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Repositioning Acquired Assets Driving Pebblebrook Hotels' Gains

07/26/2012 | By Allen Kenney

The amount of transaction activity and opportunities in the hotel sector continues to increase, according to Jon Bortz, president, chairman and CEO of Pebblebrook Hotels (NYSE: PEB).

"It continues to come from foreclosures, consensual transfers triggered by maturities, and properties where the owner bought too high or with too much debt and needs to do a transaction," Bortz said during REITWeek 2012: NAREIT's Investor Forum. "We think activity will pick-up considerably in the second half."

Bortz said the properties Pebblebrook has acquired have typically underperformed over the last three to five years, which gives the company a lot of operational upside within its portfolio. Through renovation and repositioning of some of the assets, Bortz said the company can recapture lost revenue per available room (RevPAR).

The other opportunity within the portfolio is on the expense side of the balance sheet, Bortz said.

"These properties we acquired were neglected. They didn't have third-party asset managers. They really suffered from lack of attention," he said. "At the end of the day, there is about a 600 basis point difference in margins between the portfolio I left at LaSalle Hotel Properties and our existing portfolio. There are a lot of similarities. And all the things we accomplished at LaSalle we are implementing here."

Bortz said he projects Pebblebrook's RevPAR to grow 8 percent to 10 percent this year, a couple of hundred basis points higher than his forecast for the industry as a whole.

"We also expect to grow margins 250 to 300 basis points this year," he said, adding that also exceeds his forecast for the industry as a whole. "That leads to a same-store EBITDA growth for our existing assets of 20 percent to 24 percent this year. We think because of the opportunities in the portfolio that is likely to be somewhere in the 15 percent to 20 percent range for the next three to four years."

In terms of overall portfolio size, Bortz said a major advantage of having a smaller portfolio is how hands-on senior management is able to be in obtaining margin growth and RevPAR growth by repositioning the assets.

"So, we'd ultimately like to continue to take advantage of opportunities in the market. But size is not an advantage for us because we do not operate our own properties," he said.

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