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Greetings, and welcome to the Pebblebrook Hotel Trust Second Quarter Earnings Conference Call. 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. You may begin.
Thank you, Christine, and good morning, everyone. Welcome to our second quarter 2026 earnings call. 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 begin, I'd like to remind everyone that our comments today are as of July 30, 2026. Today's comments may include forward-looking statements that are subject to various risks and uncertainties. Please refer to our SEC filings for a detailed discussion of these risk factors and visit our website for reconciliations of non-GAAP financial measures mentioned today. Now let's get to the second quarter results. We delivered another excellent quarter, exceeding the high end of our outlook across every key earnings metric for the second consecutive quarter. Same-property hotel EBITDA increased 7.1% to $123.3 million, $6.6 million above the high end of our outlook. Adjusted EBITDA was $116.2 million, $6.2 million above the high end and adjusted FFO per diluted share was $0.68, $0.06 above the high end. The story of the quarter was straightforward. Our resorts in San Francisco led the portfolio. Stronger pricing drove total revenue growth, our teams expanded margins and disciplined capital allocation activities amplified our per share growth. Let me take each in turn. At the portfolio level, same-property occupancy increased approximately 130 basis points to 79.4%. ADR grew 4.7%, RevPAR increased 6.5% and total RevPAR climbed 4.7%. Nearly three quarters of our RevPAR growth came from rate, a meaningful shift from recent quarters when occupancy gains did most of the work. As occupancy rebuilds, greater compression is giving our teams more pricing confidence, which is supporting higher room rates. We also see less price sensitivity among upper-end consumers, benefiting our premium resorts and higher-end urban properties. Let's start with the leaders. Our resorts were the principal growth engine in Q2. Resort RevPAR increased 12% and total RevPAR climbed 10.9%, supported by continued robust out-of-room spending. The strong revenue growth drove hotel EBITDA for our resorts up 18.5% with 216 basis points of EBITDA margin expansion. Applied led the way with occupancy climbing more than 11 points, RevPAR increasing 33.9% and EBITDA rising 28.8% as this post-hurricane construction ramp-up continued. Paradise Point in San Diego was close behind, growing RevPAR 22% and EBITDA up by more than 40%. Resorts generated roughly $16.5 million of the portfolio's $18.3 million revenue increase and their $8.9 million EBITDA gain more than offset the declines in urban markets held back by weaker convention calendars. More important than the headline growth was the broad nature of the improvement. At our resorts, group room nights increased 18% and group revenue grew nearly 19%, led by association and corporate group demand. Transient ADR rose more than 12%, producing nearly 10% transient revenue growth on slightly fewer room nights. That powerful combination, rising group volume and stronger transient pricing demonstrates the return on the capital we've invested in guestrooms, meeting spaces, outdoor venues, restaurants and bars. Newport is a good example. RevPAR grew 20.3% on a 13.5% ADR increase with total RevPAR growth of 18.6%, translating into EBITDA growth of almost 26%. Estancia, another recent major development, generated RevPAR growth of 22.8%, total RevPAR growth of 19.6% and EBIT growth of 54.7%. Both of these resorts continue to gain share following their redevelopments and luxury repositioning. San Francisco was once again our top urban market. Occupancy increased nearly 500 basis points and ADR rose almost 9%, driving RevPAR 16% higher and hotel EBITDA 24.6% higher, roughly 250 basis points of margin expansion, all without the RSA citywide, which shifted to March this year. The Snowflake and Databricks citywides in June more than made up for the difference and business transient and leisure demand were very strong beyond the citywides. Year-to-date, EBITDA at our 7 San Francisco hotels is up by more than $13 million or 110% versus last year, making significant progress against the $18 million recovery opportunity detailed in our updated investor presentation. Los Angeles is following a similar path, but with less intensity. RevPAR up 8.6%, hotel EBITDA up almost 14% and year-to-date EBITDA higher by approximately $6 million or 73%. Capturing the larger $22 million upside opportunity for our Empire L.A. portfolio, as outlined in our investor presentation, will require continued market recovery and property level execution, but the momentum is building and the 2027 Super Bowl and the 2028 Olympics will provide a big push. Our weaker urban markets included downtown San Diego, where RevPAR declined 9.1% against a difficult citywide comparison and Washington, D.C., where RevPAR declined 9.9% amid weak government-related travel demand and significant property level leadership transitions, which are now largely complete. Overall, urban RevPAR increased 4.1%, but urban total RevPAR increased only 0.8% and urban hotel EBITDA declined 1%. The strong performance in San Francisco and Los Angeles was offset by weaker convention calendars and banquet and catering revenue in San Diego and Boston, along with continued government-related weakness in Washington, D.C. The result was a shift from group to transient demand, which is worth a closer look. Portfolio-wide, the quarter was transient led. Transient revenue was up nearly 10% on a 7% increase in ADR, concentrated in higher rate channels. Group revenue declined approximately 2%, while corporate group revenue was essentially flat. Importantly, the group softness reflected the convention rotation, not demand pullback. That mix also helps explain the gap between the portfolio's 6.5% RevPAR growth and 4.7% total RevPAR growth. Out-of-room revenues grew 1.7%. Urban banquet and catering revenue declined approximately 20%, concentrated primarily where the citywide calendars were weakest and where World Cup matches scared up groups. By contrast, resort food and beverage revenue grew nearly 11% with banquet and catering revenue increasing more than 16% on resort occupancy growth of 310 basis points. Where group and transient customers showed up, they kept spending and spending a lot. Looking at how the quarter developed, April started well with RevPAR rising 6%. May was the softest month as we flagged last quarter, up roughly 2% on later convention calendars. June then accelerated sharply with RevPAR up nearly 12%, driven by an ADR increase of 14%. Occupancy actually dipped slightly, so June was entirely a pricing story. World Cup increased RevPAR modestly in June and in the quarter, but reduced non-room revenues. Jon will discuss the overall World Cup impact in more detail in his comments. So that's the revenue story. The earnings story is how effectively our teams turn that revenue into profits, and they did another great job. They converted 4.8% total revenue growth into 7.1% same-property hotel EBITDA growth with same-property total expenses increasing just 3.8% and margins expanding 67 basis points to 30.6%. The discipline shows up across the P&L. Rooms expense grew at less than half the pace of rooms revenue, increasing only 3.1%, even as occupancy climbed 130 basis points and room revenue grew 6.6%. Energy expenses were also well contained, up 2.7% for the quarter and flat year-to-date, reflecting the benefit of our energy reduction and sustainability initiatives. On a per occupied room basis, total expenses increased just 2%, highlighting our team's continued positive results from our ongoing intense focus on operating efficiency. We also completed our property insurance renewal on June 1 at premiums approximately 27% below last year or $6 million lower, which is better than we anticipated and a nice tailwind through next May. A more favorable insurance market helped, but so did a disciplined program design and the capital we've invested to harden weather-exposed assets. Now let's turn to capital allocation. The prior quarter you won't find in any same property statistic. Despite losing approximately $5 million of hotel EBITDA from hotels we sold and comparing against $3.2 million of prior year business interruption income, adjusted EBITDA declined less than 1% and adjusted FFO dollars were essentially flat. A 4% decrease in diluted share count lifted adjusted FFO per share 4.6%, while retained free cash flow per share after dividends increased nearly 25%. This is what disciplined capital allocation should accomplish: per-share earnings and cash flow growing faster than company earnings despite asset sales. On the investment side, we invested $12.5 million in the portfolio during the quarter and remain on track for $65 million to $75 million for the full year. This lower capital requirement converts more of our earnings into retained free cash flow for debt reduction and opportunistic repurchases of our common and preferred shares. During the quarter, we sold the Chamberlain West Hollywood Hotel for $43.5 million and used $26.1 million of the proceeds to retire $33.7 million in preferred shares at a 23% discount. That single transaction generated approximately $7.6 million of immediate value accretion and eliminated over $2 million of annual preferred distributions. And over the last eight months, we sold three hotels for just shy of $160 million at an aggregate 15.4x EBITDA multiple and a 4.6% NOI cap rate. These sales, as the ones before, continue to validate the portfolio's private market value. The value creation playbook is simple: sell hotels at higher private market values and use the proceeds to reduce debt and buy back common and preferred securities at prices below their underlying value. During the first half, we repurchased 0.9 million common shares at an average price of $13.62 and retired 1.5 million preferred shares at an average 23% discount to liquidation preference. Our balance sheet also continues to improve. Net debt to trailing 12-month corporate EBITDA declined to 5.3x from 5.5x at the end of Q1 and 5.9x at the end of 2025. We ended the quarter with $270 million of cash, $641 million of revolver availability and $90 million of delayed draw term capacity or a total of $1 billion of liquidity. The remaining $350 million of the 2026 convertible notes are fully funded through existing cash, expected free cash flow and term loan capacity, and we have no other debt maturities until 2028. Stepping back, the first half demonstrates two forms of compounding, operating leverage of the hotels and disciplined capital allocation at the corporate level. Same-property hotel revenues increased 7.2%. Same-property hotel EBITDA grew 14.5%. Adjusted FFO per share improved 23.8% and free cash flow per share surged 69% to $0.76 or $87.8 million. Each layer amplifies the one before. And with that, I'd like to turn the call over to Jon for more color on current demand trends, event-related business, our markets and the outlook for the balance of 2026. Jon?
Thanks, Ray. Since Ray covered our second quarter performance in detail, I thought I'd step back and provide a more high-level view of both the industry and Pebblebrook. So let's start with the industry's performance in the second quarter. As a reminder, the industry setup was very favorable in Q2. Benefits we expected from better holiday calendar, a uniquely active major events calendar and a reconnection between GDP growth and industry demand growth. They all occurred in the second quarter. Going into the quarter, our concern revolved around the potential for geopolitical or policy events that would negatively impact the economy and travel. Fortunately, the conflict in the Middle East and constantly changing trade policies have not yet had a negative impact on the economy or U.S. travel in general so far this year. As a result, industry demand growth was healthy in the quarter and with little new supply being added, occupancies rose and ADR growth accelerated due to the better setup, more compression days, less price sensitivity by higher-end customers, in particular, all of which led to more pricing confidence. All of the major hotel demand segments remained favorable. Group, corporate transient and leisure travel all grew weekdays and weekends alike. We even saw the international travel balance improve in June. Inbound travel turned positive for the first time in quite a while, presumably helped by World Cup visitors, while outbound travel declined. Both sides of that provide benefits for U.S. hotels, more foreign visitors coming in and more Americans staying home. For Pebblebrook, as Ray described in detail, we saw the same industry benefits in Q2 and more, even though we had soft convention calendars in a number of our major markets. During the second quarter, in the quarter, for the quarter pickup was very strong, exceeding last year by $8.4 million. We haven't seen any increase in group cancellations or attrition and attendance levels for group meetings have been more predictable than last year. We continue to watch for signs of weakening, but pickup in and for the month, quarter and year has remained favorable. World Cup delivered a modest benefit to room revenues. We estimate an increase of between $1.5 million and $2.5 million or roughly 60 to 100 basis points for the quarter in RevPAR. The incremental World Cup demand was largely offset by corporate group and transient business that stayed away due to higher rates and many booking restrictions. So the net room benefit came primarily from rate, not occupancy. This also explains the slight June occupancy dip Ray mentioned. The change in mix from group to transient, unfortunately also had a negative impact on food and beverage revenues in our match markets, particularly banquet and catering, which declined on a year-over-year basis and offset much of the room revenue gain. In total, we estimate the net benefit to hotel EBITDA from World Cup was between $500,000 and $1 million, a relatively minor benefit overall, but a benefit nonetheless. Turning back to the industry outlook with a strong economy that remains resilient and with corporate profit growth at high levels and accelerating, there are fundamental reasons to be encouraged about positive industry trends continuing in the second half of this year. However, we remain concerned about potential negative impacts from the protracted and widening Middle East conflict, policy changes and geopolitical instability and the real possibility of another potential government shutdown this fall. Given the strong operating performance in Q2 and with July continuing that trend, we're increasing our industry RevPAR growth outlook to a range of 3.5% to 4.5%. As we look out beyond this year, we believe we're at the beginning of a strong multiyear up cycle for the hotel industry. I think we can now confidently forecast that supply should remain very limited through most of the rest of this decade. We're at the beginning of a major multiyear capital investment cycle related to both AI and the reshoring of manufacturing, and we have another huge business investment cycle right behind this one with the creation and build-out of the robotics industry. We also expect very significant and growing benefits from the massive wealth that has been created over the last 15 years for both investors and employees and from the largest transfer of wealth in global history as the baby boomers begin to pass on the wealth they've amassed. We believe the prospects for healthy multiyear demand growth have never been stronger or clearer in the last 30 years, nor has supply growth been so limited at the same time. These are incredibly positive multiyear fundamentals. The multiyear setup is very good, just like this year's setup was very good. Of course, a lot of things could still go wrong as they did last year. Before turning to our Q3 and updated full year outlook, I want to spend a few minutes on why we're increasingly constructive about 2027 and the broader multiyear setup. For 2027, we believe the strong demand and supply fundamentals should outweigh any headwinds related to difficult comparisons to this year's numbers. There are a number of reasons for this view. First, we expect the economy to remain strong and potentially accelerate as business capital investments ramp further next year and corporate profit growth remains at high levels. Second, we believe the wealth effect will provide a growing positive impact on spending and travel. Third, while we have a strong holiday calendar this year, it's just as favorable in 2027. In addition, while the industry benefited meaningfully in June and early July from World Cup and America 250, we expect demand to materially outpace supply next year, which will drive occupancies higher, creating more compression and greater pricing power throughout 2027, which should more than offset the loss of this year's event-related benefits. And finally, we ultimately expect the international inbound outbound travel imbalance to reverse and it could occur next year if the positive experiences foreign travelers had at the World Cup and traveling throughout the U.S. and the very favorable media coverage to the World Cup activities translate as they normally do into increased future travel to the host country. A more positive impression of the U.S. compared to all the previous negative media about our country should help increase travel to the U.S. from abroad. For Pebblebrook in 2027, we should continue to see significant growth from the recoveries in our urban markets, led by San Francisco and Los Angeles, coupled with more favorable convention calendars in San Diego and Boston that are expected to significantly improve the performance of those markets next year. We also have a number of significant events next year, including the Super Bowl moving from San Francisco to Los Angeles, NCAA Men's Basketball Regional Finals in L.A., the NFL Draft in Washington, D.C., the Star Wars 50th anniversary celebration in L.A., the Major League Baseball All-Star game in Chicago and a significant amount of expected pre-Olympic travel into L.A. We should also see further upside from our redeveloped properties as they gain additional share. And finally, our resorts should benefit from the ongoing K-shaped economy and the growing wealth of the higher-end consumer. While the Super Bowl won't be in San Francisco next year, we continue to expect strong RevPAR growth in the city as citywides continue to return, albeit at lower rates than the Super Bowl, and corporate transient travel should grow significantly at higher rates as corporate growth in San Francisco continues to boom. We also expect leisure travel to see further increases as the impression of the city's environment has turned positive over the last year, and the city has been a showcase this year during major events. Turning back to this year. Q3 is off to a great start with July proving to be stronger than we expected. Short-term pickup has surprised to the upside, and we think this indicates that summer vacation travel is starting strong, continuing the positive leisure trends from Q2. Having July 4 fall on a Saturday provided a big lift to our portfolio overall and probably a much bigger lift than the weekend related America 250 events. Group pace for the third quarter is also favorable. Corporate travel growth remains strong and leisure travel is accelerating and allowing us to average higher prices through less discounting, fewer promotions and reduced use of lower-priced wholesale channels. Based on preliminary results through the 25th, July RevPAR is on pace to grow between 7% and 8% over last year. However, we're not prepared to extrapolate July's unusually strong short-term pickup across the entire quarter. Our Q3 range preserves a prudent allowance for shorter booking windows, potential macroeconomic and policy-related volatility and the impact of geopolitical events. For Q3, our outlook assumes same-property RevPAR growth of 1% to 3%, same-property hotel EBITDA of $100.5 million to $104.5 million, adjusted EBITDA of $92.5 million to $96.5 million and adjusted FFO per share of $0.48 to $0.52. When we look at our pace for the second half of the year, as of the end of June, room revenues were pacing ahead of same time last year by 5.5%, which is a total of $10.7 million. About 80% of this revenue pace advantage is being driven by transient with the remaining 20% in group. If pickup for the second half of the year equals last year's pickup, it would translate to RevPAR growth equal to roughly 2.4% in the second half. To put these numbers in perspective, our current nominal pace advantage is in line with the high end of our implied RevPAR growth outlook for the second half of the year. So if pickup in the second half runs ahead of last year, then we would exceed our outlook by the higher pickup. Recall that last year, with everything that happened, we lost pace advantage as the year progressed and finished down for the year in room revenue. Speaking of our outlook, we're raising our full year outlook to reflect the second quarter outperformance while maintaining our prior assumptions for the second half. With the increased outlook, we're now forecasting same-property RevPAR growth for the year of 4.5% to 5.5%, an increase of 125 basis points at the midpoint. We're also forecasting same-property EBITDA growth of 8.2% to 10.5% with the midpoint at 9.3%, a healthy increase for the year and a material step-up from our prior outlook. These increases translate into an adjusted FFO outlook of $1.69 to $1.76 per diluted share, an increase of $0.08 at the midpoint with a similar increase in our free cash flow outlook. As I indicated earlier, but worth repeating, current trends remain favorable, but booking windows remain short and the geopolitical policy and macroeconomic environment remains uncertain. We're encouraged by the industry trends we've been seeing, but we're not yet comfortable assuming visibility we don't yet have. We'll continue to take the year one quarter at a time. And if there's no material impact from geopolitical policy or other macroeconomic events, then we should keep performing favorably to our outlook just as we have in the first half. With a terrific first half behind us and a positive setup in the second half, we remain very excited about the full year for Pebblebrook. Now we just need the rest of the year to cooperate by providing a more stable environment. So with that, we'd now be happy to take your questions. Christine, if you wouldn't mind, please proceed with the Q&A.
分析師問答
Operator instructions. Our first question comes from the line of Duane Pfennigwerth with Evercore ISI.
Congrats on these results. I just wondered if you could speak a little bit more to the drivers of the better pickup that you have seen and you're continuing to see. Is that primarily leisure transient? Or are there other drivers to that better pickup, which feels like the key assumption for the back half?
The drivers have been fairly broad, but clearly led by the transient side. That includes both corporate transient, in terms of month-over-month and quarter-over-quarter pickup, and leisure transient. From a demand perspective, those are the primary drivers. Group stability, group attendance, and predictability in group attendance and spend are also positive. Another driver of potential revenue growth, which we have been seeing increasingly and saw in Q2 and in resorts in San Francisco, is an ability to drive pricing higher through increased premiums on premium rooms, similar to airlines, by using fewer promotions and discounts, adjusting our mix, and directing business through higher-rated channels while focusing less on lower-rated channels. So it’s fairly comprehensive in terms of what we’ve seen in the drivers and what we hope will continue in the second half of the year.
Operator instructions. Our next question comes from the line of Smedes Rose with Citi.
I was wondering, you provided a lot of detail around the operating outlook, which sounds relatively positive, and I get that you're somewhat tempered. Could you speak to what you're seeing in the transactions market? It seems like it's kind of picking up from what we're hearing, but I'm curious as to what you are seeing.
Yes, Smedes, this is Tom. Listen, it continues to be more constructive. Obviously, we expected that in terms of the improving operating fundamentals. As we stated previously, capital followed performance. We're seeing more transactions. We're seeing larger transactions. We're seeing more investor depth and performance is leading to more investor conviction. So you have all of the ingredients. I think you have increasing operating fundamentals, you have more investor conviction. You have more trades, which I think is giving more confidence to other investors to participate. You have the debt markets that continue to remain attractive, both in terms of availability as well as pricing. And so I think overall, it's set up for a more active, although I would tell you that it's somewhat bifurcated that it continues to kind of trend towards the luxury type assets and the resort type assets and then assets where markets have significant growth that investors can underwrite.
Operator instructions. Our next question comes from the line of Gregory Miller with Truist.
I'd like to ask about international inbound. As you discussed, the World Cup provided a lot of positive publicity for international audiences. Do you find that the local convention and visitors bureaus are taking advantage of this opportunity to promote their cities in a different way given the goodwill?
I mean, we've had a lot of conversations with folks like SF Travel, for example, and the San Diego authority. As the year has gone on, we've seen them increasingly put more money and effort into the international side, including sales trips. I'll give you a recent example. I think they were pretty hesitant at the beginning of the year, but as we started to see the imbalance flatten out and then turn positive in June, SF Travel launched a fairly major marketing effort in Canada, betting that Canadians are ready to come back. They love our country; many were here for the World Cup, the Canadian team did well, and they had a positive experience like other World Cup travelers. That word of mouth back to those countries is viewed as a positive catalyst and opportunity. So while I can't speak for all markets, I know San Francisco and San Diego, as examples, are putting more time, effort and money into winning international inbound back to their markets.
Operator instructions. Our next question comes from the line of Aryeh Klein with BMO Capital Markets.
I guess when we look at first half RevPAR growth, what do you think the underlying growth is versus the 8.8% year-to-date that was reported if adjusted for the World Cup and maybe some of the other unique tailwinds like calendar shift? And is that the right way to think about 2027 and that the events that we had this year versus next year kind of net each other out from a tailwind standpoint?
Well, it's a great question and a tough question because, as we've talked about historically, people don't always tell you why they're coming. What we've been seeing is a very broad-based increase in demand across all segments except for international inbound, which perhaps finally improved a little in June. It seems like demand growth is tracking in the 1.5% to 2% range from an underlying year-over-year perspective. Looking at the preliminary Q2 GDP report that came out this morning, it was right at 1.5%. As we've discussed before, demand growth is likely to track reasonably closely to GDP growth, and that's what we've been seeing so far this year. What changes in these kinds of up cycles is what happens with rate. The increased rate that came through the World Cup is likely to be more than offset by rising rates due to improving overall industry fundamentals and our own improving fundamentals within our portfolio. Some of that comes from the competitive framework: when the pie is getting bigger, it's easier to price with more confidence. You don't have to worry that the only way to grow is to take business from a competitor, which is the environment we've been living in for the last two to three years. It takes time for that confidence level to improve, and that's what we've started to see. So from an underlying demand perspective, I think it will continue to track GDP. We know where supply is going to be — well south of 1% — and right now it's running less than 0.5% on a net basis. That's the fundamental setup that's favorable. What will vary is how quickly confidence increases and how quickly compression nights increase; that will vary by market based on local conditions. It will also change behavior in terms of mix, shifting away from discounted channels that we used to build occupancy over the past few years and toward higher-rated channels. Ray, I don't know if you have anything to add to that, but that's how we think about what's going on.
And Aryeh, clearly, there are a lot of benefits this year. And look, our portfolio benefited from the Super Bowl in San Francisco, which we talked about. But we also had some headwinds this year. I take San Diego. San Diego year-to-date, RevPAR is negative. And that's because of a very weak convention calendar. We have 120,000 less convention room nights in San Diego year-to-date than we did last year. But that reverses in '27 and Boston also improves. So although we have some benefits from some of the calendar items, we also had a bunch of headwinds. And I know right now, World Cup is getting a lot of attention with the demand, and it certainly helped some of the markets in the U.S. and helped the U.S. as a whole. We talked about it's more marginal. But as we get to talk about '27 in the setup, we feel really good because some of these headwinds will turn to tailwinds for us in several of our markets.
Operator instructions. Our next question comes from the line of Rich Hightower with Barclays.
I want to dig into the kind of upside from redevelopments and some of the resort properties that are still on the path to recovery. So I didn't get a chance to compare sort of the before and after between the latest investor deck and kind of what came before. But does anything about sort of 2Q strength and what's still very clearly optimism about the second half and beyond, did that change the underlying sort of recovery trajectory from recent redevelopments? And then how much of that recovery path is predicated on macro and kind of basic demand drivers versus, let's say, property level execution?
Sure. I think the benefit we saw from reduced sensitivity to price increases in the second quarter applied across the portfolio, and our redeveloped properties were able to take advantage of that. Part of the remaining upside at those properties comes from both rate and occupancy share gains. We're seeing them, particularly Newport and Estancia, continue to increase market share; they have not yet stabilized, but it's always easier to gain share when things are good, Rich, than when they are difficult. The same point applies to pricing: when the overall market is getting bigger, it's easier to increase rates. I don't know that the pace of the gain has accelerated materially in recovering the next $4 million to $6 million of redevelopment, but we were encouraged by what we saw in the second quarter across all the resorts, including the redeveloped properties. We're very encouraged by the progress they're making. Outside of the redevelopments, the bridge we laid out did not assume resort-level performance increases; it wasn't meant to imply resorts wouldn't improve, but rather that improvement would be more macro related. Regarding execution, we always have varying levels across our portfolio. We highlighted some challenges in D.C. with leadership changes at our properties there. Execution matters at the resorts: we have strong execution at most properties, particularly Newport and Estancia, and we still have work to do at Jekyll Island, although we're encouraged by the pace of additional group bookings at that property.
And Rich, this provides more context, which I'm sure you look at post earnings season when your life gets a little more manageable here. We talked about Estancia and Newport because those are the most recent redevelopments, and those projects are on track to achieve their ROIs. We also identified $6 million of upside from those projects. As a reminder, the projects we started back in 2018 and 2019 are multiyear; we invested $270 million of capital and have generated over $40 million of ROI from those projects. I want to underscore that these are real achievements we are realizing. That's why our EBITDA has grown. And as Jon pointed out, we don't fully include the further upside we're experiencing in our resorts, which again led the core of the portfolio this quarter. We're really excited about it. We provide a lot of detail in the presentation, and I encourage you to look at it. We feel confident about it, and the results have proven it.
Operator instructions. Our next question comes from the line of R.J. Milligan with Raymond James.
So along the same lines of some of the questions that have already been asked, but Jon, obviously, a good problem to have. You mentioned difficult comps for next year. You highlighted some of the drivers for RevPAR growth in 2027 for the industry and then some specific drivers for Pebblebrook. I think you guys are trending about 300 basis points ahead of the industry in terms of RevPAR growth so far this year. Given the puts and takes for Pebblebrook next year and the difficult comps, how do you expect that spread to trend in '27?
Well, another good question and a difficult one. The 300 basis points is not a sustainable long-term spread. Historically we've run about 50 to 100 basis points better than the industry overall, and early on we tend to do better for a number of reasons. Some of the markets we've been in were hit harder, like this one, so recoveries in San Francisco, Los Angeles, Portland and Chicago are coming from very low levels and there is a lot to regain in those markets. Fires are a growing concern globally, and let's hope we don't have more of them. We see fires in Europe and in the Midwest here, and fortunately we are not seeing that in Southern California at this point in time, but this is likely to be a part of life going forward. That makes an easy comparison for the first half in LA and is part of why the 300 basis points is higher than what might be normal on a go-forward basis. I do think we should run 50 to 100 basis points higher. Having the Super Bowl in LA in 2027 will be helpful, and there are a lot of things going on in LA next year that should help with the recovery. The Olympics in 2028 should be a major lift in that market, and in 2029 we will see a bit of a hangover from LA. We do not yet have a clear view into all of our other markets in 2029 to know if they will offset that, but that is where the Olympics will be more difficult in terms of comparisons to overcome.
Operator instructions. Our next question comes from the line of James Feldman with Wells Fargo.
So you achieved RevPAR about 350 basis points above the high end of your guide in 2Q, but expenses were still within your original guidance range for the quarter. Can you talk about how you're able to achieve that favorable flow-through and how we should be thinking about further expense improvements into the back half of the year?
Sure, Jamie. We're really proud of our hotel teams and asset managers. We talk about this each quarter, and it's not just talk—it's results. We're excited that we've been able to keep expenses at much lower levels. It's multiple factors. Through our efficiency studies, we have fewer FTEs on a per occupied room basis than we did pre-COVID. We're using technology more and improving other areas, which helps explain why our cost per occupied room is growing less than inflation at about 2%. We'll also start realizing additional savings from items like property insurance. You shouldn't assume we'll have the same expense growth every quarter; other factors could change, but we feel good about our progress. Even with lower revenue growth, we're still able to push and expand margins. We view this as multiyear; we're just scratching the surface on many initiatives, and our hotel teams and asset managers are doing a terrific job finding more efficiencies every day.
Operator instructions. Our next question comes from the line of Floris Van Dijkum with Ladenburg Thalmann.
Jon, you mentioned something about reducing Pebblebrook's reliance on discounted channels. Presumably, you're talking about OTAs. Maybe if you could just remind us what the historical percentage of your demand came from OTAs, where that is now? And is there a difference in urban versus resorts in terms of the reliance on OTAs. I'm thinking in particular, you've got this massive potential upside in occupancy ramp still in urban. I would imagine you probably are maybe more reliant on OTAs to help fill that. But if you can give us a little bit of color on that, that would be great.
Sure. I'll speak in general and leave Ray to discuss the OTA percentages. When we talk about fewer discount channels, that goes beyond OTAs. It includes wholesale channels where we give a deeply discounted rate, maybe up to 25% or 30%, and those bookings are often filled with small to medium-sized tour groups. It also involves other channels such as crew business, which in many cases, though not all, is lower rated; crew bookings can be very low rated. We typically pick up crew in a down cycle and then slowly reduce crew as the cycle improves and other demand channels pick up. Finally, with respect to resorts versus urban properties, we tend to do more discounting and rely more on OTAs at our urban properties, particularly our independent urban properties, than we do at our independent resorts.
Yes. So Floris, on a general basis in our transient side, we have about 25% of our mix here comes from OTAs with our brands, that's lower, about 12% to 13%. Our urban lifestyle hotels that's in about, call it, about the 20% to 30% level. And then our resorts are in the 20% to 23% level. So it's a lower level there because the resorts tend to be a little more of a unique buying experience. People rely less on the OTAs. And actually, we have a high number of direct bookings on the resort side because of the premium resorts and experiences. So we'll continue to push that, whether it's technology and looking at that. I know there's a lot of efforts going on there between all the LLMs and making our hotels appear better, which our teams are working on. But it's something we manage and all of our teams do. But just to be clear, all OTA business isn't negative. OTA business positioned in a proper manner in a proper time can be a benefit. It's just when a hotel team relies too much on the OTAs and not go out and find a direct business or other channels, that's when it's more of a challenge. So you really have to take each property on a case-by-case basis and not say any OTA business is negative. I know that maybe brands have a different perspective of that because of their focus. But for us, we're about what's the net RevPAR and business being generated and OTAs are part of the mix.
Operator instructions. Our next question comes from the line of Chris Darling with Green Street.
Jon, I hoping if you could elaborate on just your broad capital allocation priorities given the meaningful run-up in your share price this year. I appreciate you still trade at a discount relative to the internal estimate of NAV, but that gap has narrowed pretty substantially. So just wondering if your thinking may have evolved.
Sure. Well, our capital allocation strategy is focused on two things. It's creating value for the shareholders and driving growth in cash flow per share. Presumably, those two are linked over the long term. So while the arbitrage opportunity has clearly for the moment, gone down, the way we look at it is there continues to be a significant discount as we sell assets within the NAV range, and we have continued to do that, using those proceeds opportunistically at the right time to buy our stock back, to buy our preferred securities back at a material discount to pay down debt related to the EBITDA that we're selling. I think those all continue to be the best use of our capital. I don't think we're ready prepared or frankly, it's not the right use of capital to be out buying new assets because we can buy our existing assets at a much more significant discount than the market values. So while the arbitrage opportunity has shrunk for now, keep in mind that NAV, as an example, it's not static. As operating performance improves, we would expect these values to go up over time. And then we'll see how the stock performs. And as we all know, these stocks tend to be on a kind of a random walk in the near term. So I don't think our allocation strategies have changed at all, but we have to sharpen our pencils because the arbitrage opportunity is not as significant as it was a few months ago.
Operator instructions. Our next question comes from the line of Jack Armstrong with Wells Fargo.
Can you take us through some of the moving pieces that brought you to raise your NAV estimate and spend some time talking about how closing the discount to your NAV is changing the way you're thinking about allocating incremental capital once we get to the convert in December?
Sure, Jack. Yes, we updated our NAV presentation. The overall gross value did not change, but some individual markets did. For example, resorts went up just because what we're seeing in the transaction market, as Tom alluded to earlier, is very constructive and pricing continues to be healthy there. We took down a couple of...
And operating performance continue to go up.
Operating performance continues to improve, as shown by our quarter and the continued strength in the resort segment. Some San Francisco markets were marked up because of that market’s performance, and there have been trades that help affirm values. A few markets were marked down, including Washington, D.C. due to its performance, a slight downgrade in Los Angeles, and reductions in Boston and San Diego. Overall, gross values did not change. What did change is our balance mix: we have more cash, less preferred stock due to buybacks, and fewer shares outstanding from the buyback. Those moves increased the overall value and raised our NAV from $23.50 last quarter to $24.50. We review NAV regularly and will assess implications going forward. On capital allocation, as Jon said, we will remain opportunistic and disciplined; our free cash flow gives us significant flexibility to pursue the most attractive options.
We have reached the end of the question-and-answer session. Mr. Bortz, I'd like to turn the floor back over to you for closing comments.
Well, thanks, everybody, for participating. Good luck the rest of the quarter. I hope you have great summers, and we'll be back to update you again on our performance come October. And I know we'll see many of you between now and then. Thanks so much.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.