Pebblebrook Hotel Trust
Q2 2021 Earnings Call Transcript

Published: 30 Jul 2021

[Operator:]

Greetings, and welcome to the Pebblebrook Hotel Trust Second Quarter Earnings Conference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Raymond Martz, Chief Financial Officer. Thank you, sir. Please go ahead.

[Raymond Martz:]

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

[Jon Bortz:]

Thanks, Ray. So I thought I'd focus on what we're currently seeing in our business and how we think the rest of the year is likely to play out. Though the path continues to be a path with uncertainty given the rise of the Delta variant. We're certainly very encouraged by the consistent increases in demand we've experienced each month, the robust level of leisure demand that is well outpacing 2019 levels, the continuing acceleration in business travel and forward bookings, our ability to push our average rate closer and closer to 2019 levels and our ability to operate our hotels with new operating models and greater efficiencies. In Q2, occupancies rose significantly every month on a sequential basis, even as we opened our remaining hotels in softer markets in our portfolio. Those gains drove RevPAR higher as rates also gradually increased. April RevPAR was 22.4% higher than March, may was 20.3% higher than April and then June rose even more, up 32.1% to May. We think July will be up 25% to June. We estimate that business travel doubled from the first quarter and probably recovered to about 30% to 40% of 2019 levels by the end of the second quarter. The airlines who certainly have more visibility than our industry have indicated they believe that business travel will improve to 50% to 60% of 2019 levels by the end of the third quarter, with further improvement through the end of the year and into next year. Their forecast seems reasonable given the bookings we've been seeing and the significant advances each month in urban weekday occupancies, which improved from 24.5% in March to 39% by June, and they look like they'll be up to around 47% or 48% in July. Overall, urban occupancy rose from 29.5% in March to 43.8% in June, just below our overall portfolio occupancy for June of 46.4% July looks to be over 52%. Most companies have already changed their travel policies, allowing either vaccinated employees or all employees to travel again. Our property teams report seeing travel from most of our corporate accounts throughout our portfolio. Businesses are definitely getting back to travel, both transient and group.

[Operator:]

Thank you. Ladies and gentlemen, the floor is now open for question. Our first question is coming from Dori Kesten of Wells Fargo. Please go ahead.

[Dori Kesten:]

For Jekyll Island and Margaritaville, how have your expectations for 2021 EBITDA changed since you underwrote them?

[Jon Bortz:]

Yes. So well, they've gone up a lot. When we were underwriting them, I think our view was that it would be a couple of years to get back to 2019 levels. I think in the case of Jekyll, we now expect to be well advance beyond 2019 levels, I think upwards of $1.5 million or more at the bottom line. And then Margaritaville, at this point, we don't yet think we'll get back to 2019 levels. I think right now, we're forecasting to be about $3 million or $3.5 million shy. That's about $2 million better than what we underwrote and when we agreed upon the pricing for that property.

[Dori Kesten:]

Okay. And just a follow-up. A few quarters ago, Tom said New York City was no longer red line for acquisitions. Has there been anything in that market or the top 10 urban markets that sparked your interest? Or you -- do you think the vast majority of deals we'll see early in the cycle will be more leisure resort weighted for you guys?

[Jon Bortz:]

Well, I think we're as -- I think as we've indicated, we're very open to acquiring in 35 different markets that we've spent a lot of time researching and building our database for, which is about 15 to 20 more than where we've invested historically and then on top of that, drive-to resort properties, which can be anywhere in the 48 states. As it relates to urban markets, our investments are going to be driven by availability and what we find attractive. And hopefully, our focus will continue to be assets where we can add value through redevelopment, repositioning, operator changes and applying our best practices and operating expertise and not pay for those opportunities, which is really key. As it relates to New York, specifically, while it's not red line, I think it's going to be a tough place for us to buy. We think the recovery to any meaningful cash flow, is going to take quite a while. It's -- the market is going to struggle and be a slower recovery market, we believe, given its heavy dependence on international inbound travel for which we've not yet even opened our borders yet. And so that's a toughy for us. It may be more attractive for a private investor, doesn't care about cash flow for the next few years and where you're basically buying on a price per pound basis. But for a public company and for us, given the high risk we attribute to the market between that, between the rate issues, between the challenges with the union and work rules in the market and real estate taxes, it's -- we just think it's going to be hard for us to find the right deal at the right price with the right opportunity. So -- well, again, we wouldn't redline it and we wouldn't rule anything out. I think it's a very, very low probability. We end up buying something in New York as an example. I'm not sure that applies to other major urban markets that are slower to recover, like D.C. or Chicago, where we have a couple of properties in I think San Francisco, I think we've reduced our exposure or share in that market. As we acquired properties elsewhere and as we sold properties elsewhere during the pandemic and pre-pandemic, and I think we feel very comfortable with the recovery there. I'm not sure we'll be a buyer in that market. However, I think we feel comfortable with what we've got there.

[Operator:]

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

[Gregory Miller:]

This is also another question. I'd like to hear your thoughts about some other specific transaction trends. You're not alone as acquirers of resorts as of late as of other REITs and private companies. Some of the pricing on a per-key basis is well north of $1 million a room. And we've also heard of some Uber luxury resorts worldwide that are being marketed for well north of $2 million a room, which perhaps to me suggests as that rock band for Winnipeg would say, you ain't seen nothing yet. I'm curious to hear your thoughts what you think about this pricing, does it seem reasonable to you? Do the trading multiples make sense either on a historical or forward basis? And not too early any of the questions, but if you're willing to share, I'm just curious how you think about resort transaction pricing today impacting your view of your own resort's valuation?

[Jon Bortz:]

Sure. So let me start by saying what we -- we don't really feel comfortable commenting on other people's transactions. I think, obviously, you should speak to them about it and their view of values and the future performance. I think in our case, when -- first of all, you can only acquire what's available. And what we've seen in the market so far are sort of a barbell group of available properties. At one end, you've got resorts and some urban properties in heavy leisure fast-recovery markets. And then at the other end, you've got much more select service and then some defaulting properties in suburban and secondary markets. At that end of the barbell, that's not what we acquired, not what we have an interest in. We're looking for non-commodity properties. And as it relates to the end of the market that we do find attractive, what's been on the market has been more dominated by the leisure properties. And so that's -- we've been looking at them and, of course, found to that were marketed to a very small group. And in fact, the Jekyll Island property was purchased by the group that the operating partner who purchased Sir Francis Drake. So there was actually a strong connection there when it came to the opportunity with Jekyll Island and our ability to acquire it. I think -- so when you think about it from that perspective, you -- the transactions are going to be more dominated by the properties that are doing better. Of course, they get the headlines and the urban properties like the Monaco and Baltimore that traded for $60,000 a key doesn't get the headlines. And so when we think about strategy, and I've heard some people say, oh, Pebblebrook's new strategy is to buy resorts, that's not our strategy. Our strategy is to focus on 35 urban markets and drive-to resorts and find assets that we can add value to, and that's where we are going to continue to be focused. So as it relates to the two that we acquired, we tied those up back in early April and early May. I think the southern part of the country was just beginning to improve significantly by March and April. And so sort of these premium levels of rate and performance were not underwritten by us and I don't think appreciated or forecasted by the sellers. So I think we got some very attractive properties at very good price per keys and very unique properties in their markets, including Margaritaville, which is number one in its set in the Lauderdale Hollywood market. So I don't know if that gets to the issues you're trying to drive to. But I guess the last part you asked about was our portfolio. I mean first of all, I do think in general, resorts are probably -- most resorts are trading at '19 values or at a premium to '19 values. And I think that would hold well for our portfolio. But I'd throw in that we've invested a lot of dollars in upscaling all of our resorts in the portfolio. And as indicated by the ADRs that we're achieving, which are significantly higher than the growth in those markets. So we're gaining a lot of share. Those investments are paying off right now, and we expect them to continue to pay off. So we feel really good about the values that we have. Our team, Tom Fisher and I and our investment team were out at Ellis] this -- earlier this week. And based upon the information we got from the brokerage community, the assets that are on the market, the assets that are going to trade based upon values that we heard, we came back and we said we need to update our internal NAV because we -- the market's moved a lot in the last 90 days. So -- and that certainly would include our resort properties, Greg.

[Gregory Miller:]

I mean, for me, it's not an issue. It's at least just more my intellectual curiosity as just being interesting and fast-moving trends taking place. So I appreciate all the insights there. My follow-up, I'll try to be pretty brief. You spoke to unique properties and Jekyll Island seems as if dealt from my seat. I'm curious I don't suspect that this is that well known of a hotel by some on the call, maybe I'm wrong. But it's not in a major metro, maybe 70 minutes or so driving distance from the next biggest city. Could you provide some greater detail as to why you chose to buy that particular hotel given its small town location? And maybe more broadly, what appeals to you about the island destination over the longer term?

[Jon Bortz:]

Sure. So I hadn't heard of it either. I hadn't even heard of Jekyll Island when Tom first talked to me about it. And so what we found attractive was we're very familiar with Sea Island, which is very high end, particularly with the cloisters and the lodge there. And we were maybe a little less familiar with St. Simons and Little St. Simons, but which are much more commercialized than Jekyll Island. And so as we did our research, we came -- we thought what they were trying to achieve at Jekyll, which was really a focus on nature, on wellness, on outdoor activities, on sustainability, those really hit our value system, what we've been trying to achieve at our properties, including our resorts. And that unique historical aspect of the property gives us what we think is a big moat on top of the fact that the development is expected to be very limited on a go-forward basis according to the plans that Jekyll Island Authority has for the Island. So it really is meant to be, I don't know, more of the Lanai or the Kauai of Jekyll Island, if you will, of the Golden Aisles, and we find that attractive. I mean it's -- you've got a very vast growing city in Jacksonville, which is 70 minutes away from Jekyll. It's very close to I-95. It's a relatively short drive to Atlanta. And its appeal is not -- the reason we like to have resorts that are within an hour or so of a major market or a major airport is when we have resorts that have large group facilities and are appealing to group in a major way. That's not the case here at Jekyll. Jekyll is really leisure-focused and small-group strategic planning board meetings, et cetera, and from that perspective being 70 minutes from Jekyll and actually closer than Sea Island is, to Jacksonville is, we think, a very attractive. So that's our view on Jekyll and happy to get in more detail on at another time.

[Operator:]

Thank you. Our next question is coming from Rich Hightower of Evercore ISI. Please go ahead.

[Rich Hightower:]

I'll just add that as a native Georgian, I know all about Jekyll. So you guys should have called me before you started bidding, but just a quick question on leisure. Maybe given some of the kind of anomalies in the macro environment where we think about stimulus this year, we think about pent-up demand coming out of COVID lockdowns last year. I mean what are the chances that leisure underperforms in 2022, if this year is indeed an anomaly? And then I'm also curious for what your guest satisfaction scores look like right now to the extent that labor bottlenecks are impacting service, especially at the resorts.

[Jon Bortz:]

Sure. So interesting question on leisure. We actually believe that leisure through next year will actually be stronger than this year. And if you think about it in our portfolio, even in Florida, the first quarter was terrible compared to '19. Southern California, in fact, the West Coast was closed for the most part, for the first three, four months of the year. And a large percentage of the population that's been vaccinated didn't really get vaccinated until May and June. And so we think the robust nature of the desire to travel on the part of the leisure customer is going to continue. And I also think the stress of the environment, obviously, hasn't gone away yet with the rise of the Delta variant. We think that -- when we think about leisure on the road and the financial condition of the consumer, while there's been additional stimulus, the direct stimulus for our customer has probably been zero. It's not the people traveling to our resorts who got $3,000 in pay. It's generally the upper upscale socioeconomic demographic. So given the robust nature of the economy, the Algolfact that it's more like later-cycle economic activity than early-cycle, we really do think it's not only getting continue but it's likely to actually increase over the course of the next 12 to 18 months.

[Rich Hightower:]

Okay. And then on the guest satisfaction...

[Jon Bortz:]

Yes, on the guest scores. So it's interesting. I mean, our guest scores, I haven't looked at all of them, and I haven't seen a portfolio roll up. But I would say, because of the investment dollars we've been making in the portfolio, our guest scores are actually up. And in the markets where we struggle with providing the same level of services pre-pandemic, we're not alone in those markets. It's pretty much across the spectrum in a place like Key West. So we haven't seen declining scores. And in fact, we've generally seen the opposite, which I think is more specific to our portfolio, Rich.

[Operator:]

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

[Michael Bellisario:]

Just one question for me, just back to all the ADR information you provided was helpful, but maybe on resort fees and urban amenity charges. I know this don't get captured in ADR, but what have you done here? What have you brought back? And any customer pushback so far in those charges would be helpful.

[Jon Bortz:]

Yes. So I think we've returned guest amenities and the services and products as well as the fee to all of the properties that had them previously. The pushback has been limited and frankly, no different than pre-pandemic when it's very, very minor. And I think it's increasingly being accepted, particularly in the urban markets. We had to restructure some of the packages to provide value to the customer. And because some things that were in the packages were either no longer available or were not going to be of interest to the customer, and we've swapped those out with other opportunities within the products and services that we're providing. And our capture rate, our average capture rates not surprisingly are much higher because it's such a higher percentage of leisure which -- where the fees are very well accepted.

[Michael Bellisario:]

Got it. And then just would it be fair to assume all those ADR percentages that you gave, if you included all the other fees that don't get counted, are they fair to assume that the percentage change versus '19 levels is actually higher than the numbers that you quoted because of all the other fees that are there?

[Jon Bortz:]

Yes.

[Operator:]

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

[Shaun Kelley:]

I'll keep it relatively short. But I was hoping we could change gears a little bit and talk about your sort of urban margin structure. I think, Ray, if I caught the comment correctly, you made something like $5 million or so in EBITDA in the urban portfolio in June. And I'd just like to get a little bit more color on your thoughts around the margin structure there going forward. How much are you benefiting from mix today versus how much is that kind of rate versus occupancy? And then kind of going forward, how do you see that side of the portfolio kind of recovering margin relative to maybe some of the outsized gains you're seeing on the resort side?

[Jon Bortz:]

Yes. I mean, I think it's an issue of revenue that we need. I mean if we look at urban at our open urban hotels in June, our GOP margin was over 33% versus 47% in June of '19. You then tack on the fixed expenses, which were 11% in '19 because of the higher revenue, but 22% in June of this year because revenues were half, less than half. They were down by 61%. And so you only get to a 14.8% EBITDA. So you have incredible operating leverage there. And so as revenues continue to come back, both increasing leisure as the cities have reopened, increasing business travel as business gets back on the road and group and citywides, we'll cover these fixed expenses pretty rapidly with a high flow-through on the additional revenue. So the operating models have been accomplished in those markets. They're -- we're going to be able to run these properties at lower revenue levels as indicated and get to higher margins ultimately as the revenues recover.

[Shaun Kelley:]

Great. And then just one other question I wanted to ask about, especially given some of the investments that have been made, are you tracking any sense of sort of either RPI or your ADR share in some of these markets? And how much of these rates gains that we're seeing are the markets that you're in versus how much are you guys taking share and some of the payback on the ROI side?

[Jon Bortz:]

Yes, so we do track it. I don't know that we haven't rolled up, and we can get back to you on that separately and give you a little bit more detail. But clearly, there's a part that relates to the market recovering, as I indicated in my comments, and then there's a significant part that relates to the share gain from the improvements and the repositionings of these properties. I mean, at L'Auberge, the market is not seeing a $250 increase in rate. It's probably seeing something closer to $50 to $75 in the market. In Mission Bay, most of our competitors are up a little bit in rate. We're up a lot in rate at both Paradise Point and Mission Bay Resort. So I don't have those off hand, but it can be anywhere from picking up 10 points to picking up 50 points of rate share, which I think is more -- we're probably somewhere between $25 and $50 in Naples, if I recall.

[Raymond Martz:]

And Shaun, just as a reminder, this is -- these are projects. We completed about 23 projects from '18 through '21 this year, which comprises about over $330 million of invested capital. It's pretty expansive on a number of hotels. It's not just a couple of resorts. With 23 projects, that's a lot of properties, which is why we're now starting to see the benefits of those investment programs.

[Operator:]

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

[Bill Crow:]

Jon, we've gotten accustomed to looking at data every day, travel and activities and things like that. And you all started your commentary talking about the sequential improvement month-to-month all the way through July. But every year has a certain rhythm to it from a travel perspective. And I'm just wondering what we should be expecting from a sequential change. It seems like July might be the peak and then we go down. And in this case, are we going to go sequentially lower through the end of the year? Or how do you see that playing out?

[Jon Bortz:]

Yes. I think we're probably -- Bill, we're probably sequentially lower in August and September. So July will be the best month in the quarter. And then I think we pick up pretty materially, I mean, in October. I mean September from a business travel recovery, I know everybody's talked about Labor Day because a lot of companies are coming back to their offices in Labor Day. And I actually think it's been a general return, a gradual return, and that continues through the summer for many companies. Maybe the major companies, some of the major companies are coming back Labor Day or later. But the Jewish holidays fall in that first half of September and Labor Day is late. So I do think we'll probably get some leisure benefit in early September that we might not otherwise get. And I think as we roll into September, business travel is probably the second half of September picking up. But I think October, particularly without any of the Jewish holidays, is probably going to be a very strong and very healthy business recovery month. And that would be consistent with what we've been seeing in terms of group bookings, advanced bookings, assuming those hold on all the way into mid-December. So that's where we think we'll see the continuing sequential improvement from October through the rest of the year; and then again, picking up pretty substantially in January, maybe not sequentially, but certainly on a year-over-year basis and probably sequentially against January and February of '19.

[Bill Crow:]

That's good color, Jon. The second question -- follow-up question is, you didn't touch much on either Chicago or Washington, D.C. and maybe specifically what you're thinking about as far as your Chicago presence goes and whether this might be an opportunity to exit one or both of the hotels. And then on Washington, D.C., just curious how important the school groups are to overall industry occupancy or market occupancy there, whether there's any sign of school group starting to book for the fall period.

[Jon Bortz:]

Sure. So as it relates to Chicago, I think our view is certainly pre-pandemic, we'd indicated a desire to leave the market. We didn't get that accomplished. And our view right now is the sentiment is still pretty negative on Chicago. Next year is, right now, targeted to be a pretty good convention year assuming that those continue to move forward as planned. And so I don't know that the current period right now is the best time to be a seller in the market. It might even be a time to be a buyer in that market, at least on a cyclical basis, but probably going to wait a little bit, Bill, unless we get approached with something that's attractive from somebody who has more conviction than the general perception right now of Chicago. As it relates to D.C., the market highly depends upon the return of the federal government to work, which it hasn't yet done to the office and it -- over the summer, it generally depends highly on the Smithsonian and the museums being open. And while some of them have been opened, and they've been limited the attendance, and when I talk to people who want to come here, they said, I went online, there are no tickets available for any of the Smithsonian visits. That's opening up July, the end of the month with the opening of the remaining museums like Air and Space. They're eliminating -- at least that's what they've said, unless they change their mind. They're eliminating the time limitations and the ticket requirements. So we think that will help continue to improve the leisure recovery here. But because the market got such a late start on announcing these reopenings, I think people made other plans. So I think it's going to be the fall, hopefully, the federal government coming back, group and business travel. I don't know how important the school groups are to the market. I don't think there is important -- they often stay out in the suburbs because historically, rates are much less expensive. So to the extent they come in the fall, it may very well help the city recover its occupancy because that's really where they want to be as opposed to staying in the suburbs because the rates are lower. And -- but what we really need is government to be back and all of the associations and business groups to return to lobbying in person and coming to the market.

[Operator:]

Thank you. Our next question is coming from Anthony Powell of Barclays. Please go ahead.

[Anthony Powell:]

And similar to Rich, I was very familiar with Jekyll Island, went there in sixth grade on a field trip. So it was a nice island, a lot of nature, good view there I thought.

[Jon Bortz:]

Thank you.

[Anthony Powell:]

Just a question on your leisure mix. So given the resort acquisitions, given kind of the strong pricing for leisure and urban markets, given you social groups, on a normalized basis, do you think the majority of your room revenue comes from leisure now or is it still that 60% business is on a stabilized basis?

[Jon Bortz:]

Well, I think with the swapping out of the properties in San Francisco and New York into Jekyll and ultimately Margaritaville, I do think the leisure piece will pick up a little bit. I mean we might add another point or two to where we've been at around 40%. Neither of those properties do really any corporate transient to speak of. Margaritaville does do a lot of business groups in a year when you're having a lot of business meetings, and we do think that's one of the opportunities there was at least pre-pandemic to continue to grow the group mix there as an opportunity because it generates a lot of profitability there on a food and beverage basis. But -- so I do think we'll pick up a little bit. But keep in mind, I mean, San Francisco and New York were pretty heavy leisure markets as well, but clearly not to the same level as those two resorts.

[Anthony Powell:]

Got it. And do you think about your portfolio that way? Are you trying to drive your total leisure room revenue mix up? Or is it more just an opportunistic property-by-property now?

[Jon Bortz:]

You're right. It really is more opportunistic, Anthony, and I don't think we have taken a position on we want to be more heavily leisure or we want to be more heavily in the Southeast or we want to be more in resorts per se. It's really not the way we approach it. It really is about buying assets that will have a more attractive risk-adjusted returns and properties where we can enhance those returns through our expertise. So definitely not a strategic approach from that perspective.

[Anthony Powell:]

Got it. And maybe one more on labor. I think you mentioned a lot of your managers were pulling double duty and doing duties that hourly employees used to accomplish. Is that something that can be permanently instituted, maybe pay a manager on a salary a bit more than use managers to kind of keep headcount lower at some of your urban properties?

[Jon Bortz:]

Well, I think what it is, is we certainly won't be able to continue to do it at this level. But I think -- when we think about how we operated these properties at very low occupancy levels, there are times during the week or the month or the year where we typically have slow periods. And I think the operating models that are now in place incorporate the fact that managers, particularly middle managers, are going to do shifts instead of just managing their function or people on their function. So I do think that, that's a permanent change, continuing efficiency at the property level and will help pull through better margins as we recover.

[Operator:]

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

[Aryeh Klein:]

Just following up on the acquisition strategy. You reduced your exposure to San Francisco. And I guess in an ideal world post-COVID, would you look for more balance across portfolio where you maybe wouldn't have 15%, 20% exposure any given market? And then just given the pace of recovery, do you think it's tougher from here to acquire resort assets at prices that would work? And maybe we hit a lull on some more non-leisure-oriented properties or gross market?

[Jon Bortz:]

Yes. So I think as it relates to share in particular markets, I mean, I think it's likely there'll be some additional diversification over the next few years as we expanded our target markets to 35 cities and continuing with drive-to resorts. So it shouldn't be surprising if we get a little bit more diversification. But we don't have a strategy to say, gee, we want to -- we don't want to have a market over 10% or 15% or 5%. A long time ago, I learned you want to be where the best returns are, the best risk-adjusted returns and sometimes diversification, one of our wise Board members said, oftentimes, diversification is worsification. So that's not a strategy right now for us. And then as it relates to resort pricing, again, any time we're acquiring, and you can go all the way back to our 2010 to '15 period, there were times when people -- well, first of all, almost everything we bought during that period, people said we overpaid. And I don't think that was the case. I think the values continued to go up and frankly, our ability to improve performance helped drive values higher. It wasn't just a market recovery. And I think as it relates to resorts, we'll continue to look for properties where we see things that other people don't, where we can bring our expertise to bear that maybe expertise other people don't have or we're willing to do much harder work than other people might be willing to do. And so that's the way we're going to look at it. And if we don't find anything, we don't find anything. But I'm not sure right now, we would say, gee, the market has gotten to a place of valuation that there isn't going to be anything on the resort side.

[Operator:]

Thank you. Our next question is coming from Floris Van Dijkum of Compass Point. Please go ahead.

[Floris Van Dijkum:]

Jon and Ray, I wanted to follow up on -- you made some comments earlier about NAV and how you think your NAV might be ticking up. Obviously, the resort trades that have occurred, some of them in your markets, imply a much higher value for your assets, too. You used to publish quarterly NAVs. Presumably you are still share those with your Board. Can you give us any more insight? And let me -- with the caveat, your convertible that you did beginning of this year, you paid $38 million to increase the strike price to the low $30 range. Has that value gone up in your view?

[Jon Bortz:]

Yes. So there's no doubt, I mean, from our internal numbers. And the reason we haven't published them is there just haven't -- there just weren't enough transactions in the market to feel comfortable that the way we were valuing each asset was supported by transactions and similar transactions in the market. So these aren't meant to be estimates a -- sort of even just educated estimates. They're really meant to be supported by actual transactions in the market. And they just haven't -- just weren't many of those until more recently. And I think as we get more comfortable as the year goes on, Floris, we'll be in a position, we hope, to be able to come back out with an NAV. But there's no doubt the values have gone up dramatically. And it's not just the resorts, it's the better properties in the good markets, whether it's The Nines in Portland or it's the Argonaut in Fisherman's Wharf or it's the Mondrian in L.A. And frankly, all of L.A., I'd say, is probably back to '19 values or within 5% or so of them. San Diego, downtown San Diego, I'd guess today, values are back to where they were pre-pandemic in the sooner-to-recover markets. So I think there's a lot of confidence and conviction on the part of the buying community, which has increased pretty meaningfully over the last 90, 120 days, as ours has about the pace of the recovery and really moving forward a lot of underwriting assumptions on the part of the buying community by a year or more from where they were really just 90 or 120 days ago.

[Floris Van Dijkum:]

I guess my follow-up is -- so if I'm -- correct me if I'm wrong, but I'm -- obviously, you feel more comfortable about values today than you did back then. Should we expect -- I know that, obviously, earnings numbers are still going to be all over the place, given that the short-term nature of your rents, but you're more comfortable with talking about the values. And will you share your NAV estimate before you give guidance?

[Jon Bortz:]

I would think we would, yes. I would think we would, Floris.

[Operator:]

Thank you. Our next question is coming from Stephen Grambling of Goldman Sachs. Please go ahead.

[Stephen Grambling:]

Recognizing your strategy is for value-add properties versus specific locations, what's your perspective on a distributed or decentralized workforce going forward and its impact on lodging? And is that part of the lens you're looking at and redefining the markets where you are kind of targeting?

[Jon Bortz:]

Yes. So a really good question. I think that when you think about both a more distributed workforce and a more flexible workforce, I think that leads to more travel. It leads to more business travel, where you're not in the headquarters anymore or you're maybe not even in a regional location. And you'll have to travel to one more often than you were when you were in that location, certainly. And it's interesting, we've seen reports, talked to some companies. At the extreme, Stephen, there are some companies who said we're not even going to have office space, everybody is going to work from home. But now they're meeting quarterly and having planning meetings and bonding and trust-building off-sites almost similar to incentive trips or strategic planning meetings that you do once a year. Now they're doing them much more often quarterly, some monthly, because they don't otherwise get together. So we think there's a lot of reasons why it actually increases travel. Certainly, people who are working from home can work from anywhere, right? Technology today allows you to do the same thing at a hotel or a resort, in another location as it does from your home. And so we do think people have coined the word leisure, which I hate. I'm thinking about leisureness or a bleisure, which sounds a little better pronunciation, I think, and maybe more romantic. But I do think all of these changes allow in this evolution of travel that will continue to experience, it leads to more travel, not less.

[Stephen Grambling:]

That makes sense. And then as an unrelated follow-up, do you have a sense for what the contribution to the strong leisure trends could be from international travel refocused in the U.S.?

[Jon Bortz:]

Well, it's a funny thing because it -- historically for us and particularly now that we're not in New York, probably runs about 10%, 11%, 12%, maybe at the most of our segmentation pre-pandemic. But your offset is you've lost that business, but you're keeping people in the United States from traveling abroad generally. And those two, when they're at the extreme, are kind of a wash. So it will affect different markets differently. I mean we're not getting wholesale business in Florida internationally in the summer, but we're getting a lot more drive-to local and regional business than we historically get. So it's pretty complicated, and I can't tell you we have the answer. But as long as it sort of happens relatively equally, meaning opening up to go abroad and opening up for people to come here, I think it's mostly a wash.

[Stephen Grambling:]

That's super helpful. And one quick comment for you all after two weeks of business travel around the country. But if you can figure out the taxi and Uber nightmare, that would be a home run.

[Jon Bortz:]

Yes. Yes. Well, my recommendation is run a U-Haul truck. Evidently, that's very popular in Hawaii these days for mode of transportation. Donna, we have more questions?

[Operator:]

Our last question today is coming from Chris Darling of Green Street. Please go ahead.

[Chris Darling:]

I want to go back to the Jekyll Island and Margaritville acquisitions just for a minute. Given the location of those properties, I'm curious how you think about the risk of rising C levels over time and then the extent to which that risk is kind of baked into your underwriting.

[Jon Bortz:]

Sure. So in both cases, as an example, the beaches are very, very large and the properties are very far away from the water's edge right now. So as we look at that issue, we've been more focused on trying to find properties that we think will be -- if they're impacted, they'll be impacted much, much later, but also provide greater protection from rising sea levels. So that's the way we looked at it. That exists certainly at both properties and Jekyll at the beachfront property. And then I mean it's interesting if you've been to the Citi CEO Conference at The Diplomat, if you look at The Diplomat, the beach there is very, very small. And I would be concerned about that property and the ability to retain that beach because it's so short at this point, whereas if you go up to Margaritaville, at that part of Hollywood Beach, the water is very far away from the boardwalk and the property. So that's kind of the way we're taking a look at it and evaluating it as we look at additional acquisitions.

[Raymond Martz:]

Yes. And Chris, when we look at a lot of those factors with climate change, it's broad, it's not just things like beaches, it's the frequency of storms. So we're looking at the age of the building, the sort of windows they have, it's very comprehensive because the beaches will take some time for the rising tides if that does occur. But storms could happen every year. So we look -- it's a very comprehensive review. And the funny thing is with all these areas of the country, they all have their pluses and minuses. The Southeast maybe has the risk of the hurricanes, which you rightly questioned and the rising sea levels. The West Coast has fires, earthquakes and appealing now, I guess, Texas now has ice storms, so each of them has their own little areas.

[Jon Bortz:]

Southwest has droughts and ...

[Raymond Martz:]

Yes. So we have to look at that, and we have to look at how climate change does factor in, and that's something we discuss in our underwriting process, and we also discussed at the Board level. So it is something that's a real factor in operating in hotels and investing in hotels.

[Operator:]

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

[Jon Bortz:]

A long call. Hopefully, everyone appreciates the time. And thanks for those of you who've hung on to this point, and we look forward to updating you again on a monthly basis with our written updates and then quarterly again as we move into the third quarter in late October. Have a great rest of your summer. Thank you.

[Raymond Martz:]

Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's event. We thank you for your interest in Pebblebrook, and enjoy the rest of your day.