Pebblebrook REIT lightens its urban footprint

BETHESDA, Maryland -- Pebblebrook Hotel Trust turned its investment focus inside in Q1 2023 with plans to channel the $100 million proceeds of two hotel sales into share repurchases and debt reduction. In early March, it concluded that the sale of Portland, Oregon icon, the 151-room Heathman, in February for $45 million and the $63-million deal for Florida’s 157-room Hotel Colonnade Coral Gables, Autograph Collection.

“The rationale behind selling these two properties is specific to each property, but it all comes down to where we believe we can find the best long-term risk adjusted returns,” said Pebblebrook President and CEO Jon Bortz. “We have an opportunity to repurchase shares in Pebblebrook at a 50%-plus discount to the underlying value of our hotels and these properties generated proceeds for us that can be used for that purpose, along with reducing debt on a leverage neutral basis.”

Although Bortz has been narrowing the trust’s investment focus more and more toward resorts, lifestyle and alternative lodging products as evidenced by its launch of the Curator Hotel & Resort Collection in 2022, he told Hotel Investment Today that these sales were asset-specific, not an indication of a wholesale flight from urban markets.

“Cities have their ups and downs, just like the economy,” he said. “But there are strong fundamental reasons to invest in cities—outside of a city like Detroit. Cities do extremely well over the long term as they represent great places to live, work, play and visit and have strong underlying economies, public transportation infrastructure, culture, sports, music, events, etc. that make them appealing places to invest.”

Portland’s long-term potential may be too long for Bortz and Pebblebrook given the opportunities available elsewhere in the here and now. Hard-hit by the pandemic, the city has yet to demonstrate its capacity for a game-changing recovery—much like its struggling West Coast sisters, Seattle, Los Angeles and, until recently San Francisco.

Pebblebrook had four properties in Portland in 2020: Kimpton Hotel Vintage Portland, The Hotel Zags, The Heathman and The Nines, as well as the nearby Skamania Lodge in the Columbia River Gorge. In keeping with its broader strategy, the investment trust sold the Kimpton property last year and closed on the sale of The Heathman in 2023 (a decision made easier by what was reported in Pebblebrook’s February 2023 investor presentation as a $3 million EBITDA decline from 2019’s $4.1 million to 2022’s $1.2 million). Unconfirmed rumors suggest The Nines may also be coming to the block.

At the same time, Skamania Lodge is getting a $10- to $12-million cash injection to expand its alternative lodging offer with additional treehouses, glamping units, a villa and a pavilion.

Hotel Colonnade Coral Gables had a much different story. It was coming off a record-setting 2022 EBITDA of $4.8 million, edging out 2019’s $4.1 million. However, in the face of new supply that hit the market since 2020 and Pebblebrook’s track record for selling off single hotels in narrow markets like Coral Gables, the property was not optimal for the portfolio mix.

“We recently invested over $500 million into the rest of the portfolio and believe the upside for those assets provides a significantly more attractive risk adjusted return than these two hotels," Bortz said. "What these hotels represent is a specific and unique situation given the public/private arbitrage opportunity. We love both of these properties, The Heathman and The Colonnade Coral Gables and believe they will make a great investment for the buyers, so the sales were true win/win situations.”

Although the buyback strategy earned high marks from industry analysts, most put the win regarding pricing in the buyer’s column. Bortz doesn’t disagree.

“Both buyers were able to take advantage of our willingness to sell at ‘today’s discounted market prices’ in a very challenging environment because of the unique opportunity we have to reinvest the capital in repurchasing our shares at an even bigger discount than the ones the buyers are getting. We believe they’ve made great purchases of very high-quality unique hotels at a terrific time,” said Bortz.

Overall, he remains optimistic. “2023 is certainly a year with significant risks driven primarily by the macroeconomic uncertainties and concerns about a substantial slowdown or recession,” he said. “Nevertheless, the lodging industry is set up with great long-term fundamentals, with limited supply growth for many years and recovering and increasing demand for travel over the long-term. For those with capital and conviction and who invest for the mid to long-term, hotels are very cheap compared to historical values and relentlessly climbing replacement costs.”