Pebblebrook's Cautious Outlook: Navigating Economic Uncertainty in 2025

Pebblebrook Hotel Trust (PEB), a leading owner and operator of upscale hotels, has issued a cautiously revised outlook for 2025 amid heightened economic uncertainty and lingering disruptions from events like the Los Angeles wildfires and lingering trade policy concerns. The company’s first-quarter results, while mixed, highlight both operational resilience and strategic challenges as it balances growth opportunities with macroeconomic risks.

Q1 2025: A Mixed Start

Pebblebrook’s Q1 results underscored the complexity of its current environment. Total revenue rose 2% year-over-year to $320.3 million, driven by strong performance at resort properties like LaPlaya Beach Resort (up 22% in RevPAR) and redeveloped urban hotels such as the Viceroy Washington D.C. (up 15% in RevPAR). However, the company reported a net loss of $32.2 million, compared to $27.5 million in Q1 2024, primarily due to one-time costs from the Los Angeles wildfires and hurricane-related repairs.

Despite these headwinds, Same-Property Hotel EBITDA reached $62.3 million—$4.3 million above management’s midpoint guidance—thanks to disciplined cost controls. Non-room revenue also surged, accounting for 38% of total revenue, up from 37% in 2024, reflecting success in expanding food and beverage operations and event spaces.

Key Drivers of the Cautious Outlook

1. Los Angeles Wildfires Impact: Nine hotels in the LA area faced a 23.4% RevPAR decline in Q1, with occupancy dropping 18%. While the impact was less severe than feared, Pebblebrook now projects a $1.5 million EBITDA drag in Q2, down from earlier estimates of $2.5 million. The Hyatt Centric Santa Monica, which underwent a $15 million renovation, saw occupancy plummet to 37%, though the property’s long-term value is expected to rebound.

2. Trade Policy and International Travel Decline: CEO Jon Bortz highlighted that unresolved trade disputes have led to a 10% year-over-year drop in inbound international travel in March 2025. This has disproportionately affected urban hotels reliant on corporate and international leisure travelers, contributing to a 2.2% decline in urban RevPAR.

3. Softening Group Demand: Meeting planners remain cautious, with Q1 group room nights rising only 5.4%—a slowdown from pre-pandemic trends. Bortz noted that second-half demand is particularly uncertain, with some planners delaying bookings amid economic uncertainty.

Financial Strength and Liquidity

Pebblebrook’s balance sheet remains a key defensive asset. With $218.2 million in cash and $642.6 million undrawn on its $650 million credit facility, the company has ample liquidity to navigate near-term challenges. Its debt maturity profile is also favorable, with no major maturities until December 2026, and 91% of its $2.3 billion debt portfolio effectively fixed at a 4% interest rate.

The company’s Piotroski score of 9—a perfect rating reflecting strong operational efficiency and financial health—bolsters its credibility. Management also emphasized its $275 million levered free cash flow over the past 12 months, which supports its ability to invest in strategic upgrades and share buybacks.

Strategic Priorities Amid Uncertainty

1. Portfolio Rebalancing: Pebblebrook is shifting focus to resorts and higher-margin markets. Resorts now contribute 45% of EBITDA (up from 17% in 2019), with properties like LaPlaya Naples and the rebranded Margaritaville hotels driving growth. Urban exposure, particularly in LA, has been reduced to 43% of EBITDA, down from 56% in 2019.

2. Cost Discipline: The 3.7% year-over-year expense growth in Q1—below the 5% guidance—demonstrates the effectiveness of renegotiated vendor contracts, energy efficiency programs, and labor optimization. Full-year capital expenditures are capped at $65–75 million, focusing on minor upgrades rather than large-scale redevelopments.

3. Share Repurchases: Since October 2022, Pebblebrook has repurchased 13 million shares at an average price of $14.07, a 44% discount to its NAV midpoint of $25.00. This underscores management’s belief that shares are undervalued, and the company continues to prioritize buybacks over dividends, maintaining its streak of 16 consecutive years of dividend payments.

Risks and Challenges

• Economic Downturn: A potential recession could further suppress business and leisure travel demand, particularly in urban markets.
• International Travel Recovery: Trade policy disputes and geopolitical tensions remain unresolved, threatening inbound tourism.
• Competitive Pressures: Rising costs and limited pricing power in some markets could squeeze margins if demand softens further.

Investment Considerations

Pebblebrook’s stock currently trades at ~$9.00, a 64% discount to its $25.00 NAV midpoint. This valuation leaves significant upside potential if the company can stabilize demand and leverage its liquidity to execute on strategic initiatives.

Conclusion

Pebblebrook’s cautious outlook for 2025 reflects a prudent acknowledgment of external risks while emphasizing its operational strengths and financial flexibility. With $218 million in cash, a fortress balance sheet, and a portfolio increasingly tilted toward resilient resort markets, the company is positioned to weather near-term volatility.

However, investors must weigh these positives against lingering risks: a potential recession could further strain urban RevPAR, and international travel remains vulnerable to policy shifts. For long-term investors, the stock’s deep discount to NAV and management’s track record of disciplined capital allocation make it a compelling contrarian play.

Key data points reinforce this assessment:
- Same-Property Resort RevPAR: Up 8.2% in Q1, outperforming urban peers.
- Liquidity: Over $860 million in cash and undrawn credit, providing a buffer against economic shocks.
- Cost Controls: Expense growth 33% below guidance, showcasing operational efficiency.

While Pebblebrook’s path in 2025 is fraught with uncertainty, its strategic pivots and financial resilience suggest it’s better positioned than many peers to emerge stronger on the other side of current headwinds. For investors willing to take a measured bet on hospitality recovery, PEB offers both value and growth potential—if management can navigate these challenges successfully.