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The COVID-19 outbreak wreaked havoc on the hospitality sector this year. Many hotels closed their doors in March to help slow the pandemic, as well as their cash burn rate. While most have reopened, some have not because the demand for hotel stays remains well below historical levels. There are some concerns that a portion of this demand -- namely from business travelers -- won't ever return due to the increased adoption of video conferencing technology like Zoom (NASDAQ: ZM).
Because of that, there's a lot of uncertainty about what's ahead for the hotel sector and real estate investment trusts (REITs) focused on the industry like Pebblebrook Hotel Trust (NYSE: PEB). Here's a look at what the next three years might hold for this hotel REIT.
Where Pebblebrook Hotel Trust is today
Pebblebrook Hotel Trust currently owns 53 upper-upscale, full-service, and resort properties with 13,200 guest rooms across 14 urban and resort markets. Due to the pandemic, only 37 of those 53 hotels were open as of December 2020.
Meanwhile, occupancy at those locations was low, reaching into the low 40% range during holiday weeks but spending most of the fall in the low 30% range. Because of the low occupancy levels and hotel closures, Pebblebrook was burning through cash at an average monthly rate of $16 million to $21 million, though that's a $9 million improvement from May.
Where Pebblebrook Hotel Trust looks headed over the next three years
With Pebblebrook burning through cash, the most pressing near-term concern is if it has the funds to survive until the hotel market rebounds. It ended the third quarter with $217 million of cash and $353.2 million of available credit on its $650 million credit facility. It boosted that number in December by closing a $500 million convertible senior note offering.
Meanwhile, aside from a $57.4 million term loan maturity next November, it doesn't have any meaningful maturities until November of 2022, when it has $707.6 million of term loans coming due. Further, its credit facility doesn't mature until 2023. Thus, it seems like Pebblebrook has the financial flexibility to get through the sector's current rough patch.
Because of that, Pebblebrook's focus once the pandemic subsides will be on reopening its hotels and maximizing its EBITDA per property. It spent the previous five years investing in the redevelopment of many of its properties to increase their RevPAR and EBITDA. It's already completed the transformation of 40 of its 53 locations -- including several it acquired when it bought LaSalle in 2018 -- leaving a few more to either transform or sell. The REIT plans to invest $15 million to $20 million in the fourth quarter of 2020 on additional projects.
Aside from continuing to enhance its existing portfolio, Pebblebrook will likely continue expanding via acquisitions. The company has a long history of buying -- it purchased LaSalle and its 64 hotels for $5.2 billion -- and selling properties, including five for $820.8 million upon closing that acquisition and $387 million of hotel properties in 2020. It will likely continue completing new deals, including one-off transactions and potentially another large-scale merger.
Given the turmoil in the hotel industry this year, there could be a consolidation wave in the REIT sector over the next few years as stronger companies acquire financially weaker competitors, with Pebblebrook a likely acquirer. The company's focus has been on buying primarily underperforming, under-invested, or incorrectly positioned hotels in top markets, especially along the West Coast, which isn't likely to change. That's because lifestyle hotels in those supply-constrained markets tend to generate higher EBITDA per key and benefit from consistently higher growth.
Expect it to survive -- and then thrive
Pebblebrook entered this year's downturn in the economy and hotel market from a position of relative strength. Because of that and its steps to shore up its financial situation, the REIT appears poised to make it through this downturn. Meanwhile, its strengthening financial position could give it the flexibility to be a consolidator of top-tier hotel properties as market conditions improve. Thus, it seems likely Pebblebrook will own an even better portfolio in three years than it does today.
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