PEB - Pebblebrook Hotel Trust (PEB) Q3 2023 Earnings Call Transcript
2023-10-27 11:32:10 ET
Pebblebrook Hotel Trust (PEB)
Q3 2023 Earnings Conference Call
October 27, 2023 09:00 AM ET
Company Participants
Raymond Martz - Co-President & Chief Financial Officer
Jon Bortz - Chairman & Chief Executive Officer
Tom Fisher - Co-President & Chief Investment Officer
Conference Call Participants
Dori Kesten - Wells Fargo
Bill Crow - Raymond James
Floris van Dijkum - Compass Point
Ari Klein - BMO Capital Markets
Smedes Rose - Citi
Duane Pfennigwerth - Evercore ISI
Anthony Powell - Barclays
Michael Bellisario - Baird
Gregory Miller - Truist Securities
Chris Darling - Green Street
Presentation
Operator
Greetings and welcome to the Pebblebrook Hotel Trust Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Raymond Martz, Co-President and Chief Financial Officer. Thank you. You may begin.
Raymond Martz
Thanks, Donna, and good morning everyone. Welcome to our third quarter 2023 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer; and Tom Fisher, our Co-President and Chief Investment Officer.
But before we start, a reminder that today's comments are effective only today, October 27, 2023, and our comments may include forward-looking statements under federal securities laws. Actual results could differ materially from our comments. Please refer to our latest SEC filings for a detailed discussion of potential risk factors and our website for reconciliations of the non-GAAP financial measures referred to during our call.
Now let's turn our attention to our Q3 results. We are pleased to report that despite two negative weather events and continuing entertainment industry strikes in L.A. We were able to achieve same-property hotel EBITDA, adjusted EBITDA and adjusted FFO at the top end of our outlook due to a continued recovery in corporate group and transient demand across many of our urban markets, and solid cost controls and gradually moderating expense environment.
Washington, D.C. led the rebound with hotel occupancy surging an impressive 13.68% and RevPAR increasing 21.4% and this was closely followed by San Francisco, which climbed over 10 occupancy points, 72%, with RevPAR up 13.1%. In Los Angeles, our occupancy improved nearly 6 points to healthy 78%, with RevPAR growing 5%. Significantly, weekday occupancies at our urban hotels, a good bellwether, business travel demand, rose to a solid 75.4%, up from 72.3% in the prior year quarter and a meaningful recovery over last year.
Our urban properties also gained from a resurgence in leisure travel, particularly during the summer, bolstered by concerts and other leisure cultural events. Consequently, weekend, urban occupancies elevated to an impressive 82.3%, almost surpassing our weekend resort occupancy of 83.9%, which itself nearly 2 points higher than the prior year quarter.
As a result, RevPAR at our urban hotels increased by 3% compared to last year's third quarter. This improvement helped to offset moderating room rates and demand for suite and premium room upgrades, particularly in the leisure segment at our resorts. Sort RevPAR was down 10.2%, with occupancy flat. Resort rates continue to be on average about 40% or $111 higher than those in 2019. The resorts bore the brunt of the two weather impacts to their results would have been better otherwise less negative.
For the quarter, we recorded a marginal increase of 0.2% for same-property total RevPAR. While room revenue dipped by 1%, non-room revenue rose by 3% attributable to the benefit of recovering occupancy levels a persisting trend across our portfolio, along with continued healthy out-of-ring spend by our guests.
The third quarter was not without its challenges, though. First, two named storms adversely affected demand on both coasts, triggering cancellations and curtailing bookings from mid-August through mid-September in several key markets. This led to an approximate 90 basis point decline in our RevPAR growth and saved an estimated $2.5 million of our same-property EBITDA.
Second, West Los Angeles properties continue to feel the impact of their writers and actors strikes, which have notably dampened demand from the entertainment sector. We estimate this caused a 30 basis point decline in RevPAR in the quarter and $0.5 million decrease in same-property EBITDA. While the writers have recently settled, the continuing after strike is expected to curtail demand in the LA market in Q4, which we have estimated and reflected in our Q4 outlook.
Finally, the completion of the redevelopment of Solamar into Margaritaville, San Diego Gaslamp Quarter, coupled with extensive renovations as a guest house that at Southernmost, resulted in an approximate 45 basis point impact to RevPAR and a $1.4 million reduction in same-property EBITDA. These renovation-related disruptions are largely anticipated and aligned with our original Q3 outlook.
Despite these hurdles and one-off weather events, overall portfolio occupancy continued its upward trajectory reaching the quarter at a healthy 75.4%, an increase of 2.5 points over year-over-year.
Our same-property EBITDA at $114.3 million hit the upper end of our Q3 outlook, with EBITDA margins at 29.4%, also at the top end of our expectations. These positive achievements were aided by prudent cost management strategies across all operating departments, as well as successful reductions in property taxes at several of our properties.
Overall, wage rate pressures and other operating costs have notably eased as the year progressed as compared with the significant strains witnessed throughout 2022. The year-over-year growth rate in our total hotel operating expenses excluding property taxes has declined from 27.8% in Q1 to 10.2% in Q2 to 5.4% in Q3. And on a prorated by the room basis, they've declined from 7% in Q1 to 5.3% in Q2 and down to 1.8% in Q3. We provided these numbers excluding property taxes, since they may vary materially on an unpredictable basis, as we are successful in winning reduced assessments and making multiyear true-ups, but these growth rates would have been even lower if we included property taxes.
We expect further easing the growth of more normal course operating expenses, meaning excluding the noise from things like property tax drops or property insurance in the fourth quarter as we are lapping the success we've had restaffing in the last four months of last year. Energy expense growth also moderated to 10.7% in Q3, down from the nearly 14% spike experienced in the first half of the year. This reduction in the growth rate resulted primarily from our significant investments in energy and water conservation across the portfolio and some moderation and energy rates.
However, we continue to have energy contracts we locked in several years ago that will roll over at significantly higher percentage increases. As a result, this will keep our energy cost growth rate from a moderating in the next 12 to 18 months. Insurance costs were also a headwind, increasing 34.4% over the prior year quarter.
On a monthly breakdown, the RevPAR in July dipped by 0.5%. August saw a 1.1% decline probably due to tropical storm Hillary, which made landfall on August 20, resulting in cancellations and reduced bookings at our 17 hotels in Santiago and Los Angeles. September RevPAR ended down 1.7%, partly due to Hurricane Idalia, which made landfall on August 30th, which increased cancellations and negatively impact bookings at our six resorts in the Southeast.
Our adjusted EBITDA and FFO benefited from business interruption proceeds of $10.9 million for LaPlaya, slightly exceeding our forecasted $10.5 million. Lower than expected G&A also contributed to our positive variances versus our outlook.
During the third quarter, we deployed $33.1 million in capital investments across our portfolio with a significant portion related to two major redevelopments. The newly transformed market redeveloped San Diego Gaslamp, which occurred on August 15th and the $12.5 million redevelopment and substantial repositioning of the four guest houses comprising 50 guestrooms and suites at Southernmost Resort in Key West.
Renovations of the guest houses at Southernmost are on track for completion in November. The public space renovations at Estancia La Jolla are scheduled to commence in November with completion expected in early Q2. This marks the final phase of a 15-month-long comprehensive redevelopment and repositioning of Estancia, which began with a full guest room renovation.
And our last major redevelopment project for 2023 involves the sweeping transformation of Newport Harbor Island Resort, which is set to commence on November 13th, with the closure of this property. We aim to complete this redevelopment in Q2 next year before the resort’s peak season.
We remain on track to invest $145 million to $155 million in the portfolio for the year, and we're pleased to report that the bulk of revenue disruptions and overall investment dollars associated with our strategic capital redevelopment projects are in the rearview mirror. We remain bullish about the substantial upside these repositioned properties will generate in both market share and cash flow in the foreseeable future.
Shifting focus on LaPlaya Beach Resort & Club in Naples, substantial strides continue to be made in the resorts ongoing repair and refurbishment. The 40-room Bay Tower and 70-room Gulf Tower, which accompanies resorts to key amenities like the lobby, restaurant and club, are substantially complete and full operational. LaPlaya is beginning to look like an upscale resort again.
Rebuilding work on the 79-room beach house is now well-along with clear end in sight. We currently are forecasting this final portion of this resort to be substantially complete and reopened in the first quarter next year. This represents a delay from our prior year-end estimate due primarily to delays in permitting with accounting.
Impressively, despite the absence of a full-fledged resort experience and the inevitable noise and disruption from very visible ongoing construction, the 110 guest rooms currently available across the two operational towers achieved a notable 50% occupancy rate and average daily rate of $389 during the third quarter, a seasonally slower period and is striking a 60% uptick over 2019 rates.
For context, it's important to note that before the devastation brought by Hurricane Ian, we project the LaPlaya to contribute over $4 million in EBITDA for Q3 as opposed to the $0.2 million loss it actually incurred. This underscores the impact of the loss of the resort had on our financial results. And as a reminder, we currently exclude LaPlaya from our same property operating results.
Regarding our Q4 outlook, we have not incorporated any additional business interruption or BI proceeds related to Q3 losses. Instead for LaPlaya, we anticipate that BI proceeds for lost income for both Q3 and Q4 in the current year will occur in 2024. As of the end of the third quarter, we have recorded approximately $33 million in BI related revenues.
As part of our strategic capital reallocation strategy, we have entered into a contract to sell Hotel Zoe Fisherman’s Wharf for $68.5 million with the sale targeted for completion in Q4. Assuming a successful closing, this will bring our total asset sales for the year to six properties, generating $300.8 million in gross proceeds year-to-date.
All divested properties have been urban properties in line with our overarching strategy to rebalance the leisure and business segments of our portfolio for optimal long-term risk-adjusted returns. John will speak more about this strategy in his remarks.
And on the capital allocation front, we did not purchase any common shares during Q3. However, we reduced our total debt and increased our cash position, while replacing $165 million loan secured by our Margaritaville Hollywood Beach Resort with a new secured loan of $140 million. This loan carries a three-year term extendable by two one-year options with a rate fixed at 7% for the issuing four-plus years.
Regarding our balance sheet and liquidity position, we have over $829 million of liquidity, comprised of $191.6 million in cash and $637 million available on our unsecured line. The weighted average cost of our debt is 4.4%, with 78% currently with fixed rates and 92% unsecured.
Our increase in cash reserves and unsecured credit facility augmented by additional asset sales provided us with more than sufficient liquidity to navigate our upcoming debt maturities over the next 12 months to 24 months.
And with that comprehensive update, I'll like to turn the call over to Jon. Jon?
Jon Bortz
Thanks, Ray. I'd like to touch on three topics this morning. First, our observations on industry trends. Second, I intend to discuss our ongoing strategic capital allocation program and our continuing pivot from a heavy urban and business travel focused investment company to a more balanced portfolio, more evenly split between business and leisure and between urban and resort. And then third, I'll talk about our outlook for the fourth quarter.
In terms of industry trends, it's fair to say the industry has seen a flattening out of the recovery in demand on an overall basis. In fact, the industry was unable to successfully absorb even the smallest amount of supply growth in Q3, with overall industry occupancy declining, albeit slightly in every month in Q3, a trend that continues from Q2.
We were surprised that this trend did not reverse in Q3. However, the revenge travel related to outbound international and cruising this year seems to have overwhelmed improving demand in business travel and international inbound travelers.
We believe business travel both group and transient, continues to gradually recover. Leisure, on the other hand, has declined slightly as international outbound travel and cruising rebounded to above pre-pandemic levels. An international inbound travel, especially, leisure has only gradually returned.
The leisure softness has primarily been reflected at resorts, while urban weekend occupancies have continued to recover. We believe next year, leisure will normalize at higher levels of domestic travel as we lap this revenge travel and international inbound continues its gradual recovery.
The resurgence in business travel we've seen is evident by the improving occupancies in the urban and top 25 markets, specifically during weekdays. This trend is particularly strong in the luxury and upper upscale segments, hotels, which are predominantly located in major cities.
The STR data for Q3 shows a consistent softening of occupancies at the mid to lower end of the spectrum. We've not seen any evidence of trading down in the industry. In fact, the STR numbers show the weakest demand and worst performing properties are at the bottom end of the quality and price spectrum with the economy hotel category performing the worst.
Geographically, in general, the previously slower recovery markets such as Chicago, San Francisco, Washington, DC and New York are now experiencing stronger demand growth and the earlier to recover markets such as Miami, Tampa, Orlando and Atlanta are witnessing weaker demand growth. The top 25 markets continue to see increasing demand in occupancies while other markets continue to see declining demand in occupancies.
Amidst this industry-wide stabilization of demand, ADRs in Q3 also displayed a moderating growth rate. So ADRs in September and so far in October have bumped up from the low points in July and August. None of these trends come as a surprise, and we don't expect much change in these industry trends for the rest of the year.
However, we do expect a modest boost in October's performance due to the favorable calendar of the Jewish holidays this year following completely in September. Of course, given the Fed's efforts to bring down inflation and slow the growth of the economy, we shouldn't be surprised if we see a slowdown or a recession sometime in the next 12 months.
Now, I'd like to move on to a brief discussion of our capital investment strategies and our overall pivot to a more evenly balanced business and leisure demand mix. Our reduction in urban properties has been going on since 2016 when we began to sell out of New York. Prior to the LaSalle transaction in late 2018, we sold a total of seven properties for gross proceeds of $592 million and all of them were urban. Acquiring LaSalle added six unique resorts, all with significant repositioning upside. Simultaneously with the corporate transaction, we also disposed of five LaSalle's urban properties for total gross proceeds of $821 million.
Since then, we've sold 24 additional properties, including the upcoming sale of Hotel Zoe in San Francisco, all urban generating gross proceeds of an additional $1.725 billion. In total, we've sold 36 urban properties since 2016 for over $3.1 billion.
In 2021 and 2022, we acquired five leisure-focused resort properties and two guest houses in Key West, which were added to Southernmost Resort for a total of $822 million. Jekyll Island, Estancia La Jolla, Newport Harbor Island, and the two guest houses have and are undergoing extensive upgrades, repositioning, and operator changes that will drive significant upside going forward.
This is on top of the very substantial investments in our other resorts, including Skamania Lodge, Chaminade, Mission Bay Resort, the Marker Key West, Southernmost Resort, L'Auberge Del Mar, and LaPlaya in Naples. And we believe all of these resorts, due to the investments we've made in upgrading them and re-merchandising them, will continue to gain market share, thereby enhancing cash flow. So, from 2016 to today, we went from two resorts to 13 resorts, which also helped us increase the leisure mix within our portfolio.
Today, we believe the business leisure mix in our portfolio is roughly 50-50. And assuming we sell additional urban properties over the next couple of years, we expect the leisure portion to edge slightly higher. We don't think it will move a lot, as many of the urban properties we've sold or are selling, such as those in San Francisco, Portland, Seattle and Washington, D.C., have a strong leisure mix, as these markets are very attractive to leisure travelers.
Moreover, most of the resorts we've been acquiring have very large business group components while their business and corporate transit mix tends to be more limited. This helps explain the actual increase in our group mix overall in our portfolio as this pivot has continued. We believe this roughly 50-50 mix between business and leisure will serve us well in the years to come, as we believe the slowest to recover segment will continue to be business transit travel and we believe that secular trends favor leisure travel as well as group, particularly group in resort locations with significant outdoor meeting and events-based and numerous amenities, activities and experiences.
As we move forward, we continue to focus on taking advantage of the public-private arbitrage opportunity that exists today. We're selling urban properties in slower-to-recover markets with lower cash flows and within our individual property NAV ranges, and then using those proceeds to reduce our net debt and repurchase our common and preferred shares at very significant discounts to the NAV of the company.
Since the pandemic began, we've sold 14 properties, including the upcoming sale of Hotel Zoe in San Francisco for gross proceeds of $881.8 million at an average trailing 12-month NOI cap rate of 0.5% and a trailing 12-month EBITDA multiple of 105.8 times. We've generally sold our lowest quality properties in the slowest recovering urban markets, thus improving the quality and growth prospects of our remaining portfolio.
We've sold five properties in San Francisco, two in Portland, two in Seattle, one in Nashville, one in New York, one in Coral Gables, one in Philadelphia, and a small retail property in Chicago. We believe strongly that taking advantage of the significant financial arbitrage opportunity, which is being funded by the sales of urban properties in slower-to-recover markets at attractive relative pricing, is by far our best capital investment strategy.
The opportunity available in the past year, including right now, represents a far better value creation opportunity for our shareholders than either using all of the proceeds to pay down our debt, which we believe is at a modest level or holding cash to take advantage of undefined opportunities in the acquisition market at an undefined time in the future.
We just don't believe any opportunities in the future will be more attractive or available at a bigger discount than buying our current properties at a 25% to 30% discount to their estimated current gross values and a 50% plus discount to the overall value of the company.
Now, let me turn to our view of the near-term. As we look at the fourth quarter, October started out well with healthy business and leisure travel. October is also benefiting from both Jewish holidays falling into September this year, versus them being split between September and October last year. This, of course, helps the performance of the entire industry.
In addition, we have some favorable convention calendars in the fourth quarter in San Diego, San Francisco, Washington, D.C., and Boston, which benefit a significant portion of our portfolio. This is evident in the year-over-year pace for our fourth quarter, which shows robust growth in both group and transient business.
Specifically, compared to a year ago, we have a 9.6% increase in room nights on the books at a 2.9% higher ADR, resulting in total revenues on the books substantially higher, up 12.8%.
Breaking it down further, our group business on the books is particularly strong with a healthy 10.3% year-over-year increase in room nights, a very strong 7.5% increase in group ADR, and 18.6% growth in total group revenue. Transient is not as strong, but is still very favorable with room nights and revenues up 9.1% and rates flat year-over-year.
As a note of caution, about how our pace may ultimately translate into our performance, we need only to look at this past quarter. We had a great pace advantage going into the third quarter, but we experienced the deficit and pickup in the quarter for the quarter.
We feel comfortable in saying that we believe this doesn't represent a slowdown in business activity, but a normalization and booking patterns. We believe that more business is being put on the books further out, consistent with more normal pre-pandemic patterns as business and leisure customers have increasingly felt more confident looking further out as their comfort level grows, with pandemic-related concerns increasingly in the rearview mirror.
In Q3, we booked almost $10 million or 8.2% less in room revenues for the third quarter than we did a year ago. So, our 5.5% revenue advantage turned into a 1% deficit by the time the quarter ended.
We expected this normalization of booking patterns as evidenced by our down 2% to plus 1% outlook. What we didn't forecast was the impact from the negative weather patterns.
So, while we're very pleased and encouraged by the fact we're almost $14 million ahead of the rooms revenue that was on the books for the fourth quarter at the same time last year, we expect a significant reduction in the PACE advantage over the course of the quarter. As a result, our outlook for Q4 RevPAR versus last year is forecasting growth ranging from 1% to 4%, which certainly compares favorably to our Q3 actual results.
As has been the case all year, we expect the bulk of this growth will be driven by increased occupancy. Our outlook for total revenues for Q4 is for growth of about 1.5% to 4.5% or approximately 50 basis points higher than our outlook for rooms' revenue growth.
So that completes our prepared remarks. We'd now like to turn to your questions. Donna, you may now proceed with the Q&A.
Question-and-Answer Session
Operator
Thank you. The floor is now open for questions. [Operator Instructions] The first question today is coming from Dori Kesten of Wells Fargo. Please go ahead.
Dori Kesten
Thanks. Good morning. I think operating expenses, if you hold to the site, energy taxes insurance is in the 3% to 4% range for Q4, do you think that's fair as a run rate for the medium term?
Tom Fisher
Hey Dori. Yes, I mean, I think that's certainly in the ballpark. And obviously, the more -- more volume we do, either in occupancy or food and beverage or other revenue activities. But there'll be expenses that are tied to that, and we'll see growth in expenses at a higher level. But as a baseline for sort of a stabilized operation, I think that's reasonable.
Dori Kesten
Okay. And just within that, would you expect your total RevPAR to continue to outpace RevPAR?
Tom Fisher
Yes. Yes, we think -- and in particular, we think as group continues to recover that volume will be apparent in our food and beverage revenues and many of our other revenues and that should also help with the margins on the F&B side.
Dori Kesten
Okay. Got it. Thank you.
Operator
Thank you. The next question is coming from Bill Crow of Raymond James. Please go ahead.
Bill Crow
Good morning. Jon, hopefully, you can hear me better than I can hear you.
Jon Bortz
Yes. Sorry about that.
Bill Crow
We talked about group for next year and the outlook and which markets might be the better markets, which ones might be the worst markets?
Jon Bortz
Sure. So currently, our pace for group for next year is positive. Let me see if I can pull it up here. So we're -- we're currently sitting at a revenue pace advantage of about 14.4%. That is about 10.5% for group. It's almost 30% for transient. Again, those are small numbers in terms of how much transient on the books, so the percentages should be ignored. But in total, we’re up 12.2% in room nights, 1.9% in ADR, 14.4% in total pace. Group is up 8.7% in room nights, 1.7% in rate and revenue on the books is up 10.5% year-over-year. The stronger markets next year include Chicago, San Diego and Washington, D.C. Boston will be probably flat on a year-over-year basis, but actually, it's at a very high level for this year. And then we see San Francisco, which is up in the first half of the year will be down substantially in the second half of the year with some of the cancellations that occurred over the last 12 months. So that's, I think, how they generally break out within our portfolio.
Raymond Martz
And then, Bill, just a little of color on the convention calendars 2024 in D.C., the room nights on the books 2024 versus 2023 is up about 32%. San Diego is up about 17%. Chicago is up 13% and Boston and L.A. are flattish. And as we know San Francisco is down mostly in the second half of 2024.
Bill Crow
Yeah. Thank you. I just wanted to follow-up on the question that Dori asked earlier about the expense normalization. I know if she cut out property taxes, insurance and energy. But that's kind of like how food and housing and CPI. So, where is expense growth? Where do you think it's going to be next year? Are we looking at another year of, call it, 5% expense growth? And I guess the question I keep getting from investors is -- at what point does 3% RevPAR growth translate into growing margins and EBITDA?
Jon Bortz
Well, you should ask them what their predictions are for inflation, because that's really what's driving the increases in the industry that we see I think the intent of cutting out those three categories was not to say they're not important. It was because they tend to be more volatile on a year-over-year basis, particularly property taxes, which are volatile, not because of volatility on the part of cities raising the tax rates but because we tend to be unsatisfied with the initial assessments that we get because the cities are trying to keep as much revenue as they can, as you and I have talked about before, and as a result of that, it takes us one, two, three, four, five years, in some cases, to fight through the process to get successful appeals and reduced assessments.
And when that happens, it tends to have a multiyear effect on property taxes for those properties in terms of true-up because we're accruing them at the levels generally that we get the bills at -- and then we have reductions when we get those bills reduced. And so because of how long it takes. We also generally don't know, and it's hard to forecast when those things are going to occur. So as it relates to that one, when we look at next year, Bill, it will be likely a headwind for us from a expense growth perspective because we're going to be coming off three quarters, the first three quarters of this year, where property taxes actually declined in our portfolio significantly because of reductions we got and true-ups that we got. So it doesn't represent a run rate, because it's being impacted by these true-ups.
Now, we hope we'll get some true-ups next year. We don't know when those processes will be successful. And we expect to get true-ups over the next three or four years, frankly, from these pandemic years when the assessments didn't come down, but as we all know, the values have come down dramatically. So, we'll have to come up with those numbers as it relates to the run rate on the property taxes and look at what percentage impact that will have on the overall revenues. But it will have some -- it's going to have some impact on an overall basis. Insurance, Ray, I mean, you can speak to that.
Raymond Martz
Yes. So Bill, we know insurance. The good news is we pretty much know what the cost is going to be here over the next couple of quarters because as part of our renewal on June 1 that -- those rates did increase. So for the next couple of quarters to the second quarter, we know we're continuing to have this as a headwind, and we'll have to see what happens at the renewal.
Now if you look back to what happened after Katrina, same thing happened where the rates got jacked up the year following Katrina, that stayed elevated for two years, it was a pretty benign storm environment. And then they started declining double-digit rates for a number of years. We refer those as the good years, by the way, as opposed to our insurance carriers. So we'll have to see what happens this year. Typically, property insurance, unlike other expenses tends to go up and down. So we could be looking a year from now, property insurance being lower than it is now, unlike things like wages and other costs that tend to be stickier and stay up there.
Bill Crow
Okay. All right. But it sounds like when you put all together, it's likely that margins are probably going to have a tough time being flat next year just with all these fed wins. I mean maybe I misunderstood, but that would be my takeaway.
Jon Bortz
Yes. I think that's -- it depends what revenue growth we see. We're going to need to see 4% plus revenue growth, I think, to get to flat margins next year, and we're going to need to be higher than that. Now we have some tailwinds related to the fact that we had a significant disruption this year and lost revenues, and that will help provide a tailwind for that growth rate next year. And then it will depend upon how much share we gain next year through the investments we've made and then, of course, what the macro environment looks like.
Bill Crow
Yes. Okay. Thanks for the time. Appreciate it.
Jon Bortz
Yes. Thanks Bill.
Operator
Thank you. The next question is coming from Floris van Dijkum of Compass Point. Please go ahead.
Floris van Dijkum
Thanks. Good morning, guys. Appreciate taking my question. So I know we can get bogged down in the minutia of insurance, and it's an important aspect and same thing with the property taxes. But as I'm just thinking about this bigger picture, you guys have invested nearly $300 million of revenue-enhancing investment capital into your portfolio to upgrade and enhance your portfolio over the last couple of years.
There have been obviously -- and a big chunk of that has actually been invested since last year. You haven't had the benefits of any of that and you've had the detraction of, call it, $12 million to $13 million of renovation disruption this year in terms of EBITDA. Again, what I'm trying to get at is to get a run rate for adjusted EBITDA going forward that should be significantly despite all these concerns about margins, et cetera, you should theoretically have, call it, $30 million to $40 million maybe even $50 million higher EBITDA than what you had this year. If I just do the math on the capital that you've invested in your portfolio and next year sort of being a first full year of stabilized or putting earnings, if you will. Maybe if you can talk a little bit about the run rate of -- or earnings power of your portfolio going forward?
Jon Bortz
Yes. I mean, I think that's what we've tried to lay out in our investor presentation in some of our prior calls for is that there's significant upside. Now some of that – some of the share gains from the investments we've made have occurred. But others, as we've shown in the investor presentation with the bridge that we have are in the future, that will be next year, that will be the year after. That will be the year after that and probably some in the year after that. These major repositionings tend to take three to four years. And -- they -- we gained share more quickly in good years and strong years and otherwise takes longer if the environment is flatter. So there's significant upside from the investments we've made.
The dollars are out the door. We -- that impacts our balance sheet, obviously. And that's -- the good part is the investments have already been made. And as you say, the investment side, the return side is still to come. And so it's hard for us to lay out exactly what that looks like from a timing perspective. And we haven't even started our process with our property teams about what next year looks like. But we do have a good pace going into next year. We're encouraged that the macro side is at least any slowdown has been deferred. Who knows, maybe it gets eliminated, but I think more likely deferred or softer
So we're -- you can tell we're a little cautious, given the macro environment. But when we get through this overhang of when is the recession coming or when is the slowdown going to be here. I think we're going to be more confident about the timing of when we're going to see the significant returns from those dollars that have been invested. But definitely next year, we have the tailwind of not having all that disruption within the portfolio.
Floris van Dijkum
And Jon, if I can maybe just follow up on that typically, the returns that you would expect to get from this revenue-enhancing CapEx would be minimum of 10%. I mean, what historically, what's the range been in terms of that -- the returns on that investment on a stabilized basis?
Jon Bortz
Yes. On a stabilized basis, we tend to get to 10% plus depending upon the extensiveness of the – of the redevelopment. Generally, the larger the redevelopment, the higher the returns on those. And look, it's not perfect in terms of every property, some end up being lower, some end up being higher. Some of that gets impacted by the market and competition, et cetera. But we've averaged out at 10% plus.
Floris van Dijkum
Thanks.
Operator
Thank you. The next question is coming from Ari Klein of BMO Capital Markets. Please go ahead.
Ari Klein
Thank you and good morning. Maybe just following up on the expense question, when you look across the portfolio, are you still seeing cost savings opportunities out there given all the streamlining that's already been done in since COVID? And then just on the insurance side, aside from the rate increases, has your coverage changed in any kind of meaningful way?
Jon Bortz
So on your first question, Ari, the effort to be more efficient is continuous. I've been in the business in the hotel business since 1984 and over the course of that lengthy period we've continued to find efficiencies every year within our portfolio and I think the industry generally has as well.
We operate these properties with far fewer people today than we did 10 years ago and way, way fewer than 15 or 20 years ago. And we think that's going to continue, as technology continues to develop, as the industry begins to adopt, uses that come out from AI. See, I got that in there, AI, AI.
But we do think there's, opportunities in a number of areas. And yes, it's a continuous effort within the portfolio. Curator which has 100 hotels today has over 100 Vendor Partner Agreements, Master Service Agreements, which have also helped to bring down our costs in our portfolio by millions and millions of dollars on an annual basis.
They continue to pursue additional contracts, reducing costs on a per unit basis. New technologies, the Curator team reviews new technologies almost on a daily basis. Many of them are geared to reducing costs.
We see a lot of technologies related to reducing energy costs over the long-term. Water Usage in particular, is seeing a lot of focus within the Technology industry. And we'll see adoption of that overtime as those become more widespread and available.
So we do think efficiencies are going to continue. And again, if you go back and look historically, at our margins at the LaSalle margins, all the way back to the late 1990s, what you'll see is gradual improvement in those margins over the long time.
And obviously, they're cyclical, they go up and down. And we tend to get more costs eliminated when things are difficult. And I would say we're still in an environment which has its challenges, because of inflation. So we continue to focus on reducing costs.
Raymond Martz
And then, Ari, on the second part of your question on the insurance coverage, we have the same amount of overall property coverage today than we did last year. So it's $500 million, which takes a lot of storms and different events.
Here and there, we'll have higher deductibles at some different parts of the layers of the insurance structure. It looks like it's a quilt of different programs that are in there, but overall, with the same amount of coverage that we did before. So I think that speaks to the benefit we had is compared to if you're a smaller owner operator with the relationships on the insurance carrier side, when push comes to shove in markets like this, the carriers that you have relationships with, they'll stick with you. So we're able to maintain those levels of coverage, probably more than if you are a smaller owner or did it have the long-term relationships that we had.
But look, overall, insurance market, it goes up and down. The property market is tough. The GL market is better. Cyber has gone a little better. So there's varying phases. Right now, we're going through a rough patch here on the property side. But as history has showed, we go through a period where there's less storms and then it comes back down because a lot more carriers will come back to the space.
Ari Klein
Got it. Thank you.
Operator
Thank you. The next question is coming from Smedes Rose of Citi. Please go ahead.
Smedes Rose
Hi. Thanks. So John, in addition to AI, you need to be able to work in [indiscernible] in your remarks.
Jon Bortz
You talked about corporately, not personally, right?
Tom Fisher
I think he's saying something. Thanks, Smedes.
Smedes Rose
Guys, operator, can we move to the next -- no, I'm just kidding.
Jon Bortz
Go ahead, Smedes.
Smedes Rose
I wanted to just ask you a little bit about kind of what you're seeing in the transaction market? It looks like you have two more properties on the market and certainly in the media, there's been more than that, that has been sort of popping up. But just we've all seen what's happened with interest rates and just kind of curious, is it still deals under $100 million or easier to get done? Or kind of what are you sort of seeing in terms of the ability to transact in this market?
Tom Fisher
Hey, Smedes, it's Tom. That's obviously a great question. I think it continues to be kind of a bifurcated market in terms of those assets that have cash flows and then those assets, for example, like the ones we're selling maybe in those assets that are in recovery markets.
So I would say, overall, the transaction market is pretty challenging. I would say that the deals and the things that we're selling, obviously, the things that are trading are below $100 million that continues to be the trend. I think deals are taking longer. I would tell you that at the end of the day, our perspective is there's a lot of strong interest. We're seeing a lot of interest. We're just trying to translate that into conviction in terms of the investors given the fact of the macro market.
So I think that there's still some headwinds there. I think the higher for longer narrative from the Fed is not necessarily helping on the financing side. But you will see some deals that with high cash flow, the CMBS market is open. You'll see some deals north of $100 million that will trade. But again, they have some, again, high cash flow, et cetera.
I do think that in some of these recovery markets, we're transitioning, not necessarily from a return basis, but we're looking -- the investors are looking at a price per key and they're looking at it from the perspective of if they believe in a market, they want to get in early in a cycle because the price per key is compelling, especially relative to replacement costs and also given the backdrop of very limited supply in a number of these markets moving forward.
Smedes Rose
Okay. Thank you. Appreciate it.
Operator: The next question is coming from Duane Pfennigwerth of Evercore ISI. Please go ahead.
Duane Pfennigwerth
Hey, good morning. Thanks. I wonder just to follow-up. If you could talk a little bit about your outlook for asset sales into 2024. Of course, it will depend upon the environment and depend upon conditions. But like in your ideal optimal scenario, how many assets would we be talking about? And how would you be thinking about shaping the portfolio
A – Jon Bortz
Yes. So from a strategic perspective, I think it will ideally, it's going to be -- it depends what happens with the trading of our stock and the relative value opportunity between the public market and the private market. I think we've said before, we were asked how many of your 47 properties would you sell given the arbitrage opportunity to take advantage of it. And I think I've said 47. So we wouldn't sit here and say, we have a sales target for next year of five properties and $300 million or anything like that, we don't really work that way. We don't need to sell any of these properties.
We feel like we've transitioned the portfolio to a more favorable leisure business mix, as I talked about. So it's really going to be opportunistic, and that will be driven by not just the overall macro. Obviously, it will be driven by the debt markets. It will be driven by what the view of investors is related to the future of both of those. But I think where we see
the opportunity for fairly significant value improvement is as interest rates come down, we get past this macro view. We have an environment, as we've said, in our markets, cities, resort markets, probably four years to five years of very, very nominal supply growth.
And that's going to lead -- assuming we have a good macro environment, it's going to lead to pretty strong RevPAR growth. And that will ultimately get built into buyers underwriting fairly early on as we start to see an acceleration in the growth rate of RevPAR. So it's really going to depend upon how that market plays out, how the macro environment plays out and then the relative value opportunity between what we can sell for on any given day and where our stock is trading, the opportunity to buy that back and create value for the shareholders.
Duane Pfennigwerth
Thanks for those thoughts, Jon. And maybe just take a rifle shot on LaPlaya. When you think about the timing of getting that asset completely repositioned and completely renovated and launched. Do you think you have enough time to catch the heart of the season in the first quarter? Or is it a little bit late and it would be more about kind of the second half of 2024.Thanks for taking the questions.
A – Jon Bortz
Sure. Well, we're working really hard to catch the season and there is an intense effort at the construction and project management level to get this project done and open. Of course, the
the one unknown continues to be how quickly we can get the county to respond. And I think we're down to one last permitting approval, that we'll have obviously continuous inspections -- and there, you may lose days, but you're not going to lose weeks. Right now, we're losing weeks waiting on a permit, but I think from a ramp-up perspective I mean, we've been trying to ramp up. We have a lot more money going into sales and marketing efforts. We have a pretty good group booking pace right now for the property. We have had to unfortunately move some business out of January that we can't accommodate without having the Beach House building. But going into the prime season of really President's Day on, we're starting to build a pretty good base. And the nice thing is we have a lot of people who want to come back to Naples who haven't common vacation there for a couple of years, and a lot of the business tends to be annual because they have family in the marketplace.
So, we're hoping we don't miss the season. We don't control everything as it relates to the reconstruction of that Beach House building, but we're getting pretty close now, and we're feeling better.
Duane Pfennigwerth
Okay. Thank you
Operator
Thank you. The next question is coming from Anthony Powell of Barclays. Please go ahead.
Anthony Powell
Morning. Question on get cash flow for next year and the year after. In terms of your CapEx, where do you think your CapEx spend could go next year, you finished up a lot of these projects and also on the dividend, you had some NOLs this year, you have an impairment. So, I'm curious if you have enough NOLs to may not pay a dividend next year even as RevPAR grows.
Raymond Martz
Sure. So, on the CapEx, as you know, we talked about this, where we're investing about $150 million this year. the property we would expect in 2024. That number should be $100 million or less. We just -- not haven't even started our budgeting process with our teams and we'll go through that. But should be substantially less next year and then trending at a low level for a number of years, but for if we ever decide to get approval on say, Paradise Point in San Diego for that conversion there.
But overall, as we commented before, the major renovations of the portfolio have been made. Therefore, the amount of CapEx we're going to need going forward will be much less than what we've had the last couple of years. So, we should assume that for 2024 and beyond.
And then regarding the dividend, yes, we still have an NOL that we could certainly burn through and also as we make progress on sales, it's good for the cash and take advantage of the public/private arbitrage on that. But as a result, for example, for Brazil, we completion of that sale, we will incur a tax loss, which we can add into our NOLs.
So, for most likely, we would have -- don't have a need in 2024 to increase the dividend to -- for taxable income purposes, we may choose to otherwise. But you should not assume that in 2024, we have to increase the dividend. Beyond that, we'll have to see where the world plays out, what the macro is and additional sales that we complete.
Anthony Powell
Great. Thank you.
Operator
The next question is coming from Michael Bellisario of Baird. Please go ahead.
Michael Bellisario
Thanks. Good morning, everyone.
Raymond Martz
Good morning.
Jon Bortz
Good morning.
Michael Bellisario
Jon, just on the topline, can you just walk us through the puts and takes compared to last year. I know there are a lot of moving pieces last year. You mentioned the convention calendars being stronger this year, but could you maybe remind us of the good and bad in both periods to kind of help us get a better feel for what the underlying, kind of, true run rate is in the fourth quarter?
Jon Bortz
So, we had a -- we did have a couple of renovations last year that started, I think, November, December, which had a fairly mild amount of impact. I don't recall it being great. I mean, we can get back to you with what that number was, but I would think it was relatively small, $1 million to $2 million or something perhaps, perhaps, might not even have been that much. So it's pretty clean on the revenue side.
The expense side, the biggest negative impact is we had a nice true up in property taxes of over $3 million in Q4 last year. And so that -- without any expected true up this year in Q4, that will show an increase in quote expenses if you will for property taxes. Outside of that, I don't think there's any major item on the revenue side.
Raymond Martz
For last year, no, nothing that's notable. We did comment about this earlier, but fourth quarter of this year, in terms of the pluses here, very good convention calendar in San Francisco. It's about four times what it was in the fourth quarter last year. In San Diego, the commencement center room nights are almost more than double what it was last year. And in Boston, it's also double what it was last year. The only market that -- and D.C. is also up. The only conventional market that was down year-over-year is Chicago. So the fourth quarter we have -- and one reason why we have the group pace going in is very favorable and we're starting out. So those are the positives this year, less anomalies last year, at least on the revenue side.
Jon Bortz
Hey Mike, the one other thing is related to LaPlaya, which is not in our reporting numbers, but obviously is in our numbers overall. I think LaPlaya was negative, slightly negative in Q4. And there was some impacting in Key West. And LaPlaya in Q4 this year should be $2 million to $3 million positive.
Michael Bellisario
Got it. That’s helpful. And then just along the same lines, just on 4Q, last year you had a big shortfall on the bottom line, maybe we're all just on our side here bad at modeling 4Q this year. But there's been a lot of portfolio changes, is it just post-pandemic changes and demand patterns or is there something else going on in the fourth quarter that's causing profitability to be lower than we sort of all remember it to be?
Jon Bortz
Well, the thing that happens in Q1 and Q4 is, when you lose volume, obviously your fixed costs are still there. And so it tends to have a worse flow compared to more normal volumes pre-pandemic. And so there tends to be less ability to absorb that shortfall in one and four, whereas in Q and 2 you have a lot more volume, you have a lot more occupancy, you got higher rates in those quarters, and it's a little easier to absorb that flow, that shortfall from pre-pandemic in volume than you can in one and four. I don't think it has much to do with a change in the portfolio on an overall basis.
Raymond Martz
Yeah. And Mike, also just to remind again on the energy, property taxes, and property insurance. Those three items alone cause about 160 basis point impact to margins in a quarter, which was not -- in fact, from last year that's harder to forecast. That's not related necessarily to hotel operations. So the good news is there's less pressure on the labor side. So that's less of a headwind there than it has been.
But these three items that -- these are items that were not in play last year. We didn't have property insurance increases going up 50% to 60% last year. And then as John noted some of the unusual timing of property taxes and we know what's going on in energy market. So those three items have a big component, if you look at our guide of down 100 basis points plus, it reflects 100 basis points headwinds for those three items.
Michael Bellisario
Helpful. Thank you.
Operator
Thank you. The next question is coming from Gregory Miller of Truist Securities. Please go ahead.
Gregory Miller
Thanks. Good morning. This question is about your 2W Hotels. As Marriott is nearing completion of the renovation in New York Sea and Square, and to my understanding, using the hotel as a flagship for the new direction of the brand. Do you anticipate any major operating changes or any forest renovations to your Boston or Los Angeles properties to meet new brand standards?
Jon Bortz
No.
Gregory Miller
Okay. I can't argue with that. And then just since others are asking a second question, last one as well. This one is about so-called hidden fees. Have you noticed any changes to booking trends for hotels that are already presenting the total hotel charge early in the booking process relative to hotels and alternative accommodations in the same market that have yet to present total hotel charges?
Jon Bortz
That's a really good question, Greg. And the answer is we haven't seen anything anecdotally, it's probably a better question for Marriott, since they've been the one who've completely switched over and have some time period now to do some data measurement to see whether they're losing share or not. We've not seen it with our Marriott's. But I can't tell you we've dug into the detail into minutia to see if there's been change in share within our Marriott properties, what might it be related to. So I mean, obviously, the whole industry is going to go there. We as an industry at the association level, which includes owners, operators and the brands are supporting legislation that does incorporate all charges interestingly, except government charges into the upfront rate, and that's the way searches would occur, but that would apply across all kinds of lodging accommodations and that's really been the focus of the industry to make sure it's a level playing field.
I think we have -- and the thing that we've seen, and I think it's been helpful and we'll really over -- we'll eliminate any long-term impact is the weather, you call it a destination fee or a resort fee or an urban amenity fee, it's been adopted by most properties within the urban and resort markets. And certainly, the major cities have adopted it.
So I don't think from a competitive standpoint, ultimately, it's going to make a difference. You know, by the nature of your question, certainly possible, it could make some minor difference in the near-term where there were not everybody is doing it. But I think in the short -- in short order over the next 12 months, I think you'll probably see it adopted everywhere. And it's already required in California. It will be required for next year, I forget whether when in the year kicks in, but I think it's pretty early.
Gregory Miller
Yes. Yes, I was thinking about that one as well. I appreciate it, Jon.
Jon Bortz
Yes.
Operator
Thank you. Our final question today is coming from Chris Darling of Green Street. Please go ahead.
Chris Darling
Thanks. Good morning. Jon, going back to the discussion around dispositions, Boston and Washington, D.C. stand out to me as markets where you've kept your portfolio fairly intact since COVID at least. Maybe I'm reading too much into it, but just curious to understand how you're thinking about the long-term prospects for those cities relative to some of the other urban markets where you've sold out of.
Jon Bortz
Yes. I mean, I think of those two markets, we probably feel better from a long-term perspective about Boston than we do about D.C. We just think will take -- D.C. is more of the same -- some of the same issues that the West Coast cities have whereas Boston for a number of reasons doesn't really seem to have those in a significant way. We also -- we like the fact that most people have gone back to work in Boston. And in D.C., for whatever reason the federal government can seem to get people to come back to the office. So it's just going to take longer in D.C.
I would also say our -- the other way to think about it is, look, we have a pretty small position in D.C. today. We sold quite a number of properties when we bought LaSalle out of that market. So -- and we were never a big investor in D.C. at Pebblebrook. So we're going to carry a much smaller position in D.C. in all likelihood anyway than what we carry in Boston, which, while maybe the number of properties are similar, the sizes are quite dramatically different as are the EBITDA numbers. So we're big fans of Boston. We're big fans of San Diego and L.A. We believe in San Francisco, but we've been reducing our position there. And there are some other markets, obviously, that we've been reducing our position
Chris Darling
Okay. That's helpful. And then just one quick one, related to the entertainment strikes in Los Angeles. Historically, when you've seen those strikes come to an end, how quickly does business pick back up?
Jon Bortz
It depends on the time of year. So that there are quite a number of productions that are just -- they would start the next day. The studios and the production companies have their plans in place. But the deeper we get into the fourth quarter, the entertainment industry tends to shut down a good bit between Thanksgiving and the second week in January, just through its culture. And so whether they buck that trend and do a lot more than they normally do to get things done or in the work so they can have a season in the spring next year. Not sure. I don't have enough insight into that. But historically, they're pretty anxious to get those productions going. It's just if this runs much further and deeper into November, I'm not sure we're going to see a whole lot get done in the last four to six weeks of the quarter.
Chris Darling
All right. That's very helpful. Appreciate the time.
Jon Bortz
Yes. Thank you.
Raymond Martz
Thanks, Chris.
Operator
Thank you. At this time, I'd like to turn the floor back over to Mr. Bortz for closing comments.
Jon Bortz
Well, thanks, everybody, for participating. And hats off to Jimmy Buffett. I'm sure he's having a Cheeseburger in Paradise somewhere right now. We'll talk to you next year.
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.
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Pebblebrook Hotel Trust (PEB) Q3 2023 Earnings Call Transcript