Pebblebrook Hotel Trust
NYSE:PEB
Earnings Call Analysis
Q4-2023 Analysis
Pebblebrook Hotel Trust
Pebblebrook Hotel Trust has wrapped up the year with strong financial outcomes, surpassing expectations. The adjusted EBITDA ended at $356.4 million for 2023, exceeding forecasts by $6.5 million in the final quarter with a boost to $63.3 million. The adjusted funds from operations (FFO) per share concluded at $1.60, overtaking the anticipated figures for the year and delivering a Q4 performance of $0.21 per share, which was $0.07 higher than projected.
The remarkable results in Q4 owe much to the urban hotels within Pebblebrook's portfolio. Seeing a revival in both corporate and leisure travel, cities like San Francisco, Washington D.C., Boston, and Los Angeles displayed remarkable resilience and growth. While occupancy rates overall arched up to 67.7%, they are still trailing behind pre-pandemic levels. Nevertheless, there’s optimism in the air, with urban hotels showing a 5.5 percentage point leap from the prior year and potential for further growth highlighted by the current gap from 2019 levels.
Boston stands out as Pebblebrook's most lucrative urban market in terms of EBITDA, achieving a 78% occupancy, which aligns closely with last year's figure. It boasts the highest occupancy rates amid the urban landscapes, even though it has yet to reach its 2019 peak. The Q4 data indicates a balanced boost in travel demands from both business and leisure sectors, presenting a robust outlook as we head into 2024.
The company's resorts maintained a commendable performance through the year with a slight occupancy incline despite considerable redevelopment work that could have posed disruptions. The resorts still beckon opportunities to recuperate occupancy losses from prior years, pointing to a robust potential recovery looking forward.
Amidst a 9.3% drop in average rates for 2023, the last quarter saw a pivot towards stabilization with just a 4.9% fall. Resort rates substantially surpassed their 2019 averages. The portfolio celebrated a 4.2% year-over-year augmentation in same-property RevPAR and a 5.9% swell in same-property total RevPAR, highlighting non-room revenue progression and notable occupancy advances. These gains were also resilient against a 113 basis point negative impact from renovations, suggesting a vibrant pathway for future flourishment.
Pebblebrook faced multiple impediments throughout 2023, from renovation-related disruptions to unexpected weather events and strikes, aggregating to an adverse financial toll. Nevertheless, real estate tax credits and insurance savings considerably offset these impacts, evidencing the ability to navigate and adapt to challenges effectively.
Looking ahead, the company has projected a significant reduction in capital expenditure requirements and is poised to complete transformative projects in the upcoming year. These strategic investments mark critical milestones in the company's developmental agenda and are expected to generate considerable market share and cash flow improvements upon maturation.
In 2024, the company estimates acknowledging $11 million in business interruption proceeds, which have been integrated into the financial outlook. While these proceeds will impact adjusted EBITDA and adjusted FFO, they won't affect same-property EBITDA. This figure is in stark contrast to the $33 million recognized in the previous year.
Pebblebrook successfully executed its disposition strategy in 2023, offloading 7 properties and generating over $330 million. This capital has been directed towards debt reduction and accretive share repurchases — a testament to the company's shrewd financial management and investor-centric tactics.
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Greetings, and welcome to the Pebblebrook Hotel Trust Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Co-President and Chief Financial Officer. Thank you. Please go ahead.
Thank you, Donna, and good morning, everyone. Welcome to our fourth quarter 2023 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer; and Tom Fisher, our Co-President and Chief Investment Officer. But before we start, a reminder that today's comments are effective for only February 22, 2024, our comments include forward-looking statements under federal securities laws. Actual results could differ materially from our comments. Please refer to our latest SEC filings for a detailed discussion of potential risk factors and our website for a reconciliation of non-GAAP financial measures referred to during this call. And in 2023, our portfolio continued to recover from the negative impact of the pandemic. This is a testament to the dedication, innovation and resilience of our hotel teams and operating partners. Their exceptional contributions were instrumental in propelling our portfolio's growth and recovery in 2023, and we thank them for their support and hard work. We are delighted to report favorable operating and financial results for 2023. Our adjusted EBITDA reached $356.4 million, exceeding the top end of our outlook by $6.5 million in the fourth quarter as adjusted EBITDA increased to $63.3 million. Our adjusted funds from operations per share also surpassed our outlook, ending the year at $1.60 per share, with the fourth quarter at $0.21, beating the top end of our Q4 outlook by $0.07 per share. This better-than-expected performance in the fourth quarter was fueled by our urban hotels, which continued to experience a healthy recovery in corporate transient and group demand, including from improving convention calendars and recovering leisure travel in the cities, driven by concerts and sporting events. San Francisco, Washington, D.C., Boston and Los Angeles led our urban strength. Focusing on our 2023 hotel operating results, occupancy rates increased 4.6% occupancy points to 67.7%. However, this level is still well below our pre-pandemic occupancy of 81% in 2019 and our peak occupancy of 85% in 2016. This gap highlights our portfolio's significant remaining growth potential, particularly at our urban properties, which are on a promising recovery path. In 2023, our urban hotel has achieved an occupancy rate of 68.4%, marking a 5.5 percentage point increase from the previous year, yet it is still 15 percentage points below 2019 levels. Washington, D.C. led the recovery with a significant 15-point rise to 64%, up from 49% in 2022. San Francisco also showed substantial improvement with occupancy climbing 61% from 47% in 2022, our Los Angeles portfolio also managed to achieve significant occupancy growth in '23, increasing from 64% to 73% despite facing challenges from entertainment industry strikes and adverse weather conditions that significantly affected demand. Our Boston portfolio, our largest urban market by EBITDA, achieved 78% occupancy similar to last year, and Boston represents the market with the highest occupancy levels in our urban markets, yet it remains well below the 88% level achieved in 2019. During the fourth quarter, at our urban hotels, weekday occupancy rates rose by 4 percentage points to 64%, while weekend occupancies increased by more than 2 percentage points to 69%. This demonstrates that the uptick in demand was powered by both business and leisure travel. These are positive indicators heading into 2024. For 2023, our resorts maintained their strong performance with occupancy rates rising by approximately 2 percentage points to 65.8% despite the negative impact of significant disruptive redevelopments at Estancia La Jolla, Jekyll Island Club Resort and Southernmost Resort Key West during the year. Like our urban hotels, our resorts have also had substantial opportunity to regain lost occupancy from 2019 as occupancy 74.4% in 2019, 8.5 points above 2023. In the fourth quarter, our resorts benefited from increased business group demand as evidenced by the 1 percentage point rise in weekday resort occupancies over the comparable prior year period and weekend resort rates surged by 7 points to 74.6%, highlighting the enduring appeal of leisure travel and attractiveness of our redeveloped and repositioned resorts. Despite a 9.3% decrease in average rates during 2023, there was a trend towards rate stabilization with a more modest 4.9% decline in the fourth quarter. Even with this normalization, our resort run rates in 2023 remain 40% or $108 higher on average than in 2019. Across the portfolio, same-property RevPAR for 2023 saw a 4.2% increase year-over-year increase, while the same-property total RevPAR grew by 5.9%, indicated continued strong non-room revenue growth along substantial occupancy improvements. This progress was achieved despite an approximate 113 basis point negative impact from renovations, showcasing our portfolio's robustness and potential for future growth. Our urban properties experienced a significant uplift in 2023 with a 9.3% increase in RevPAR and an 11.3% rise in total RevPAR. Our resort RevPAR declined by 6.5% from 2022, but total RevPAR decreased by just 2.8% as healthy nonroom spending and occupancy gains helped mitigate the room rate decline. For Q4, total RevPAR increased by 5.7% with our urban properties, realizing an 8.8% gain and resorts flattish with a 0.4% decline. For 2023, same-property EBITDA came in at $350.9 million with Q4 at $66.6 million, exceeding the top end of our outlook by $3.6 million, thanks again to better-than-expected urban demand recovery in Q4. During 2023, our hotel EBITDA experienced several challenges that impacted our performance, including renovation disruptions, which we estimate had a negative impact of $12.7 million. Additionally, severe adverse weather events and the L.A. and active strikes contribute to an estimated negative $3.5 million impact. However, these negative effects were significantly offset by approximately $12 million worth of real estate tax credits and general liability insurance savings. Consequently, the net negative impact of these onetime items on hotel EBITDA totaled approximately $5.5 million. We expect significant additional real estate tax credits as we achieve successful tax assessment appeals over the next few years. However, which was primarily focused across 6 major redevelopment projects, including Margaritaville San Diego Gaslamp, Hilton Gaslamp Estancia La Jolla, Jekyll Island Club Resort, Southernmost Key West and Newport Harbor Island Resort. Looking ahead to 2024, we are posting to complete 3 pivotal projects, the comprehensive $49 million transformation and upscaling of Newport Harbor Island Resort, the $26 million luxury reposition of Estancia La Jolla Hotel and Spa and the $20 million first phase of the additional alternative lodging clamping units, cabins, villas and infrastructure at Skamania Lodge. We anticipate completing all of these projects in the second quarter, marking a significant milestone in our comprehensive $540 million multiyear strategic capital reinvestment program. It's important to note that the vast majority of these returns on these recent investments have not yet been realized, but we anticipate significant improvements in market share and cash flow as they ramp up and stabilize. And as Diana Ross so beautifully saying in our opening song today, our properties are coming out in 2024. These major redevelopment disruptions are behind us, and the benefits of these major investment dollars are to come. Also, our CapEx requirements are set to decrease markedly to between $85 million and $90 million in 2024. Shifting focus to Opal Beach Resort and Club in Naples, we're happy to report that the restoration of the 79-room beachhouse and pool complex is expected to be substantially complete in the next week or 2. This is the last of the rebuilding efforts following the extensive damage from Hurricane Ian. The resort and club look great and it's better than ever, reports to ramp up quickly with our restored product. As noted in last night's earnings release, we anticipate recognizing $11 million in business interruption proceeds in 2024 from Opal's lost income for the second half of 2023 and early 2024. This has been incorporated into our '24 outlook. The BI will impact adjusted EBITDA and adjusted FFO but not same-property EBITDA. This compares to the $33 million of BI recognized in 2023. Our disposition strategy in 2023 was successfully executed with 7 property sales generating over $330 million in gross proceeds. The aggregate sales proceeds reflected a 20.2x EBITDA multiple and a 4.2% NOI cap rate. Proceeds from our property sales were used to pay down over $179 million in debt and for accretive repurchases of common and preferred shares. From the start of 2023 through the end of January 2024, we repurchased approximately 6.8 million common shares at an average price of $14.07, including over 318,000 common shares recently purchased in January at an average price of $15.69. We also purchased 2 million shares of our Series H preferred equity shares at an average price of $15.90 per share, which is a 36% discount to the par value of the series with 1 million shares repurchased at the end of 2022 at $16, a 30% discount is a discount on par value and 1 million of these shares rise purchased in Q4 '23 at $15.79 a 37% discount. Following our debt pay downs and the extension of $357 million of bank term loans out to 2028, our next meaningful debt maturity is a $410 million bank term loan maturing in October 2025. You should anticipate that this maturity will be reduced and addressed from free cash flow and potentially proceeds from additional property sales, additional debt market activities or from our $659 million undrawn unsecured credit facility. And with that comprehensive update, I'd like to turn the call over to Jon. Jon?
Thanks, Ray. And good morning, everybody. I'm going to focus my comments on two topics. First, what we've seen in the industry most recently and what we expect for this year in terms of the industry performance; and second, how that translates into the assumptions behind our company's outlook for Q1 and for full year 2024. As to the hotel industry, I believe the industry's reported performance in the second half of 2023, and so far in 2024, clearly evidences a softening in overall demand, primarily in the mid- to lower segments. Perhaps indicating financial sensitivities in the middle to lower socioeconomic demand segments, likely resulting from the impacts of inflation, the reduction or elimination of extra savings from pandemic era government transfer payments and the dramatic increase in consumer credit rates. Perhaps it's just difficult comps for the middle to lower price point hotels as others have suggested. But total industry demand hasn't exceeded restricted supply growth since March of last year, and it's been negative 7 out of the last 10 months. This weaker overall industry performance has occurred at the same time that convention, group, business transient, particularly larger corporations and international inbound travel all continue to recover and while leisure travel remains healthy. The top 25 markets have outperformed the other markets by a wide margin and the urban markets, which have previously been slower to recover, have performed by far the best. And while the softening demand has been almost completely focused on the mid- to lower segment so far, we're not so naive to think that there can't be an impact in the higher segments at some point. We're humble and we recognize we've never been through a pandemic and recovery before, let alone one where the Fed continues to work aggressively to slow down the economy to bring inflation down to its target. So far, so good, as the economy has held up and everyone who wants a job seems to have one. Yet we remain wary though still cautiously optimistic about 2024. It's extremely difficult to forecast how these conflicting economic waves will impact each other as we move forward in 2024, just as it was in 2023. All we can do is planned for different scenarios and monitor all of the macro and micro indicators very closely, and we'll let you know when we see the trends changing. As a result of this ongoing uncertainty, we plan to continue to provide monthly operating updates. Given the weak overall trends over the last 10 months, including January and also for February so far this year, we expect industry RevPAR for 2024 to be flat to up 2%. This forecast also assumes a so called soft landing for the economy. We believe the Fed will remain diligent in its inflation lowering mission this year and with expectations for rate cuts recently pushed later into the year with fewer overall cuts now expected, we believe forecast by the institutional prognosticators in our industry now seem a little optimistic, at least they do to us. We do believe that business travel, both group and transient, along with international inbound travel will continue to recover, and these demand segments will continue to benefit the upper upscale segment and the urban markets primarily and thus the top 25 markets versus the weaker other markets. I also want to point out that overall industry performance in 2023 and so far in 2024, has substantially benefited from the very strong performance of Las Vegas, a large, volatile and influential market affecting the total industry numbers. Excluding Las Vegas, the rest of the industry's performance was softer in 2023. And by our calculations, that weaker performance equated to 48 basis points or just shy of 0.5%. And remember, the public lodging REIT and other institutional lodging investors generally don't own in Las Vegas. We would urge STR to publish industry numbers on a weekly, monthly and annual basis that excludes Las Vegas, so we can all get a clear picture of the overall industry in which we live and invest. Las Vegas until recently, was never included in the industry data and reports, so this is a new issue. Given our forecast for the industry's performance for 2024, we expect to do substantially better than the industry given our 60% or so concentration in major urban markets, including slower to recover markets, which have been accelerating. And we expect to do better due to the lack of material disruption from renovations and repositionings in '24, which will soon be complete and from gaining RevPAR share from our many completed major repositionings and redevelopments over the last several years. Given our industry outlook for RevPAR growth of 0% to 2%, we're forecasting our same-property RevPAR to increase 200 basis points more, so in the range of 2% to 4%. We expect most or all of it will come in occupancy gains. We're forecasting that our total same-property revenue will increase in the range of 3% to 4.6%. And as a reminder, LaPlaya is not included in the same property numbers for 2023 or 2024. However, if we were to include it, the LaPlaya would add about 50 basis points of RevPAR growth to our outlook. Encouragingly, our group pace is looking good for '24. As of the beginning of February, group room night pace for this year was ahead of the same time last year by 12.5% with ADR pacing 2% ahead of last year for a total group revenue pace advantage of 14.7%. We Transient room nights are also pacing ahead of 23 by 9.4% with rate lower by 1.9%. Total group and transient pace for 24 was ahead by 11% in room nights and total revenues, with ADR flat year-over-year as we continue to recover significant occupancy. While total pace is strong, we caution that booking trends have lengthened and continued to normalize. So these percentages will naturally decline as more businesses put on the books. Not surprisingly, our urban pace is stronger than our resort pace, but both are significantly ahead of last year. Right now, Q3 has the strongest pace advantage followed by Q4 then Q2 and then Q1. We expect group will represent roughly 28% or 29% of our overall mix, which is up slightly from last year. Given a slower Q1 pace, our forecast for Q1 is for our same-property RevPAR to be flat to up 2%, with total same-property revenues higher by 0.8% to 2.8%. Whether on the West Coast and in South Florida has not been favorable so far this year, particularly in February. So even as we gained ground from not having much comparative negative impact from our major renovations and redevelopments in Q1, our resorts have suffered from softer leisure demand due to the weather. While January RevPAR growth increased a healthy 5.1%, February is on track to be roughly flat. Unfortunately, March's performance will be negatively impacted by the last week of the month due to the earlier arrival of the Easter holiday this year. But April, on the other hand, should benefit from this shift. For 2024, we expect same-property total revenue growth to exceed same-property RevPAR growth as it did in '23 due to strong food and beverage and other revenue growth, some of which is a result of the continuing recovery in group and some as a result of the significant remerchandising we've done it so many of our properties where we've added more meeting space, event venues and bar outlets, improve some of our outdoor event and restaurant venues to increase the length of their outdoor operating seasons and reconfigured and reconcepted restaurants to focus on increasing banquet and catering business and driving higher revenues and profits. For the year, we're forecasting same-property expense growth in the range of 4.7% at the low end of our total revenue growth range to 5.3% at the higher end of the range. However, if we exclude the impact of $9 million of real estate tax credits in 2023, to get a better view of the underlying expense growth rate, it's about 100 basis points lower, implying an increase of 3.8% to 4.3%. Keep in mind that all of our RevPAR growth will likely come from occupancy growth and food and beverage growth should outpace RevPAR growth due to increases in group business and total occupancy, both of which come with significant marginal expenses. Our expense growth assumptions are based on an expectation that combined wages and benefits will increase in the 4% range, give or take. Most other expenses will increase at a lower rate. Energy and insurance will grow at a much faster rate and real estate taxes will show a much greater increase due to the $9 million of tax true-ups in 2023.We expect the combination of LaPlaya's operating performance and BI accruals will likely be roughly equal between 2023 and 2024, so no big headwind as we had previously feared. We're extremely excited about the pending full completion and reopening of LaPlaya Beach Resort and the rebuild property looks fantastic. We'll be having a tour of both LaPlaya and in on fifth in Naples for investors and sell-side analysts on the Wednesday afternoon following City's re conference in Hollywood, Florida. So feel free to let us know if you'd like to join us as we'll be transporting folks from the Diplomat. LaPlaya was on track to deliver the highest EBITDA in our portfolio in 2022 before the hurricane hit. So it's quite important to our future growth. Not only are we excited about LaPlaya's operations getting back to normal, but we're also very excited about the significant upside throughout our portfolio following our $0.5 billion plus investment program over the last few years. Whenever we get over this macroeconomic Hill related to the Fed's efforts to drive down inflation to its 2% target, we expect to experience a significant upside in our markets over a multiyear period that will be powered by little to no supply growth in our markets while economic growth drives up travel demand. If we look back to the beginning of the last cycle, and you can see these results in our investor presentation, total EBITDA for today's current portfolio doubled between 2010 and 2015. So in this next cycle, we expect urban and resort supply will be more restricted and slower to be added than in the last cycle. We also believe demand will grow in a healthy and profitable way due to strong economic growth, driven by significant technological and medical developments, a massive onshoring effort in various industries, growth coming from the green energy transition and positive secular trends related to travel. These positive fundamentals in totality, coupled with a moderating inflation outlook and significant benefits from the completion of our strategic redevelopment program should lead to very strong bottom line performance for us over an extended number of years. We just need to get over this macro hump. That completes our remarks. We'd now be happy to answer your questions. So Donna, you may proceed with the Q&A.
Thank you. Ladies and gentlemen, the floor is now open for questions. If you would at this time. [Operator's instruction]. We do ask in order to allow as many questions as possible, that you please limit yourself to one question. The first question today is coming from Duane Pfennigwerth of Evercore ISI. Please go ahead
Just on -- I'll repeat the question, and I know maybe you're a little bit less levered to it. But on the group segment, do you -- do you lean on group differently than you did pre-pandemic given changes in underlying seasonality? And maybe, Jon, just broadly, how would you characterize the setup entering 2024 from a visibility perspective? How does this forecasting environment feel versus a "normal" time prepandemic?
So I think the question of do we lean on group differently this year versus last year or even pre-pandemic I'd say it's really driven by each individual properties situation and what's going on in those particular markets. So give San Francisco, let's look at that as an example, with a softer convention calendar this year, we're leaning on all the other segments, including in-house group more so than we would in a year where we have significantly greater convention activity. In a market where the convention activity is up strongly like a market in San Diego, we may lean on group a little bit less than we have in prior years and try to drive those transient customer rates so we can take advantage of the compression, the greater number of compression days in that market. So I don't think there's any general philosophy that's different in '24, but each market and each property will behave a little bit differently. And then your question about setup, I mean, right now, because [indiscernible] is so far ahead, I think the setup is pretty good. I mean we expect to pick up another point in mix of group in the portfolio because of the strength of convention and our in-house group strength that we have compared to last year. And I think as we get into the year, what is the unknowable and the part that's hard to predict is what is short-term group going to look like, both in the month -- for the month in the quarter for the quarter. I mean we have probably less group on the books than perhaps other companies, I don't know others. We had about 60%, 62% of our forecasted group on the books heading into the beginning of February. And that's a little bit better than last year as evidenced by the pace. So I think the setup is good for the year. it's hard to forecast because as we normalize these trends and how much of this group was compared to last year, was it because it was put on the books further out. And therefore, as we saw in some months last year, the short-term pickup was softer than the year before. So that's what makes it hard to forecast.
Appreciate the talks, thank you.
The next question is coming from Smedes Rose of Citi.
I just wanted to ask a little bit, maybe just what you're seeing on the transaction side of the market. It seems like that market's been a little bit challenging. But coming out of ALIS, there was a lot of talk about how this year would improve significantly. And maybe how you're thinking about potentially moving forward with additional asset sales? Or are you fairly happy with where the portfolio is now?
Hi Smedes, it's Tom Fisher. I would agree with you that I think the sentiment coming out of the ALIS Conference was pretty positive. I kind of look at it from the perspective that I think 2024 might be a transition year here last year, there was a lot of interest of lack of conviction. This year, I think, is probably transitioning to a lot of interest, but building conviction. And I think part of that is given the fact that I think investors think that the worst is behind them in terms of debt cost and that they can actually underwrite assets and underwrite debt cost and hopefully improving debt costs from that perspective. So I think overall, I think it's become -- the market is getting better, but it's getting better from a financing front for cash flow and yield assets with strong sponsorship. And so I think you'll continue to see a gravitation towards some smaller deals, which was kind of predominant in 2023 and also those deals that -- are those assets that are in markets that have recovered as opposed to those markets that are laggard markets are still in recovery because I think both from a lender's perspective and an investor's perspective, it's all about cash flow and debt yield today. And then I think as it relates to our portfolio, I think we're happy with what we've done, but we continue to look at and we would engage in opportunities if it makes sense for us for additional dispositions. And I think that the interest in dispositions is really strictly related to being able to generate proceeds that allow us to buy our stock back at such a large discount. So to the extent that the public private arbitrage opportunity goes away, I think our interest in selling assets generally goes away.
The next question is coming from Michael Bellisario of Baird.
Jon, just first quick question on CapEx and returns. Are you seeing any change in sort of the ramp-up of performance post renovation, post repositioning? And then for the projects that have been completed already, is there any updated view on timing or the time line of when you think those projects will reach stabilized returns?
Sure. So well, the biggest impact to the ramp-up was the pandemic, not surprisingly for projects that were completed right before the pandemic hit. There were some completed during quite a number completed during the pandemic and a few that have now been completed sort of if we're in the post-pandemic period in this post-pandemic period. In general, it's probably anywhere from 3 to 5 years to ramp to full stabilization, and it really depends upon what are the structural changes repositioned flagged properties. So where we're not -- so take the Hilton Gaslamp as a good example. It's one of the best locations, if not the best location in downtown San Diego all around. It hadn't had capital that was in the LaSalle portfolio and hadn't had capital invested for almost 15 years. And we did an exhaustive repositioning of that property -- and it has some unique aspects, including -- I don't know, it's 30-some 20-some suites and loss in a separate building from the main building. That will ramp much quicker, and we're already seeing that here in the first quarter even. That will ramp much quicker than where we take a property like Jekyll Island, and we repositioned it higher. It's an independent property, and it will just take longer. But ultimately, the repositioning should end up at significantly higher stabilized returns because of the fact that it doesn't have an ADR sort of implied cap by its customer base, like a branded property would. So they tend to take longer on the independent side in general. And they're much quicker on the branded side. The other thing that impacts it obviously, is the strength of the market. It's a lot easier to gain share in San Diego with the Solamar conversion to Margaritaville in a market that's strong where demand is increasing and everybody is not fighting over a sort of stable demand level in a market. So in a market like that, we would expect that to ramp more quickly in the market. So in general, that's what I would tell you. I don't. Obviously, some things that were done years 1 or 2 years before the pandemic. They may not get to our share gains and those double-digit returns, but they should get to mid-single digit, if not higher on a cash-on-cash basis. So the newer deals with demand already ramping up should see higher returns.
Got it. And then just one quick housekeeping item. Just on the real estate taxes. I think you mentioned $12 million of real estate credits last year as a onetime item. But then when you were talking about margins, you mentioned $9 million of impact. Can you square those 2 for us?
Yes, there was GL. And there's GL in the $12 million that was mentioned in the script, but you might have just missed it.
Combined the 2. But really focused on are the real state tax credits of $9 million and that we would suggest pulling that out to try to get the run rate in your models because that's more of a run rate because the credits tend to be lumpy and could represent multiple years. So by taking that out, which is what we discussed in the call that reduces our run rate of operating expenses by about 100 basis points lower than what was provided in the 2024 outlook.
And Mike, I think our -- to the other comments we made, we feel pretty positive about significant future assessment reductions and true-ups primarily in the West Coast markets, maybe to a lesser extent on the East Coast in a market like D.C. But it just takes time. And part of the reason sometimes the credits tend to be large is it's a multiyear true-up of an assessment that we over accrued and overpaid until we achieve the success in the assessment. And clearly, we know values went down dramatically in a number of the markets on the West Coast. And it's just -- it's a lengthy process designed to stack the deck in the government's favor. So being persistent ultimately pays off.
Thank you. The next question is coming from Bill Crow of Raymond James.
Two quick questions for me. Jon, you talked about your expectation that the inbound outbound travel, international travel deficit will narrow. And I'm curious whether that applies to inbound travel from Asia as well, which seems like it will be much more impactful to the West Coast markets.
Yes, Bill, actually, we do think it does. And if you look at the data, I think what it shows is you have a significant increase in Asia inbound. It's coming from Korea. It's coming from India, and it's coming from Japan. And those are all 3 markets we're later to begin the recovery as compared to the markets in Europe. In a market like India, many are forecasting will ultimately replace China from a size perspective given the growth in the economic base and the large population in India. And obviously, the better relationship the U.S. has with India versus with China. We have seen significant increase in China. It's just off a very low base right now. So while it used to be clearly in the top 5, it's not there right now. But the other markets seem to be picking up much of the slack but not all of the slack.
That's helpful. Jon, given all the changes to your portfolio, I know the order of importance or contribution to EBITDA has changed pretty dramatically over the last couple of years. Key West is now, I think, a top 5 market. I think if you looked at Florida your assets there and maybe throw Jekyll and Georgia into that. It seems like a lot of exposure to hurricane-prone markets. Are you comfortable with the exposure that you have to that region?
We are comfortable. It's interesting as we analyze weather impacts and weather risk on a corporate basis through looking at the individual properties, what we find is they're just our weather risk everywhere. They're just different kinds. And some get more media attention than others. But heavy rains and flooding on the East Coast, in the Midwest, have been pretty consistent over the last few years compared to where they used to be. Fires on the West Coast, although being helped last year and this year with the heavy rains. But heavy rains on the West Coast, there are risk from those. We had a tropical storm warning in Southern California, we haven't had in 85 years. We had an earthquake in Washington, D.C. There just seem to be weather risk everywhere. And so we're comfortable with what we have in Florida. We think we bought the right properties in Florida. I think the rebuilding of LaPlaya will help mitigate any future damage based upon the way it's been rebuilt in the effort to mitigate through strengthening the real estate. But I'd say today, yes, we're comfortable with where we stand in Florida.
I'll yield the floor.
The next question is coming from Dori Kesten of Wells Fargo.
As you wind down your ROI projects midyear, what's a good run rate for CapEx? And how long would you expect to be able to maintain at those lower levels.
Well, we've significantly redeveloped and comprehensively renovated the vast majority of the portfolio -- we think the run rate is likely in the $50 million to $60 million range on an annual basis. Our nonmajor project capital in our 2024 plan is about $40 million. And so that's a little lower given the number of projects that have been redone more recently, we also have been deferring some smaller ROI projects to retain capital in order to use some of that capital to buy back our stock at such a big discount because the returns are higher. So we do think those will ramp up a little bit over time from where this year's other capital is being invested and what the total number is. But yes, for the next 2 years outside of whenever we decide to -- we're able to proceed with the conversion of Paradise Point to Margaritaville, we think the capital is going to be -- should be in that $50 million, $60 million range.
Okay. And have you said what your expectation is for the EBITDA trajectory of will over the next several years?
We haven't. We -- as it relates to this year, and that's hard enough to forecast a reramp from, again, from being closed. We're looking at about $22 million of EBITDA, give or take, as our outlook for this year. That would be in excess of where we were in '19, but well behind the 30 -- what was it, $35 million, we were headed for in 2022 before the hurricane hit at the end of September.
Okay. And I guess, by -- you have an expectation of when you should get back to that 35% or yet?
We -- well, that will depend a lot on the market. It depends on how other properties price and perform in that market. And -- but the good news, we think it's whether it gets back there, in general, our resorts are not at the '22 levels. They've come off a little bit from there. We would expect Naples Opal to probably do the same thing if it were running stabilized today, but maybe in the next 2 years, there's certainly a possibility we can get back to the same level or nearby.
Yes, Dori, when you look back to Irma, when that hit South Florida, Naples came back as a market quicker than Key Westin as just an indication, which is different demand drivers and customer base in Naples versus Key West. So that's another way to... A lot more annual return is because of the base population there.
The next question is coming from Jay Kornreich of Woodford Securities.
In the fourth quarter, you generally saw a rebound in the urban markets, and I believe you commented on the occupancy gap to 2019 closing at 15%. So I'm just curious if this rebound is coming more from us this transient customers or group customers? And how much growth do you foresee in your urban markets in '24 versus 2023?
Yes. So actually, the rebound is coming from 3 segments. It's coming from BT. Corporations are getting back to the office. You're seeing, obviously, significant growth and activity around AI, which is headquartered in San Francisco. The group side is recovering as well. We're going to have a down year on a convention basis in '24 from prior year cancellations when things were may be viewed a little more challenging from a quality of life perspective, but that's improved dramatically, I'd say, at or better than pre pandemic levels in terms of quality of life and continuing advances in the politics there. So group has been improving, including in-house group and leisure is coming back to the market, both from a domestic perspective and from an international inbound perspective. And I'd say the market segment probably furthest behind continues to be that international inbound because a lot of it came from China, in particular, given the population base in San Francisco and the attractiveness of that city from an Asian perspective. So it's really all the segments. We do expect it to continue in 2024 in all segments except for the drop in convention. And we think these other segments should do well to offset that drop in convention. And hopefully, we continue to have an up year on a RevPAR basis in San Francisco. But we do think urban will lead the pack on a RevPAR basis our portfolio again in 2024.
And Jay, when you -- as it relates to San Francisco, when I know there's a lot of talk about the convention calendar in '24 versus '23, which is down, and that's primarily in the fourth quarter, actually the first half of '24 is up year-over-year. But what is also about is not really capturing the numbers are all the self-contained groups. -- which those are groups like JPMorgan that happened in January, that's a self-contained group. It's not a convention number. So that's up year-over-year. So that part actually is coming back as the other BT group is coming back to the city. So when you look at that, you look at those 2 components, not just a convention demand.
And you probably hear that from folks like host who own the big Marriott Marquis in town.
The next question is coming from Dany Asad of Bank of America.
John and Ray, can you just -- if we're looking specifically to the Boston market, you kind of called that out in your prepared remarks, but can you help us break down those 10 points of occupancy gap relative to 2019 in Boston. What is it that have to recover, maybe break it down for us by day of week. And then what will drive the incremental occupancy points in Boston from here. I'm just kind of wondering if you're seeing that flatten out or kind of how that trend has been going?
Sure. I mean I can give you some general comments. We can follow up with some detail as to the specific segmentation with Boston. We don't happen to have it handy right here. But in general, I'd say it's in 2 segments primarily it's in BT, particularly on the large corporate side, including consulting and financial are probably down the most in that market. Those are continuing to recover. You hear probably similar comments about that from the major brands, not only for Boston, but across the country. But it's a big component in that market. That's what's down along with some group. The convention -- the major convention is actually running similar to some of its strongest years in the past, where convention is down is at the Heyns Convention Center. And that's because, if you recall, there was this hub up about the prior governor wanting to shut down Hynes and sell it for other uses. And that sort of potential conversion idea has now passed. The Heyns Convention Center is actively pursuing new business and which will help drive particularly the Back Bay to even higher levels, particularly in our portfolio with the Westin, which is attached to the convention center as well as the Revere and the W, which are nearby. So -- and they're also planning to do needed renovations over the next few years as they rebuild the group base there. So our in-house group at Weston, as an example, still down a little bit from where we were in '19, and we have that to gain back. And I think that's indicative based upon Marriott's position in the market, it's indicative of other property opportunities as well. So it's really those 2 segments. I think leisure has been pretty strong. There's probably still some inbound international to go, but it's not a large component.
Thank you. The next question is coming from Gregory Miller of Truist Securities.
I'm hoping you can provide some context on the NAV revisions that you've released for February relative to November, given estimated value declines from most of your markets?
Yes. So Greg, when you look at the gross enterprise value change, it went down about $200 million from our last update. And about half of that $100 million are from property sales. That's the sale of Zoen San Francisco and some retail space in Chicago. And then the other half of the $100 million, that's reflective of the asset-by-asset value estimates that we do internally here based upon what we're seeing in the market. Tom is very close to the transactions in other parts in each market to understand where that is taking into consideration the debt markets and so forth. So that's how we adjusted the $200 million decline. So again, half of it was from asset sales, half was the change in value. And then the balance of it is just really a reflection of the debt paydowns and then buying the preferred at a big discount changing that for the NAV. So overall, the NAV change moved to dollar, but a big portion of that was really just timing there and some of the adjustments there with the values.
And Greg, I think when you look at where the values were down, it was primarily markets that were slower to recover where the debt markets are having a bigger impact on values because those markets lack those markets lack strong yield and many of the buyers are primarily all equity buyers. So I think as the yields -- as the operations continue to recover and yields continue to grow, not only will the values go up because of that, but they'll go up because of sort of the lack of yield penalty being imposed on values by the debt side.
And that will help transactions in general.
The next question is coming from Floris Van Dijkum of Compass Point.
You guys still have this giant gap in profitability, particularly in your urban markets. I calculate something like 96 million shortfall relative to 2019 levels. Maybe, Ray, I mean, I know you've invested in your portfolio, you're going to get some return on that capital. But is there a risk this cycle that your urban markets never fully get back to 2019? Or how do you see that playing out over the next 2 to 3 years?
Well, a couple of factors. One is as we indicated before, we'll continue to track how and monitor how the changes in business chains and business group, both are going in a good direction. So that's on both sides, and that's about the growth of RevPAR this year. So that's a positive there. And so that's one. Two is the international inbound component is an impact. You look at that side, we still have 10 million less international inbound travelers than what we had pre-COVID. And the international inbound travelers tend to go to a lot of the coastal markets, the gateway markets, which are the markets we own in. So unfortunately, we did a lot of the markets that we are -- the urban markets we're in, we're in those markets that did go down the most finite pandemic, but it does have most of the -- the biggest growth level is coming back now. So it will go in different periods. Markets like Boston have rebounded quicker variety just because of the nature of the industry is in Boston. They're benefiting from the European travel there more than the West Coast urban markets are getting penalized because they rely more in Europe as an example. But also you have a lot of the industries in Boston and we're coming back to the office. There's more travel. The industry is they're doing there. And we know the tech side will be slower in the West Coast. So yes, overall, we are confident over the next several years. In some markets, we'll get back to pre-'19 levels sooner than others like Boston and San Diego, some that will take longer. But overall, we've seen how travel does follow GDP over the long term. We're just right now in the period now from the pandemic. There's a lot of distortions in the market. But as these normalize, with all these demand factors, we think it to get better.
The one thing I'd add is, are there markets like San Francisco and Portland, do we think the bottom lines are going to get back to where we were in '19 in the next 2 or 3 years? Probably not. I think that would be very unrealistic. Will we dramatically narrow that $96 million EBITDA difference over the next 2 to 3 years, yes, we think we will from a combination of those kinds of markets recovering with significant operating leverage in them, obviously. And the stronger markets like Boston and San Diego as an example, exceeding '19 levels with strong operating leverage as well. So -- and all of them with occupancy opportunities, obviously, to regain.
Actually, that leads me maybe the connected question here in terms of occupancy upside. I think you mentioned on your prepared remarks that you have about a 15% gap in your urban markets. I think it's 13% in your overall portfolio. Where do you -- you clearly expressed some positive sentiment towards Boston and San Diego in particular, do you think that to get back to '19 levels, you don't necessarily need to get all of that occupancy back because of the ADR growth, but do you think you're going to get back in terms of occupancy in Boston and markets like San Diego as well back to the 2019 levels over the next year or 2?
I think -- I don't know if we'll get there in the next year or 2, but I think we'll narrow that difference pretty substantially in those kinds of markets. And in fact, we may not want to get there. We may want to press more on the rate button in those markets and change the mix within the house. Running 88% in a market like Boston, it's doable, but we'd rather run 85, frankly. And sometimes you have to take the occupancy, you can't get it in rate. But yes, I think we'll narrow them dramatically. But do we think we're going to get there? I mean tell me what the economic world is going to be also over the next 2 or 3 years because I think if we get past this hill this year, I think we're in really good condition to drive both occupancy and rate.
Thank you. Our final question today is coming from Chris Darling of Green Street.
Chris, it better be a good one year, they clean up here.
Hopefully so. I want to go back to the discussion around your NAV estimate. I'm just wondering, if lower values in some of these urban markets, are they -- does that make you more likely to hold some of these assets rather than to sell it to press values, especially as you're expecting some fundamental upside in the near term. So just wondering how you're thinking about that.
I think selling in those markets would likely bring our growth rate down a little bit on a marginal basis, but the investment of the proceeds from them into are the rest of our portfolio through buying back our stock. As long as that remains exceedingly attractive, I think it does still make sense. As you know, I mean, the public markets tend to not look 3 or 4 years out as it relates to lodging rates or, frankly, most companies. Value is not the popular form of investing. It's really growth. And while that would impact our growth rate a little bit, I don't think it's a margin it's as attractive to hold as it is to sell and buy our stock back. I mean where we've been selling has generally been the slower to recover markets and the lower-quality assets in those markets. So we've been improving the overall quality of the portfolio. At the same time, we've been buying the remaining part of the portfolio back at a big discount. So I don't think it would change our view of where we've been focused.
All right. That's helpful to hear. And then just one more for you on Skamania. Just hoping you can elaborate on what exactly is being done with the initial $20 million investment. And then as you densify that property over time with these alternative lodging units, I'm just curious to understand if there's upside in terms of operational efficiencies that you can realize.
Sure. So we have -- Skamania sits on 200 acres. We had a golf course that took up about 100 acres and we closed it several years ago, and we rebuilt on it a 9-hole Part 3 in a sustainable way and an 18-hole putting course adjacent to it. And then we freed up, I think, about 70 acres of it along with the additional land we had for future development. This $20 million investment went for a $2.5 million Pavilion that we build adjacent to the 18-hole putting course for events and some for weddings. We added 3 more treehouses to the 6 we already had, so we now have 9. And we're experimenting with some additional new alternative products. We're completing 5 luxury glamping units on a portion of the property. We're adding a 3-bedroom villa and we're adding 2 2-bedroom cabins. And those will have longer length of stay, perhaps weekly, in some cases, perhaps monthly, whereas the treehouses are much more nightly like the rest of the lodge. And then in order at this point to really do it right, we've brought through the property or at least through a portion of the property, which would -- we brought through utilities, road and infrastructure. So gas, electricity, water, sewer and roads for access to about 1/3 of the excess acres. So we can build significantly a greater number of alternative lodging units. We're looking at things like a luxury RV park. We're looking at Farmhouse in with vineyards and fruit fields. I mean, there's a bunch of different things we're looking at. But right now, we're just experimenting with what does the customer have an interest in this market? And what are they willing and what are they willing to pay for that. And so it's similar to what we did with the original couple of treehouses that we built. Will there -- are there operating efficiencies? Yes, they're significant. I mean we're not adding anything other than hourly at this point in time as we add these additional units. If we add a different concept like a farmhouse enter something, we may or may not use the same team at the property. But ultimately, a lot of the expansion of the units, and these units run 2x or more of what the average lodge rate is. So they're significantly more profitable on a per key basis or a per bedroom basis as it relates to the cabins and Neville. So there's a lot of operating leverage for these additional units. But right now, it's not a huge number of units. It's really sort of a test case.
And Chris, just to give you some sense of that development of that Skamania, and we love it because all the additional amenities we can add. So it's more than just a lodge, there's a lot of things to do there. When we acquired that hotel, they had about $4.4 million of EBITDA. It ended '23 million and almost $13 million of EBITDA. And the occupancies are still below where we were pre-pandemic. So just to show you that the -- by adding all these additional services, do we think it's maxed out. No, there's plenty of growth opportunities there. And with additional units we can have between the glamping and other alternative for this, we think there's a lot more growth in there. So it's been a great investment for us, and we look forward to that.
Sounds like a lot of interesting things over time there. So I appreciate it.
Yes. Thank you, Chris.
Thank you. At this time, I'd like to turn the floor back over to Mr. Bortz for closing comments.
Well, thanks, everybody, for participating. We'll see you -- many of you down in Florida. We hope you can join us for our Naples tour. And otherwise, we'll be in touch with you in April again to report first quarter results. Thank you very much.
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