BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Pebblebrook Hotel Trust Bets Big On Boutique Hotels

This article is more than 8 years old.

This story appears in the June 28, 2015 issue of Forbes. Subscribe

Jon Bortz rides an orange bicycle through the kelly green lobby of Washington, D.C.'s Hotel Monaco. Dressed in a conservative suit and sensible black shoes, the curly-gray-haired 58-year-old looks a tad silly. But the bright cruiser captures the flavor of Pebblebrook, the hotel company he founded six years ago. "Gotta have fun," Bortz says, as he swings a leg over to dismount.

And that's precisely the point: Every detail of this hotel has been designed to create an enjoyable experience. Unlike most real estate investment trust chief executives, who spend more time reviewing spreadsheets and meeting shareholders, Bortz is deeply involved in ensuring that properties have the right vibe--he signs off on every piece of fabric, every chair, every fixture that will grace his hotels. Bortz gestures toward a colorful piece of art in the lobby, which, yes, he personally approved. He heads down the staircase to the hotel's lower level, pointing out the custom wallpaper depicting the heads of presidents (this is D.C., after all).

When Pebblebrook bought this property in 2010 from Kimpton Hotels for $74 million, the stairwell was bare and the ceilings were covered in the kind of flat, gridded panels found in a midmarket office space. Guests staying here frequently squawked about being on the ground floor, slightly below street level, which felt like a basement. So Bortz dressed it up, put in antique tin ceilings painted gold and added tasteful drapes and graceful consoles that give the corridor the feel of a grand hallway. It paid off: The number of complaints dropped dramatically, and these days overnight room rates average $265, compared with $152 citywide, according to STR Analytics, with an enviable occupancy rate of 85% (67% is typical for D.C.).

That attention to detail explains in part how over the past six years Pebblebrook, which started as nothing more than a bright idea--Bortz founded the company in 2009, raising $400 million on his track record as one of lodging's top-performing CEOs--has quickly blossomed into a $3 billion (market cap) leader among lodging REITs in America. Like other REITs its returns have been impressive: 144% for the past five years, versus 115% for the S&P 500, with hefty dividend increases of 33% for 2013 and 44% in 2014.

"Bortz is like a rock star. He walks on water in people's eyes," says Jeff Donnelly, a managing director at Wells Fargo Securities. Pebblebrook projects its cash flow (Ebitda) could jump by 22% to $327 million in 2015.

But despite its success, the big question facing all hotel REITs is whether there is any juice left in the run-up. During 2013 and 2014 the Baird/STR Hotel REIT subindex, which tracks the price performance of 11 lodging companies, rose a whopping 54%. Through the second week of June the subindex is down 10.7%. RevPAR (revenue per available room, a key lodging REIT metric) has decelerated for seven straight months. And in past downturns lodging REITs have cratered. "These are stocks that work best very early in the cycle," says C. Patrick Scholes, an analyst at SunTrust Robinson Humphrey. Other analysts mention the potential for competition from lower-end chains like Hampton Inn and Courtyard by Marriott.

Bortz shrugs off the gloomy scenario because he thinks demand for his boutique hotel properties is driven by increasingly affluent Gen Xers and emerging Millennials, and even those of older generations, who would rather collect experiences than things.

Bortz first gained an appreciation for the value of a singular experience back in the 1980s, when he was a vice president at LaSalle Partners overseeing the redevelopment of Washington, D.C.'s Union Station. The government had reopened the 1907 Beaux-Arts station as a national visitor center for the Bicentennial in 1976, but the project failed miserably. By the time Bortz took over, the station had been closed again and suffered from a leaky roof, with toadstools growing on the floor.

Bortz oversaw the $180 million redevelopment for LaSalle, adding 210,000 square feet of retail space. "It really was my introduction into the need to create something that was a unique destination and a unique sense of place," Bortz says.

Next Bortz managed the transformation of New York City's Grand Central train station for LaSalle in the late 1990s. Under Bortz's watch Grand Central morphed into a thriving hub for the hundreds of thousands who come each day not just for trains but also for gourmet meals or to buy Vince Camuto shoes and Swatch watches. Bortz eventually took the company public in 1998 and was CEO until 2009.

His experience at LaSalle rejuvenating run-down properties like Grand Central formed the foundation of Pebblebrook's strategy of polishing diamonds in the rough into gleaming boutique hotels and packaging them together for investors. Today Pebblebrook's portfolio of 36 properties (30 wholly owned, 6 in joint ventures) consists primarily of chic hotels flying under an array of brands like Kimpton, Wand Sofitel--all unique properties in gateway cities forecast to be big with travelers for decades to come.

Bortz's concept is simple: Buy underperforming properties on the cheap in cities where it is hard to build, and renovate them to create a locally flavored experience special enough to command premium pricing. "I think people are looking for things that are more authentic, from an experience perspective," he says. "So if I go to Portland, as part of my overall experience of Portland I want to stay in a hotel that speaks to Portland, that makes me feel like I'm in Portland, and not in the same room I could be in in Des Moines or New York or Baltimore or anywhere else in the country," he says. So D.C. has the presidential wallpaper, and Hotel Zetta in San Francisco, a city of tech-obsessed adult children, has a giant Plinko board in the lobby.

Quirky amenities and a flair for creative decor help bring in young travelers, but Bortz is even better at slashing operating costs. His hotels got rid of tiny individual toiletries bottles (a huge waste of plastic), replacing them with large pump bottles. Annual cost savings: $40,000 per hotel, or about $1.4 million companywide. Another big savings comes from strategic housekeeping: steps like not changing the sheets every night for guests on multiday stays (and convincing them it's primarily for environmental reasons), which cuts maid visits from 30 to 15 minutes per room, thus saving $60,000 per hotel, nearly $2.2 million per year. It all adds up to operating margins of 39% for Pebblebrook versus 37% for the industry.

So far this year Pebblebrook's shares are down 7%. Other lodging REITs are down as much as 20%. The question hanging in the air is whether this is a sign of what's to come or simply a hiccup. Contrarian investors, who would rather ride strong demographic demand than bicycles in hotel lobbies, should take note. With dividend yields ranging from 3% to 6%, the sleep-well-at-night reassurance of owning these stocks (at least for as long as this lodging upswing lasts) could be even more comforting than an extended stay in one of Bortz's sumptuous hotels.