire about our sustainability practices in RFPs, and I think that's becoming increasingly common and increasingly important.

And of course, we take our commitment to ESG very seriously. And we're moving to much more sustainable practices and more interaction with all of our stakeholders, including the communities that we do business with. But I think your question related to are people going to travel less because of ESG. I don't know the answer to that, and I don't think the clients know either.

[Operator]

Our next question is coming from Floris Van Dijkum of Compass Point.

[Floris Van Dijkum, Compass Point]

I know it's a long line here. And hopefully, we're close to the end. Can you maybe comment on Curator? We've talked about a lot of the other key issues here, but maybe touch on what you're seeing with -- I know you signed up Sage recently. Any updates you can provide on how that's moving? How the signing up of new partners is going? And if you're feeling good about where that stands?

[Jon Bortz, Chairman, President & CEO]

Yes. So we are feeling good about the speed at which it is growing. The progress we're making in terms of building out the benefits, which are through attractive master service agreements with our product and service partners in the industry. And as we build those out, we're seeing increasing commitments on the part of folks who are in the independent side of the business.

I think the one thing we've learned, Floris, based upon the number of leads we have of people who've contacted us and the number of properties they have is that the addressable market is actually probably more than double the size we thought it was. So I think we were thinking the market was 500 hotels or so. We think -- today, we think it's probably 1,000 hotels or more just in the U.S. So I think we feel really good about where we're going. And we did provide an update in the press release on the number of members who've signed up, the hotels that have signed up now and the number of master service agreements we've completed and the number that are in process. So we feel good about the progress so far.

[Floris Van Dijkum, Compass Point]

Just you mentioned domestic, is there a potential that you could take this abroad as well down the road? Presumably that would increase the market size significantly, but...

[Jon Bortz, Chairman, President & CEO]

Yes. I think that's possible. We're not an expert on how things are purchased abroad. And so if it's anything like the U.S., that the larger you are, the better pricing you get. We certainly know that with some of the service providers, that's the case around the world, but we don't know about some of the other products and services. It's not something we've investigated yet. We've got our hands full within the U.S.

The one area I would say we're beginning to look into as an expansion of it is with restaurants, independent restaurants outside of hotels who suffer from the same sort of anti-competitive situation as independent hotels do. So that's something we're beginning to look at and talk to some folks about, and that may be an opportunity to expand where Curator is focused.

[Operator]

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

[Jon Bortz, Chairman, President & CEO]

Thanks, Donna. Thanks, everybody, for taking the time. Long call. We wanted to get to everybody's questions. So we appreciate that, and hope and wish everybody to stay safe and healthy. And go travel if you've been vaccinated. It's a lot of fun. Go to a meeting, I think you'll find it's not a scary experience. So thanks for taking the time. We look forward to updating you in 90 days.

[Operator]

Ladies and gentlemen, thank you for your interest in Pebblebrook. You may disconnect your lines at this time, and have a wonderful day.