Pebblebrook Earnings: Hotel EBITDA Declines Due to Tough 2022 Comparison

While hotel operations for Pebblebrook PEB declined year over year in the second quarter, the decline was smaller than we had anticipated, leading us to reaffirm our $27 fair value estimate. Occupancy improved to 73.2% in the second quarter compared with 70.0% in the second quarter of 2022. However, the average daily rate fell 4.5% year over year. As a result, revenue per available room remained flat in the second quarter, slightly worse than our estimate of 2.8% growth. However, same-store operating expenses increased 8.0% in the quarter, leading to EBITDA margins falling 370 basis points to 30.1%, in line with our estimate. Same-store EBITDA for the hotel portfolio was down 12.9% in the second quarter, slightly better than our estimate of a 14.8% decline. The company repurchased an additional 3.6 million shares in the second quarter. Therefore, while the decline in hotel operations led to adjusted funds from operations falling 13.9% to $0.62 per share in the second quarter, the lower share count led to the company beating our $0.56 estimate.

Management explained that business in the second quarter of 2022 benefited from many travelers rebooking trips from the first quarter of 2022 due to the omicron-variant outbreak. Management also reported that occupancy among the urban portfolio of hotels increased 6.6% in the quarter due to increased business travel. This reinforces our belief that business travel should return over time and drive strong results for the next several quarters. Weekend demand was also higher in the second quarter compared with 2022, suggesting that leisure travel remains healthy. Finally, advance group bookings for the second half of 2023 are up 18.5% over the pace of booking at the same point in 2022, suggesting that revenue growth should be stronger in the second half compared with the second quarter.