It's hard to understate the coronavirus pandemic's impact on the world. Not only is COVID still a lingering concern, but entire industries have been upended. One of the hardest hit has been travel, including hotels that house vacation-goers and business people when they're away from home. Pebblebrook Hotel Trust (PEB -3.62%) just released a business update that shows both the good and bad of what's going on today.
Green shoots are starting to shine through
Pebblebrook owns upper-scale full-service hotels and resort properties. Geographically, its focus is on urban markets in major domestic gateway cities. These are not Super 8 motels stuck on a stretch of highway, only getting people looking to rest their heads after a long day of driving. These are really more like destination hotels -- that would be hard to replace -- where people go for a fancy getaway.
Image source: Getty Images.
In the early days of the pandemic, vacation travel came to a virtual standstill, with some countries choosing to deny entrance to travelers from other select countries. In December 2020, Pebblebrook's occupancy was a scant 19.8%, down from 79.4% in the fourth quarter of 2019.
That's a terrible decline and one that is certainly unsustainable. That is why the recent business update was so exciting. Management pointed out on the very first page of the presentation that "December marked the best performing month compared to 2019 since the pandemic began."
And the following page showed the improvement, with occupancy hitting a low of 14% in January 2021 and reaching 48% by December. Total revenue, meanwhile, increased from $19.2 million in January all the way to $80.4 million in December, just 20% below the December 2019 results. Simply put, things are getting better.
Still not out of the penalty box
Before getting too excited about this performance, however, investors need to step back. December's occupancy was still just 48%. That remains well below the 79.4% Pebblebrook achieved in Q4 2019. The improvement in revenues came from price increases, including the average daily room rate, which was higher by 18% in December versus the same month in 2019.
In other words, Pebblebrook is charging customers more, but there are still vastly fewer of them. That's not exactly a great outcome. And even then, the revenue it's generating is still 20% below pre-pandemic levels. Some of those price increases the real estate investment trust (REIT) has pushed through are also likely meant to offset the price increases Pebblebrook itself is facing due to inflationary pressures. When you consider other factors, this hotel REIT is still facing material headwinds.
To be fair, Pebblebrook's business is in much stronger shape than it was early on in the pandemic. However, through the first nine months of 2021 asset sales and a nearly $500 million preferred stock issuance were key sources of cash flow, as the REIT continued to try and stabilize its operations. It simply isn't past the problems just yet and cash appears to remain tight.
And notably, Pebblebrook highlighted that January 2022 occupancy levels are likely to be lower than those seen in December 2021. The big reason is the omicron variant of the coronavirus that has quickly spread throughout the United States. That suggests Pebblebrook's performance remains highly tied to the pandemic's progression. Any flare-ups will likely result in occupancy and revenue dips. While the hotel landlord is muddling through the headwinds, the ongoing recovery could be very lumpy.
Still a reason to worry
When you add it all up, Pebblebrook remains a REIT that most conservative investors will probably want to avoid. Given that the dividend is stuck at a penny a share per quarter -- a mere token to keep institutional investors around -- this is definitely not a name for dividend investors. It is, in the end, a turnaround play, which is only appropriate for more aggressive types who can handle some volatility. Things are getting better at Pebblebrook, and that's good. But there's still a lot of room for recovery in its business, with no certainty that the recovery will be a smooth trip.