Pebblebrook Hotel Trust — Q2 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2022. Pebblebrook is a hotel REIT that owned 54 hotels with 13,415 guest rooms at quarter-end. Results reflect a continuing recovery in travel, along with recent acquisitions and dispositions.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 |
|---|---|---|
| Total revenue | $397.5 million, versus $163.3 million in 2021 | $655.6 million, versus $247.0 million in 2021 |
| Operating income (loss) | $51.9 million, versus $26.3 million | $(25.7) million, versus $(69.9) million |
| Net income (loss) attributable to the Company | $28.0 million, versus $1.5 million | $(71.5) million, versus $(119.1) million |
| Net income (loss) attributable to common shareholders | $16.6 million; diluted EPS $0.12 | $(94.2) million; diluted EPS $(0.72) |
| Operating cash flow | Not presented separately for the quarter | $142.6 million, versus $(2.3) million |
| FFO available to common shareholders and unit holders | $89.3 million, versus $(18.6) million | $97.7 million, versus $(78.0) million |
| EBITDAre | $124.5 million, versus $16.4 million | $166.9 million, versus $(9.4) million |
Amounts are rounded; filing financial statements are in thousands. Reported operating margin was approximately 13.1% for Q2 2022 versus 16.1% in Q2 2021, and approximately (3.9)% for the first half versus (28.3)% in 2021. These GAAP margins were affected by impairment charges and prior-year property-sale gains.
- Hotel performance: Same-property Q2 occupancy was 69.4% versus 42.6%; ADR was $318.58 versus $258.21; RevPAR was $221.04 versus $109.96; and Total RevPAR was $335.61 versus $170.83.
- Cash and liquidity: Cash and cash equivalents were $32.0 million, with $30.7 million of restricted cash. Management reported $561.2 million of cash, restricted cash and available senior revolving-credit capacity in total; the senior revolver had $498.4 million of remaining capacity after borrowings and letters of credit.
- Debt: Debt carrying value was $2.518 billion; face value was $2.529 billion. The company had $100 million drawn on its senior unsecured revolver. Assuming available extensions are exercised, $60 million of principal and $83.7 million of interest were due on or before June 30, 2023. Debt covenants were in compliance at quarter-end.
- Cash deployment: First-half investing cash outflow was $216.7 million, including $247.2 million for acquisitions and $42.4 million for hotel improvements, partly offset by $73.0 million of sale proceeds. Financing cash inflow was $44.6 million.
Material changes versus the prior comparable period
- Q2 revenue increased $234.2 million year over year; management attributed most of the increase to stronger leisure demand and some recovery in business and group bookings. The first-half revenue increase was $408.6 million, also reflecting hotels that had been suspended during Q1 2021.
- First-half operating cash flow improved to $142.6 million from a $2.3 million outflow as hotel operations and demand recovered.
- First-half 2022 included $73.3 million of impairment losses on two hotels, compared with $14.9 million on one hotel in first-half 2021. Q2 2022 impairment was $12.3 million. Q2 and first-half 2021 results included a $64.6 million gain on hotel sales; 2022 had no such gain.
- Interest expense declined to $45.7 million from $50.1 million for the first half, primarily due to capitalized interest on renovations and maturity of certain interest-rate swaps.
- In May and June 2022, the company acquired Inn on Fifth for $156.0 million and Gurney’s Newport Resort & Marina for $174.0 million. It sold The Marker San Francisco for $77.0 million. Two other hotels were classified as held for sale at June 30, with aggregate expected proceeds of approximately $151.0 million; the company expected to complete those sales in Q3 2022.
Outlook, commentary, risks and unusual items
- Management said leisure travel recovery had brought resort revenue to pre-pandemic levels, while corporate and group business was recovering more slowly but had increased substantially from 2021.
- The company expected COVID-19 to continue negatively affecting the hotel industry and its results, financial position and cash flows for the remainder of 2022. It cited continuing uncertainty from new variants and public and individual responses.
- Inflation and expected future inflation were raising labor and other costs and adding uncertainty around consumer confidence and economic growth. Higher interest rates are also a risk: 24.8% of aggregate indebtedness was exposed to variable rates, excluding term loans effectively swapped to fixed rates; a 0.1 percentage-point rate change was estimated to change annual interest expense by about $0.6 million.
- Management expected $100 million to $120 million of 2022 capital investment, including approximately $50 million for redevelopment and repositioning projects. First-half capital investment was $42.4 million.
- The company said it exited the credit-facility covenant-waiver period at the end of Q2 2022 and was compliant with covenants. Substantially less-restrictive covenants were scheduled to remain in place through Q1 2023. Repayment or refinancing of near-term debt was expected to rely on operating cash flow, property-sale proceeds or revolver borrowings.
- Fixed minimum payments for hotel, ground and finance leases totaled $1.8 billion over future periods, including $20.8 million due on or before June 30, 2023. Expected annual distributions on preferred shares and units were approximately $50 million.
- Estancia La Jolla’s mortgage cash-trap provisions remained active, restricting hotel cash held by the lender; Margaritaville’s cash trap was released in Q1 2022. The company reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the expected Q3 2022 sales of the two held-for-sale hotels, and the additional July 2022 property sale agreement for $32.9 million, closed on expected terms and dates.
- How hotel demand, particularly business and group bookings, progresses against leisure demand, and whether inflationary operating costs pressure margins.
- Available liquidity, covenant compliance and refinancing or repayment plans for debt maturities, including the March 2023 revolver maturity and the $60 million of assumed near-term principal due.
- The nature and valuation assumptions underlying the $73.3 million first-half impairment charge, and whether further property impairments or dispositions occur.
- That FFO, EBITDA and EBITDAre are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow; also assess common-share dilution from convertible notes, which were dilutive in Q2 EPS but excluded when anti-dilutive for the six-month period.