Pebblebrook Hotel Trust

NYSE:PEB

Earnings Call Transcript 2022-Q1

[Operator]

Greetings and welcome to the Pebblebrook Hotel Trust First Quarter Earnings Conference. [Operator Instructions] As a reminder, this conference is being recorded.

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

[Raymond Martz, CFO]

Thank you, Donna and good morning everyone. Welcome to our first quarter 2022 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer, but before we start a reminder that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, future results could differ materially from those implied by our comments.

Forward-looking statements that we make today are effective only as of today, April 27, 2022, and we undertake no duty to update them later. We'll discuss non-GAAP financial measures during today's call and we provide reconciliations of these non-GAAP financial measures on our website at pebblebrookhotels.com.

Okay. So last night, we reported our Q1 results, and they were significant - and they significantly exceeded our expectations from just 60 days ago. Versus Q1 2019, same-property RevPAR was down just 23.4% with average daily rate up 19.4% and non-room revenue per occupied room up 19.6%, demonstrating our continued ability to drive room and non-room price increases across the portfolio to offset cost pressures.

Same-property revenues recovered 76.8% of 2019 and same-property hotel EBITDA recovered to 61% of Q1, 2019 marking our best quarter compared to 2019 since the pandemic. Even more encouraging for the rapidly improving demand trends as the quarter progressed. The first half of the quarter was negatively impacted by Omicron.

Demand started to reaccelerate in February, first, with strong leisure demand aided by the Super Bowl in early February, which benefited our nine hotels in West Los Angeles; and then with President's Day weekend, which helped our resorts in many of our urban properties. Business demand snapped back quickly starting in February in a much more substantial and broader way than we expected and then accelerated further into March.

March ended at 62% occupancy with ADR up 19.7%, resulting in same-property revenues only 9% below March 2019. Same-property hotel EBITDA for March was also down just 9% in 2019, and hotel EBITDA margins were up 12 basis points. Pretty amazing bottom line operating results, considering occupancy was down about 20 points to 2019. This points to a lot of upside going forward as more business travel demand returns with favorable operating leverage yet to be realized in the portfolio.

The accelerated operating trends are being driven by an expanding number of demand segments and an increasing number of markets. Leisure continues to be robust, which we expect will continue as we get into the heavier leisure travel season later in the spring and summer. We haven't seen any pullback in leisure demand or spending levels due to rising gas prices or inflation.

And we wouldn't expect much impact given the type of leisure traveler at our upper upscale luxury hotels who is in a strong financial position and is generally less impacted by these factors. Resurging and pent-up business travel both transient and group, have been the most significant positive surprises in Q1. Not only are they recovering but doing so at a faster pace of recovery than what we are forecasting.

These trends are accelerating in the second quarter with strong booking trends and increasing rates. Group bookings, leads and site visits have increased substantially over the last 90 days and the booking window for both leisure and group has been stretching out. These trends are continuing into Q2 and for the balance of the year. These improvements demand trends were evident in our occupancies at many of our urban hotels when comparing January to February.

Our hotels in West L.A. increased occupancy from 34% in January to 67% in March. Boston went from 55% to 81%; San Diego from 42% to 76%; Seattle, from 16% to 45% and Portland, from 25% to 45%; D.C., from 15% to 39%; and San Francisco, from 14% to 36%. Much of these increases were driven by increases in retail [ph] demand which indicates a healthy recovery in business travel.

Based on our current pace for April, these occupancies should rise further another four to five occupancy points despite the negative impact of Easter and Passover in April. And occupancy should continue to improve during the rest of the quarter. These are very positive trends. We're also encouraged by the strong ADR growth we've generated, which bodes well for the remainder of the year.

For our resorts, ADR was up 29.1% from Q1 last year and 59.4% compared to Q1, 2019. This was led by L'Auberge Del Mar up $359 or 103%, Marker Key West up $258 or 62.4%, Chaminade in the Santa Cruz Mountains was up $126 or 62.6%, Southernmost Key West was up $283 or 62.6% and LaPlaya Beach Resort in Naples was up $332 or 60.6%.

All five of these resorts were recently renovated and have gained ADR share, demonstrating the success we're having generating much higher room rates that, not surprisingly, flow extremely well to the bottom line. Across our resort portfolio, we generated 22.4% higher non-room revenues per occupied room in Q1 versus 2019 demonstrating our ability to drive higher non-room spending even with a much lower business group levels than back in 2019.

These results underscore the financial benefits we are beginning to receive by dramatically enhancing the quality of the overall guest experience at these properties, both physically and operationally. And as Jon will cover later, we have several additional renovation and redevelopment projects underway or on deck to start later this year.

We expect to generate outsized revenue and EBITDA gains in future years from these projects, which has been the case with our previous major redevelopment projects. In addition to the strong room rate growth at our resorts, rates were also higher in Q1, 2019 in a number of our urban properties. The rates were higher than they were in Q1, 2019.

L.A. was up by 21.5% over 2019 Q1 and exceeded by 23.3%, Chicago was up 5.5%, D.C. was up 4.5% and Portland was 0.9% higher. We continue to expect ADR growth to be greater than 2019 for all of 2022, led by our resorts, but with an increasing number of urban markets climbing above 2019 as the year progresses.

Based on current trends and the increasing visibility of business on the books, our current outlook for Q2 is for RevPAR to be down just 8% to 10% versus Q2, 2019. Our best-performing properties in the first quarter in terms of EBITDA growth included many of our resorts. Compared to Q1 2019, Jaco Island Club increased hotel EBITDA by 114%. San Diego Mission Bay was up 227%.

Mondrian Los Angeles increased 96%, LaPlaya Beach Resort EBITDA grew by 59%, Marker Key West was up 49%. Southernmost Key West was up 37% and Margaritaville Hollywood Beach increased 36%. As a result of the much better than forecasted hotel operating results, our adjusted EBITDA finished at $46.5 million, 50.3% recovered versus Q1, 2019 and significantly above our Q1 outlook of $14 million to $19 million.

Adjusted FFO per share was a positive $0.11, also much better than our outlook of negative $0.11 to $0.15 per share. Again, this represents considerable progress during the quarter. On the operating side, the expense side of the business, despite headline concerns about inflation and rising gas prices, we remain encouraged with our new operating models, which have made our hotels more efficient.

We will be more profitable as we climb back to pre-pandemic levels of demand and revenues. Labor challenges remain, but continue to lessen conservatively from what we experienced in 2021. More former associates are coming back. We are seeing far more qualified applicants for available jobs. And we've been able to take advantage of an increase in the number of temporary work visas from the administration.

So we have far fewer open positions than last year and many of our properties are now fully staffed. In addition to the high-quality nature of our properties, which affords the staff at our property's ability to earn market-leading wages and benefits, this gives our teams the ability to attract the best-quality associates. We remain confident that we have eliminated 100 to 200 basis points of expenses from our operating models at our hotels through a broad array of operating improvements.

Shifting to our capital improvement program. We invested approximately $20 million in the portfolio during the quarter, successfully completing the renovation and conversion of Hotel Grafton into Hotel Ziggy on the celebrated Sunset Strip in West Hollywood. And we will be completing the redevelopment, transformation and reopening of Hotel Vitale as 1 Hotel San Francisco later in the quarter.

We remain on track to invest $100 million to $120 million into the portfolio in 2022 with approximately $80 million of the targeted for ROI redevelopment projects, which we expect will generate cash and cash returns of 10% or higher when these transformed and remerchandised hotels and resorts stabilize over the next two to three years.

On the investment side. Last week, we announced that we executed a contract to acquire the 119-room Inn on Fifth in downtown Naples, Florida at a purchase price of $156 million. We anticipate completing this acquisition later in the second quarter. This luxury resort property is in excellent condition. It has more than 21,000 square feet of high-value retail space, which we estimate would be valued at $25 million to $30 million based on its current annual rental revenue of $1.9 million.

We plan to retain Noble House Hotels & Resorts to manage this property at closing. Noble House also manages our LaPlaya Beach Resort, which is just 20 minutes away. So we expect some significant operating and marketing synergies between the two resort properties.

We intend to fund half the acquisition with preferred operating partnership units with a 6% distribution rate and non-call protection for five years, similar to our other preferred equity series that we have previously issued.

And turning to our balance sheet. We have no meaningful debt maturities until November 2023. And as of March 31, we had approximately $694 million of liquidity, including our $611 million unsecured credit facility that remains undrawn. 81% of our debt was locked at fixed - with fixed interest rates, limiting the impact of rising interest rates on our cash flow.

Finally, given the current improving demand trends and Q2 outlook, we expect to exit our covenant waiver period at the end of the second quarter, marking another significant milestone in our road to recovery.

And with that cheerful note, I'd like to turn the call over to Jon. Jon?

[Jon Bortz, Chairman and CEO]

Thanks, Ray.

As Ray indicated, the trends are very positive coming out of the first quarter and heading into the second quarter. Demand has increased since the January pullback with a dramatic increase in March and a further increase in April.

Business travel is noticeably improving. Citywides and business group meetings of all sizes are happening, attendance is improving and spend per person is strong. Group lead volume, site tours and bookings continue to increase with many of our properties, with both group leads and bookings at higher levels than same time 2019 and with bookings at higher rates. These substantial and rapid improvements in business travel have led to significant gains in both our urban occupancy levels and average daily rates.

Occupancy for our urban portfolio, excluding 1 Hotel San Francisco, which has been closed, increased from 32% in January to 47% in February to 59% in March. And for April through the 24th, it increased to 64%.

ADR has climbed materially as well, from $198 in January to $245 in March to $265 in April so far. Of course, these occupancy levels are still well below 2019 levels. And with lots of pent-up business demand, we have significant occupancy growth to recover to drive higher operating performance.

As Ray indicated, some of the previous urban markets that were slower to recover have been gaining occupancy rapidly. And in all cases, it has continued in April. For example, Washington, D.C., which ran an occupancy of 39% in March, has climbed to 62% in April through the 24th. Seattle in March has gone from 45% to 53% so far this month. San Francisco has increased from 36% to 41%, with a strong last week of April that should bring occupancy to 43%. Our two properties in Chicago should reach an average of almost 50% occupancy in April.

Encouragingly, and as evidenced by our first quarter average rate, there continues to be little to no price sensitivity from either leisure or business customers. We're very optimistic about an accelerating recovery in business travel over the next three to four months.

And as indicated, we're already seeing it in the second quarter. And we're extremely excited about the potential growth in occupancy and rate over the next few years with limited construction starts and supply growth for the next few years.

When we look at performance within our portfolio, as Ray indicated, our resorts continue to lead the way. Our resorts, including the Margaritaville, Estancia and Jekyll Island acquisitions are on pace to far exceed their EBITDA in 2019.

For Q1, our 11 resorts combined achieved $45.4 million of EBITDA, which is a $12.1 million or 36% increase over Q1 2019. We're currently forecasting that EBITDA for 2022 at our 11 current resorts will exceed their 2019 EBITDA by $50 million to $60 million, reaching total EBITDA of between $169 million and $179 million.

We continue to be very focused on taking advantage of pricing power and a lack of pricing resistance, not just for rooms, but for F&B, banquets and catering, parking, resort fees and service and administrative charges. As Ray indicated, and it's worth repeating, non-room revenue per occupied room was 19.6% higher than in Q1 2019. We continue to see very strong spend by business groups and leisure guests, and we expect this will continue throughout the year.

As you know, we made three major and one small acquisition last year. These acquisitions have all far exceeded our underwriting. And even though we haven't owned any of these properties for 12 months yet, the trailing 12-month NOI yields on these investments are terrific. A 9.1% NOI yield for Margaritaville, which we didn't acquire until late October; an 8.5% NOI yield for Jekyll Island Club Resort, which we acquired in late July; and 5.5% for Estancia La Jolla, which we acquired on December 1.

We expect all of these returns to be higher by the end of 2022. And while these improved results do include some of the benefits from the many operating changes we've already implemented with our operators, these returns are all before the ROI from the physical improvements we're planning that will reposition these properties higher.

Since 2018, we've invested $350 million in transformational redevelopments and major renovations in 25 properties, including 16 properties acquired through the LaSalle transaction in late 2018. Remember, these dollars have already been invested and the improvements are now in place.

But in most cases, we're just beginning to see the returns on these sustainable investments. We're increasingly excited about the improved performance at these properties as demand returns, and their increased performance will substantially increase our growth rate over the next few years, and we have more transformations on the way.

Just last month, we completed the $6 million redevelopment of the 108-room Grafton on Sunset in West L.A., which we transformed into Hotel Ziggy, the eighth member of our Unofficial Z Collection. Ziggy seeks to recall the heyday of music on the Sunset Strip through its design and by adding a new music venue called Backbeat as the heart of the music immersion experience throughout the entire property. We recently held our grand opening and the reviews have been off the charts, so to speak.

In June, we plan to reopen Hotel Vitale in the financial district of San Francisco, following a $28 million transformation, into the eco-focused luxury 1 Hotel San Francisco. The construction is complete and we're just waiting for the final FF&E deliveries before we can reopen. This completely redeveloped property is spectacular. And with its Bay Bridge and skyline views, in-house Bamford Wellness Spa and its new farm-to-table offerings, it should dominate in the luxury category of hotels in San Francisco.

Our upcoming major projects include the $22 million total redevelopment of Hotel Solamar in San Diego's Gaslamp District into Margaritaville San Diego Gaslamp District. We've completed the property's design and plan to start construction towards the end of the third quarter. Given the performance of Margaritaville Hollywood, we're very excited about the large upside from this transformation.

We're big believers in San Diego. Not only is San Diego the most popular convention destination in the U.S., but its premier weather attracts a robust level of leisure travel. And there's a new large life sciences segment that's in the process of sprouting downtown.

In October, we also intend to commence the $20 million comprehensive renovation of Hilton Gaslamp, just two blocks from Solamar, and probably the best-located hotel in all of San Diego, but certainly in the Gaslamp District. This hotel is the entrance to the Gaslamp District, directly across from the center of the Convention Center.

The focus of our redevelopment is to further evolve this property as a lifestyle Hilton and take advantage of its prime location, outdoor areas, great views and unique architecture. We're remerchandising the entire ground floor, opening the property to the outdoors, creating a large indoor/outdoor bar and more fully remerchandising a second-floor indoor/outdoor event venue. The rooms will mirror a more typical contemporary Southern California seaside bungalow.

We expect our transformed Hilton and Margaritaville will lead the market in rate and RevPAR as they stabilize over the next few years. Both of these properties will remain open during their redevelopments and both are expected to be complete by the end of the first quarter of next year.

We're also in the middle of planning extensive redevelopments and remerchandising of our recently acquired Jekyll Island Club Resort and Estancia La Jolla. We haven't yet finalized the scope of these major projects, but we do expect them to be completed in phases, with some of the scope likely getting done later this year and through Q1 of next year, including complete room renovations at both properties.

We're also planning to complete the second and final phase of the reinvigoration of the iconic Viceroy Santa Monica come this winter. Our rooms renovation should start in November that will complement the transformation of the property's entire indoor and outdoor ground floor that we completed in 2022. We expect to gain additional rate and RevPAR share following the completion of this final phase in Q1 next year.

In addition to these major projects, we also have numerous smaller ROI projects throughout the portfolio, such as converting the pool on the rooftop of Revere in Boston to additional indoor/outdoor events space, and adding a resort pool just completed here in the second quarter to Chaminade Resort in the Santa Cruz Mountains that continues the transformation of this former conference center into a more amenity-rich, luxurious leisure and group destination.

We're also adding a new leased restaurant at Mondrian in West Hollywood which will complete the property's recent $19.5 million redevelopment to return it to its former glory on Sunset Boulevard. And we're adding five keys at Le Méridien Delfina Santa Monica which we're creating out of unused storage rooms and offices.

And then there are two major multi-year projects we've been hard at work on for a couple of years, and both involve the master planning of significant unused acreage at former conference centers. Skamania Lodge in the Columbia River Gorge and Chaminade Resort in Santa Cruz.

With the incredible success of the outdoor pavilion and six treehouses we added at Skamania in the last five years, and the trend of consumers looking for increasingly experiential lodging alternatives, we believe we have the potential to add as many as a couple of hundred units of alternative lodging at each property. These developments will likely include treehouses, glamping, spaces for luxury RVs, cabins, villas, farmhouses and additional outdoor venues and amenities.

Later this year at Skamania, as the first step in this master plan, with a $10 million to $12 million investment, we expect to commence adding three more treehouses, five luxury glamping units, a multi-bedroom villa and a large outdoor pavilion that will host additional business and social events adjacent to our recently completed and already very popular 18-hole putting course.

So I'm sure you can tell, we're feeling like the planets and stars are beginning to align for Pebblebrook and our industry. So now we'd love to move to the Q&A portion of our call. Donna, you may now proceed.

[Operator]

[Operator Instructions] The first question is coming from Neil Malkin of Capital One Securities. Please go ahead.

[Neil Malkin, Capital One Securities]

Excellent quarter, well done. Jon, just maybe wanted to start on the resort side. Obviously, it's been a big focus for you guys, at least since COVID. Obviously putting a lot of capital, or plan to, as well. Just would like to get your thoughts on what gives you confidence to put in more capital? And be - and I guess have your position with the resorts, given where we are in terms of this uber-high historic ADR levels that we're seeing essentially from resorts almost across the country, but definitely at your properties?

What gives you the confidence that you'll be able to further up-mix at the resorts that are already killing it? And what gives you confidence that these ADRs won't sort of maybe back up a little bit or kind of maybe just stay flat for a period of time, just given how high they are right now?

[Jon Bortz, Chairman and CEO]

Sure. So I think there's a number of factors, Neil, that give us confidence. First off, I don't think our resorts, as an example, have reached their potential. I mean, we have made a lot of investments, as you've noted.

And we've indicated over the last few years, with a belief that the demographics and wealth in this country and around the globe which continue to grow, are leading to more spending on leisure, more spending on travel, more spending on experiences, and our resorts are providing that. And in many cases, our resorts are departing from a more traditional focus of golf and spa and moving more towards activity-based, experiential-type activities and opportunities at our properties.

So we believe there's a long-term trend that favors more leisure. We think the pandemic has accelerated some of that. It's also added some additional opportunities, particularly with more hybrid work. Where people, in many cases, are "working from home," Mondays and Fridays, and therefore have more of an opportunity to be flexible in terms of location. So we are seeing more leisure weekend, more mixture of business and leisure on weekends, that supplement what we think is already a broader long-term trend of people seeking out more leisure time and more spending.

I think in the case of our properties, certainly part of what we've gained - a significant part of what we've gained has to do with the investments we've made, and the ADR gain, the share gain we've made in the markets. And that we expect to continue to make because of the capital we have invested in the transformation and repositioning of these properties.

And specifically, a lot of our properties, traditionally - a lot of our resort properties traditionally do quite a lot of group business. And of course, that's only just beginning to come back really from late last year into this year.

And we have a long way to go. So as perhaps rate compression moderates, which we think won't really occur until next year, but even if it were to moderate a little bit later this year, we think it gets made up for with further occupancy, particularly group, which also comes with more revenues and more spend.

So we feel like the bottom lines of our resorts are going to continue to go up. They're not at a peak level. And as we've acquired additional resorts, we bought up properties that we believe have more opportunity to be repositioned up, and therefore, significant growth in ROIs on those investments.

[Neil Malkin, Capital One Securities]

Okay. Appreciate that, Jon. And then last one. I think you took an impairment, you mentioned in the Q, on two assets you plan to sell. I assume that those are in San Francisco. And can you just - maybe just talk about that with respect to your clear capital allocation priority to not - I guess you want to call it the Sun Belt or resort, and kind of what that says about your view on San Francisco, longer term.

[Jon Bortz, Chairman and CEO]

Yes. I think we've been pretty clear that we're an opportunistic investor. And our - where we end up investing is determined based upon our own assumptions and frankly our own biases, whatever they might be, but our view of the future as well as how others view the world.

And so as an example, if some folks believe that resorts have peaked and the good times have been had and we don't share that view, it leads to the opportunity, we think, to buy leisure-focused properties at attractive values. And of course, only time will tell whether those turn out to be great investments.

And the reverse can be true, too. If others have different views on different markets, then that leads us to the reallocation of capital out of those markets and in to more leisure-focused markets, which is what we did last year and what you should expect we're likely to continue to do. But again, it does get influenced by what others are willing to pay for properties and how they value them.

[Operator]

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

[Unidentified Analyst]

This is [Steph] on for Smedes. Can you just walk me through how you're thinking about the margin and the 2Q guidance and kind of what that - what the assumptions are around hiring needs through the quarter, and labor costs?

[Jon Bortz, Chairman and CEO]

Sure. So [Stefan], we - when we - when - if you look back at Q1, it was sort of negatively impacted by the declines in the first half of the quarter and the sort of fixed nature of staffing, which is why, as an example, January, margins were so challenging. And to the opposite side of that, benefited from kind of a surprise in demand. And staffing levels that weren't frankly prepared to accommodate that level of demand, that certainly aided the margins in March, which were attractive.

We've been focused on staffing up through our portfolio to have the staff levels necessary to accommodate the large increases in demand we're expecting through the rest of the second quarter, particularly June and into the summer, which is season for a lot of our properties on both coasts.

And so margins will likely have some impact on the negative side, presuming that we're successful adding those staff levels in the second quarter and probably will benefit ultimately in the third quarter, particularly July and August, which we think are going to be exceptional months based upon our forward bookings at this point, with higher rates and more efficient overall operations in the third quarter.

So what's behind Q2 is a little more cautiousness on margins because we had a little benefit in March from the surprise in demand levels and then the staffing up needed in April and May to be ready for June, July and August in the portfolio.

[Raymond Martz, CFO]

And also, [Steph], in addition to the margins, as Jon noted earlier, as we continue to see more business travel return, that business travel will come with more banquets and catering business, which have lower margins than the rooms. So although that could have a negative influence on just the nominal margin numbers, it is growing hotel EBITDA, which is what our focus is.

So as we get more business segments to come in and more business travel and more components there, it may have also a different impact on margins, negative. But ultimately, it's about the EBITDA, which we're striving to get back to 2019 levels as quickly as we can.

[Unidentified Analyst]

Great. And I guess just one more for me. Do you expect to exit the covenant waiver period after the second quarter? Can you talk about thoughts around capital return and what shape that would be? I believe your shares still trade below your published NAV expectations.

[Raymond Martz, CFO]

Sure. Well, yes. We expect at the end of the second quarter, when we finalize our numbers, that we'll be able to assume that we achieve our second quarter outlook here, exit our waiver period, which allow us more freedom to do things which you're alluding to, to repurchase shares if desired.

So we'll - as we always do when we look at capital allocation, we'll look at the opportunities out there, whether it's on the investment side or how we're trading in those areas as well as other capital programs and make that decision. So we'll evaluate that.

But as it relates to outlook of a dividend, I don't think, unless there's some significant gains we have in some of these sales, because some of the losses we've had in - over the last two years because of pandemic, you should not expect a complete normalization of the dividend here in 2022. That's more likely a 2023 decision, ultimately by the Board, based on management's recommendation.

[Operator]

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

[Shaun Kelley, Bank of America]

First question was just to see on - when you think about the second quarter RevPAR outlook, the down 8% to 10%, I think, versus 2019 levels. Can you just help us think about the composition of that rate versus occupancy as second quarter progresses? Obviously, you've seen exceptional rates thus far. So just how do you think about that mix?

And then maybe my follow-up would be, Jon, just maybe your longer-term thinking about kind of, let's call it, this rate versus occupancy mix as the cycle plays out. The cycle seems like it's going to be a very different one than what we've seen in the past as it might relate to that mix, so just kind of curious on your - some of your longer-term observations around that dynamic as well.

[Jon Bortz, Chairman and CEO]

Sure. So as it relates to Q2, when we compare back to '19, March ran 82% of occupancy, this portfolio ran 82% in March of '19. And it ramped up as it does seasonally to 90% by June. Rate also went from $255 to $271, so about a 6% increase in rate over that period of time.

I think when we look at Q2, we do expect to gain ground, as we're doing in April, a little more quickly than the seasonal - the typical seasonal growth that we had back in '19. And I think where we'll continue to excel will be on the rate side. Our expectation is rate will continue to be up mid-teens, as an example, versus '19. Keeping in mind the rate is a little harder to forecast at this point even than demand and occupancy.

So we know how we're focused, and that's rate over occupancy in the portfolio, and that will continue to be our focus in the second quarter. But we have a lot of occupancy recovering in the second quarter and then into the third quarter versus '19. And we do expect to do that at substantially higher rates than we did in '19.

I think as it relates to the cycle. I think this, again, sets up really well over the next few years, assuming the macro environment continues to provide an attractive environment of even modest economic growth, is a recovery of the full occupancy and demand from '19. At the same time, the industry being more highly focused on rate. And the benefits of that, partly due to the challenges, I think that will continue on an industry basis with staffing levels.

And so it's easy to trade off occupancy for rate when you really are challenged to provide adequate service. And I think while we believe, because of the quality of our properties and the wages that we pay and the earnings that people can make, particularly tipped employees, at our properties, that we're not going to have the high level of challenges that others will have. And therefore, we can provide that higher level of service, which is really indicative of the gains we've been making consistently on our customer rankings and ratings.

But others are going to be a little more challenged, and I think they are going to have to clearly trade off occupancy for rate because they're going to have a hard time getting the staffing levels to service their customers adequately.

So I think between that and the fact that there's going to be very little supply growth over the next three to four years, it sets up really well for an environment of rate increases and the benefits of that in terms of profitability growth at the bottom line.

[Operator]

The next question is coming from Dori Kesten of Wells Fargo. Please go ahead.

[Dori Kesten, Wells Fargo]

In your new EBITDA bridge, you highlight the resort upside, ROI gains and margin upside. So what's implied for your urban hotels for the next two to three years?

[Jon Bortz, Chairman and CEO]

The - I guess what's implied is that on - in total, Dori, they get at least back to where they were in '19, as well as benefiting from the improvement in the operating margins from the expenses that we took out of the operating models, as well as those that have been - that we've transformed, whether Ziggy or Viceroy or Le Parc or Mondrian as examples, that those properties gain EBITDA over the 2019 levels. So that's what's implied through the whole bridge that we laid out in the investor presentation.

[Dori Kesten, Wells Fargo]

Okay. And on the Z Collection and Curator, do you have an internal time line for the monetization of these assets? Or are there any, I guess, guideposts you can provide us? Like size they need to be?

[Jon Bortz, Chairman and CEO]

No, we don't have any internal plans for monetization. We're trying to highlight that there likely will be value there at some point. and we may have an opportunity to take advantage of it if we should so choose. But no, we don't have a time line. We don't have specific hurdles or thresholds to get.

We're really focused on, particularly in Curator, growing that as quickly as we can, expanding its benefits and value to the Curator members and helping them create value at their properties. So if we do that, we think Curator will continue to grow quickly. And somewhere down the road, there will be an opportunity to monetize it.

[Operator]

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

[Bill Crow, Raymond James]

Yes, Jon, I'm here. I'm sorry about that. Since we last talked on the fourth quarter earnings call, I think two things have happened. One is we've seen this fairly dramatic increase in BT and group business. And the other one is the drumbeat of the recession has gotten much louder. And I'm just wondering whether - when you look at those two opposing forces, how your time line of a recovery to '19 has changed, if at all.

[Jon Bortz, Chairman and CEO]

Yes. So that's a good question, Bill. Unfortunately, or I guess, fortunately, I've been around the block a few times. And I've witnessed - I think in my business career since the early '80s, I've witnessed about 20 predicted recessions by the stock market. I think we've had five over that period, four or 5. And so as we all know, the market worries about lots of things, sometimes appropriately, sometimes inappropriately. It's been having no impact on our business levels.

And I think, when we look at the two forces that you're about and its impact on our expectation of getting back to 2019, I would say, since there's been no impact and we're not expecting an impact at this point from fears of a recession, given how strong the underlying economy is, and given the fact that we're a long way from a stabilized level of activity of travel, particularly for business travel, given the level of overall economic activity, that we probably accelerated our expectation of getting back to '19 to somewhere in the fourth quarter, probably to something closer to somewhere in the third quarter.

[Bill Crow, Raymond James]

Great. My follow-up question, Jon, is really focused on what we've seen in the interest rate environment. I'm wondering if the rapid increase there and ongoing cost inflation and of course this talk of recession, has there been any change in cap rates in the private market at all? As you - and whether there's a greater sense of urgency to sell two, three, four assets on your part?

[Jon Bortz, Chairman and CEO]

Yes, I think it's fair and accurate to say, based upon what we know of the transaction market, that the pullback in the financing markets, the increase in rates and spreads, has probably created a little bit more uncertainty or perhaps lack of commitment on the part of some in the transaction markets.

As we were putting together our NAV update, we tried to take that movement into account, particularly with the urban markets where, despite the rapid improvement, where there's still lesser yields in those markets on an operating basis, which are the properties more impacted by this pullback in the debt markets.

So I do think there's a little more caution and perhaps hesitation on the part of some that has made its way into the transaction markets, it's probably had a very minor impact on values of some assets. And in our case, we've tried to reflect that in our NAV.

[Operator]

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

[Aryeh Klein, BMO Capital Markets]

Maybe just on the guidance. I think revenue was down 9% in March. And it looks like, in the guidance, your outlook is for down 9%. Yet it also seems like seasonality - or the trends is going to continue to improve faster than seasonality. Is that just an element of conservatism on your part? Or is there something else?

[Jon Bortz, Chairman and CEO]

Yes. I think it has to do with the fact that what I was talking about earlier, Ari, about the need to staff up. The fact that we probably needed more staff in March, based upon the ultimate demand level, but it wasn't anticipated. And therefore, we kind of had to make do because it does take time to hire people and get them to be productive. So we got some benefit in March on the margins.

And so we're forecasting in the second quarter that we will have success adding the staff necessary in order to accommodate the demand growth we're seeing, both in the second quarter, but also more importantly what we're anticipating in the third quarter.

[Aryeh Klein, BMO Capital Markets]

Got it. And then the $55 million of incremental resort EBITDA for 2022 that was outlined in the presentation. Is there - where does the upside, I guess, come from beyond 2022? Because I assume you think that - it sounds like you think that can continue to grow given the resort investments that you're making. So is that from rate? Operating efficiency improvements? ROI? Something else?

[Jon Bortz, Chairman and CEO]

Yes. It's primarily in a couple of areas. First, as it relates to a number of the properties that we've made significant investments in. So take a Chaminade, take Skamania, take Mission Bay Resort, take L'Auberge as examples. We have a lot of occupancy to gain at these new repositioned levels of ADRs at these properties. So that's one particular area of opportunity on a total basis.

The second would be changing the operations and improving the performance and then ultimately getting the benefits from upcoming renovations and repositionings of Jekyll Island and Estancia and Margaritaville within the portfolio, as well as the incorporation of the two B&Bs into Southernmost, numbers that haven't annualized yet. So that's the second area of upside.

And the third area has to do with group coming back. Outside of Key West, the two properties in Key West, all of our resorts traditionally do a lot of group. In fact, the group mix is typically anywhere from 40% to 50% in those resort properties, and that business is just beginning to come back. Certainly, it was well below where it would have been in the first quarter, but for Omicron.

And so along with that occupancy that comes back with that group business comes a lot of banquet and catering revenue that Ray was talking about, that brings significant profitability to the bottom line, but puts a little more pressure on the actual mathematical margin number, but revenues are much higher. So that's where we think the opportunities are for further growth in the resorts beyond 2022.

[Operator]

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

[Michael Bellisario, Baird]

Jon, just one follow-up on your labor comment. Can you maybe quantify where you were at with headcount relative to 2019 levels in March? And then kind of where do you expect to end up by 3Q? Basically trying to figure out, are you at 80%, 90% then? Any quantitative or qualitative comments there would be helpful.

[Jon Bortz, Chairman and CEO]

Yes. I don't have that off hand, Mike. It's something we can - we might be able to get back to you on in terms of a mathematical number. I don't know if we have that rolled up for the portfolio at this point. Frankly, it's more of a tracking mechanism because each property is being managed pursuant to an individual operating plan.

But I think they're clearly well below where we were in '19, again, partly because the occupancy hasn't come back, partly because all the banquet and catering business hasn't come back, and there's a lot of employees associated with those areas.

In most cases, we've brought back most of our hourlies related to housekeeping. But for occupancy levels, most of our hotels, because of their quality level, we've brought back the service levels that we were providing pre-pandemic, certainly at all of our luxury properties and most of our upper upscale properties.

And then the customer, in some cases, has the ability to opt out of service during their stay, which more people are doing for numerous reasons. So staffing levels are still below. I think we were at - well, it's a slightly modified portfolio. We were somewhere around 9,000 employees in total, full and part-time, before the pandemic. I don't know offhand, Mike, but I guess we're probably somewhere in the 2/3 to 3/4 range of where we were.

[Raymond Martz, CFO]

And also, Mike, we don't necessarily expect to get back to 2019 levels of staffing or FTEs at all departments because, as we've talked about before, all the new operating models we have, where we're combining and clustering operations of some of our properties, combining management positions, or in some cases eliminating some managers.

So there will be ultimately less full-time equivalents at our properties just because, well, there's not enough employees out there, but also the retooled operations, which is how we got to some of the 100 to 200 basis point savings just by being more efficient and then combining some positions here.

[Jon Bortz, Chairman and CEO]

And to be clear, a good bit of it is in the salary side, the manager side, as Ray was saying, by clustering positions. But also, where we've reconcepted and we've changed menus, we require fewer people in the kitchens, as an example. And so - and frankly, a lot of them are hard to - it's probably the hardest position to hire for today, are cooks.

So it has - we've adapted both to the environment and to a desire to provide what the customer's really looking for, what they're willing to pay for, at the same time, creating more efficient operations.

[Operator]

The next question is coming from Floris Van Dijkum of Compass Point. Please go ahead.

[Floris Van Dijkum, Compass Point]

Ballpark figures, I mean, I'm just - it sounds like obviously the resorts have been incredibly strong. You've given your EBITDA guesstimate for the year for your resorts, which is higher than '19. The key question a lot of investors have is, how about the urban markets?

If you get back to '19 levels of EBITDA on an overall basis for the fourth quarter, does that sort of imply that your urban markets are going to gain about $180 million of EBITDA this year on an annualized by that quarter? Obviously, you're not going to - it's going to go gradual, so you're not going to get the full benefit of that. But it sounds like we're going to see an incredibly sharp recovery in those urban markets in terms of your profitability.

[Jon Bortz, Chairman and CEO]

Yes. I mean, I think - I don't know if that's the exact right number. But certainly, there's a long way to go and there's incredible operating leverage in those businesses, in going from levels of occupancy at - from 30% to 60% - in the 60s, which is - we're at low 60s, we got to in March, and you saw that in the performance of the urban markets.

I think we had three urban markets in the first quarter that were - EBITDA that we're ahead of 2019. Boston and L.A. were two of them; I think Miami, which is really one property, Colonnade, which was the third. But that will continue to progress over the course of each month. And more and more of those markets will move to achieving '19 and then surpassing '19 in those markets.

So you're absolutely correct that there is obviously a very significant growth from the prior 12 months of bottom line to the next 12 months of bottom line.

[Floris Van Dijkum, Compass Point]

Maybe - and just - I know I've heard you talk about this in the past as well, but the typical hotel cycle inevitably gets ended by increased supply. And typically, that tends to occur later on in the cycle when we also have a downturn, economic downturn. And it just exacerbates the operating leverage on the negative side.

As you look out, maybe I'd love to hear your thoughts. And maybe share your thoughts on the - what you're seeing in terms of new supply in the - in your markets, but also nationally and the prospects for new supply over the next couple of years. And how much of a runway do we have in the hotel sector, in your opinion?

[Jon Bortz, Chairman and CEO]

Yes. I mean, I think in the resort and the major cities, particularly the hard-hit major cities, so leave out a few of the Sun Belt markets like an Austin or a Nashville, as an example. But the major coastal cities, I think you're going to see very limited - very, very limited new supply in the next three to four years.

I mean, today, it takes three years to build a high-rise hotel in a major market. As we've talked about replacement costs and new development costs have gone up dramatically, 30% or so in the last two years. I mean, as we've looked at our projects in the last quarter, we've seen another 10% increase in costs. And so it's incredibly challenging economically to make sense out of building in a major city today, particularly a city that was impacted severely or materially by the pandemic.

So starts are not happening in the major cities outside of a select few. And there are very few resorts commencing. And typically, those take a long time, from a planning and government approval perspective, and then building them also takes sort of that 3-year period today.

So we think it's about the best runway. I mean, I think it's the best runway I've ever seen from a supply perspective. And so even if there was a short downturn precipitated by the Fed trying to impact inflation in a dramatic way, we think it's probably short-lived, and it happens at the same time there's little to no supply in the market, and we're still recovering normal demand that was taken away from the pandemic. So we do think it sets up really well, Floris.

[Raymond Martz, CFO]

And Floris, just also in addition just to things taking longer and costing a lot more, also thinking about construction financing, especially in the urban markets. Lenders - traditional lenders are still hesitant to provide financing to urban hotels. As we talked earlier on the call, a lot of debt funds are more participating there.

Construction financing, which is way more complicated and expensive, it's even more difficult. So that will continue to be a challenge for new construction. And with interest rates rising, that just increases the cost of financing, right? So all these factors pointing to a really good environment here for the next several years.

[Operator]

The next question is coming from Anthony Powell of Barclays. Please go ahead.

[Anthony Powell, Barclays]

Big picture question on just alternative accommodation. You talked about your plans to add cabins and whatnot to Skamania the and Chaminade. What's your view on alternative accommodations as an asset class? Given you like leisure as a trend long term, would it make sense for you to maybe take down portfolios of vacation rentals in well-located areas, given the positive trends there?

[Jon Bortz, Chairman and CEO]

Yes. I mean, it's - that's always a possibility. I mean, certainly, vacation rentals have been - have existed and been in business for a long time. And I think what you - I think when we do them as part of a major project and they sit on the same grounds and they can be managed by the same player, it makes a lot of sense.

I don't see ourselves getting into buying vacation rentals individually in different markets and offering that as an alternative like the single-family housing companies have done. It's possible, Anthony, but it's not something we're focused on right now.

We'd rather focus on the properties where we have traditional facilities, but with a lot of amenities, that are in locations that are of interest to folks who may want to rent for a week or a month or have a unique experience like we're providing, with treehouses and glamping and farmhouses and yurts and other things like that.

[Anthony Powell, Barclays]

Got it. And maybe switching gears, I guess. You talked about business travel coming back. What kinds of business travel customers are kind of leading the way? What segments are lagging? And what's your time line for those lagging kind of segments within BT to kind of catch up?

[Jon Bortz, Chairman and CEO]

Yes. So I think sometimes discussion ends up focusing on large corporations, as if that's the indicative user that exemplifies all business travel, whether transient or group. And that's clearly not the case, right? You have a lot of small, medium-sized and even larger private businesses that have been traveling for a year already, and that travel level has been increasing both within those groups as well as other - really all other categories, including the large corporates.

So we're seeing everybody come back. The return to work has obviously helped. The declining cases following Omicron, the elimination of mass restrictions and testing restrictions and things like that have helped a lot of these other slower-recovering markets. We're seeing all industries come back from a travel perspective. The laggards have been the large technology companies. Not that they're not traveling, but they're not traveling quite at the same level yet.

Second, international. So when there's a convention in a market, and if it's medical or technology as examples, it often has a large international component. And that's been coming back, but it's nowhere near the levels of the domestic users and attendees at those conferences.

And then a few conferences are still providing hybrid alternatives which are still depressing demand for those conferences. And those are gradually fading as people are comfortable meeting in person. And second, people recognize that certainly for any kind of interactive meeting, it's really a terrible alternative to meeting in person. It works fine for speaker presentations and panels, but it doesn't work well for anything that might be interactive.

[Operator]

The next question is coming from Jay Kornreich of SMBC. Please go ahead.

[JayKornreich]

Can you just give any additional color around San Francisco? And if you're seeing improvements around the quality of life there? And how you see kind of the ramp-up of corporate travel and group bookings in light of the comment you just mentioned to answer the last question, that some of the technology workers are a bit slower to come back?

[Jon Bortz, Chairman and CEO]

Yes. I mean, it's indicative in the numbers we've provided of occupancy. San Francisco has been gaining significant occupancy monthly. It will continue to do that. It's probably three to six months behind some of the other markets. And clearly, it's been improving significantly.

We've been out there. We have a lot of folks who've been out there and gotten back to us and said, "We think the city is cleaner. It feels safer. It's active." The recent conventions that were there, game developers and the NCAA tournament that was there, the news reports we saw were very favorable, where people were talking about it being them feeling safe, it being clean, it being fun and that they would come back. So forget our own opinion about the fact that we think it is getting better.

It's got a long way to go, don't get me wrong. These are issues that have been created over the last five years. it's going to take years to get back to where the city was where it was really maximizing as an attraction, but it's definitely getting a lot better. And we see it within our own portfolio and we see it by submarket.

So pretty indicative of both the technology user, where that account is as well as where the tourism is going as an example. So - and the conventions are back and they're happening and attendance is rising. And obviously, as I indicated with technology, it will still be a slower-to-recover market, but it's clearly recovering and in a very significant way.

[JayKornreich]

Got it. That's helpful color. And I guess, specifically within your lifestyle hotels within San Francisco and maybe other urban markets. How are those at this point faring against the bigger brand hotels? And how do you see that trend continuing as more the citywides start coming back?

[Jon Bortz, Chairman and CEO]

Well, I don't have it in front of me, our properties in San Francisco. But when we look at our independent properties in general, they've been leading the way in terms of performance and recovery, primarily because they're experientially focused, they don't rely on large groups or citywides in general. They certainly get impacted by them, but they don't rely upon them for a lot of their direct demand.

So they're generally outperforming our branded properties and other branded properties in the market, both on an ADR basis and usually on an occupancy basis. There are times when - where we have a branded property we compete with who's focused on, because they get so many redemptions, they're trying to get to a certain occupancy level to maximize the rate at which they get paid for those redemptions. But outside of that, generally speaking, the customer continues to move towards a greater interest in a unique experience.

[JayKornreich]

Got it. And just to slip one more in, just with COVID spreading in China kind of being a hot topic at this point. Have you guys seen any related impact on our business or hesitation from international customers at this point related to that?

[Jon Bortz, Chairman and CEO]

Well, the only thing we've seen is people are reluctant to go to Asia. And certainly, it's still hard for them to travel here. So yes, we've certainly seen that ongoing impact. But that customer hadn't really come back yet anyway because Asia has been going through these waves of lockdowns because of their approach.

So outside of that, the only thing we've heard, and again, it's anecdotal, but from a lot of our travel planners and agents, a lot of folks who were going to go to Europe deciding to stay here in the U.S., which I think has more to do with the conflict in Europe as opposed to anything going on in Asia.

[Operator]

The last question for today is coming from Stephen Grambling of Goldman Sachs. Stephen, please make sure your phone is not on mute. Mr. Grambling, can you please respond?

[Raymond Martz, CFO]

Maybe his question has been answered.

[Jon Bortz, Chairman and CEO]

Maybe we answered his question, Donna...

[Operator]

In that case, Mr. Bortz, I'll turn it back to you for closing comments.

[Jon Bortz, Chairman and CEO]

Thanks, Donna. Thanks, everybody. We hope you appreciate the song we picked today, both - we think we're entering a new era, if you will. And also, we all hope for a peaceful resolution of what's going on in Europe. So with that, we look forward to updating you in 90 days. And we expect the news to continue to be very favorable. Thanks, Donna.

[Operator]

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.