Pebblebrook reduces SF exposure with Hotel Zoe sale

Hotel transactions continue in the troubled San Francisco market with Pebblebrook Hotel Trust announcing it executed a contract to sell the 221-room Hotel Zoe Fisherman’s Wharf for $68.5 million ($310,00/key) to a third party, well below the acquisition price in June 2015 of $122 million ($552,000/key). The sale is targeted to be completed later in the fourth quarter of 2023.

For the trailing 12 months ended September 30, 2023, the hotel’s net loss is estimated at ($1.2) million, its net operating income is estimated at $2.2 million, and its EBITDA is estimated at $2.7 million, well shy of pre-pandemic performance. Zoe EBITDA averaged $7.4M between 2014 and 2019, according to Truist Securities. The $68.5 million sales price reflects a 25x EBITDA multiple and a 3.2% net operating income capitalization rate (assuming a capital reserve of 4% of total hotel revenues).

Truist Securities Gregory Miller wrote that they continue to view Pebblebrook as a likely net seller for the time being, potentially including more hotels in San Francisco and in other markets like Portland, Oregon. “Until there is clear evidence of a material and sustainable recovery to convention citywides and compression benefits from the currently lagging recovery of Asia Pacific international inbound demand, we view hotel EBITDA for Pebblebrook’s San Francisco hotels to remain challenged,” Miller said. “Pebblebrook could maintain some long-term ownership in the city but reduce its meaningful exposure.”

Miller hypothesized that several Pebblebrook hotels seem to be theoretical candidates for sale in part due to heavy exposure in the Union Square area, currently weak convention bookings, and the unknown of what may transpire with the Westfield Centre upscale mall which is now under receivership and is a short walk from Hotels Zetta and Zelos. “San Francisco would be a very different place if there was the kind of tourist vibrancy that we see in New York City today – but San Francisco is more distant from Europeans and somewhat more tied to Asia Pacific travelers,” Miller said.

The news is not all negative in San Francisco, according to Miller, and some of the positive developments that may be a 2025-plus story receive little investor focus. “However, it is difficult for us to have great confidence on the recovery of local hotel EBITDA without a lot of hard data as support – and Pebblebrook will have to lap through a tough 2024 in the interim,” he said.

Potential positive developments in San Francisco include the appointment of the new head of the local tourism agency, a growing AI office presence, a lack of major clickbait negative news stories for several months, local elections in 2024 that may continue to spur local leaders to focus on street conditions and economic improvement, and the potential of positive media coverage from the APEC event in November with world leaders flying into San Francisco.

“We remain cautiously optimistic that successful Fall 2023 conventions can help re-convince meeting planners that San Francisco is able to host major events without issues for attendees. However, our view is more hope/gut feel than from actual forward data,” Miller added.

Proceeds from the sale of Hotel Zoe Fisherman’s Wharf will be used for general corporate purposes, including reducing the company’s outstanding debt and repurchasing its common and preferred shares. Pebblebrook owns 47 hotels, totaling approximately 12,200 guest rooms across 13 urban and resort markets.