Pebblebrook Hotel Trust — Q1 2020 Form 10-Q
Business context and reporting period
Reports the three months ended March 31, 2020. Pebblebrook owned 54 hotels with 13,352 rooms, primarily in major U.S. cities. The quarter captures the initial impact of COVID-19: hotel demand nearly disappeared, and the company suspended operations at 46 hotels while keeping eight open with sharply reduced staffing and expenses.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $269.1 million | $367.2 million |
| Operating income | $54.9 million | $29.9 million |
| Net income attributable to company | $41.9 million | $5.6 million |
| Net income (loss) available to common shareholders | $33.8 million; $0.26 per diluted share | $(2.5) million; $(0.02) per diluted share |
| FFO available to common shareholders and unit holders | $(7.2) million | $51.8 million |
| Cash provided by operating activities | $1.5 million | $56.3 million |
| Capital improvements to hotel properties | $50.1 million | $43.3 million |
| Debt at period end | $2.71 billion | $2.23 billion at December 31, 2019 |
| Unrestricted cash at period end | $727.4 million | $30.1 million at December 31, 2019 |
Revenue declined 26.7% year over year. Same-property occupancy was 56.7% versus 75.5%; ADR was $249.94 versus $252.01; RevPAR was $141.71 versus $190.26; and Total RevPAR was $213.58 versus $280.88. GAAP operating income and net income include a $117.4 million gain on hotel sales. The company also recorded a $20.6 million impairment loss. Net income should therefore not be read as a measure of underlying hotel performance.
Interest expense was $23.6 million, down from $29.3 million a year earlier. The company reported a $54.3 million unrealized loss on interest-rate derivatives in other comprehensive income. At March 31, derivatives had aggregate fair-value liabilities of $72.7 million.
Material changes versus the prior comparable period
- Revenue fell $98.1 million; management attributed the comparable-property decline principally to March operating suspensions, partly offset by property portfolio changes.
- Hotel operating expenses fell $35.4 million, including a $5.0 million increase in costs associated with suspended operations.
- Two hotels were sold in March for an aggregate $331.0 million, generating a $117.4 million net gain. Cash proceeds reported in investing activities were $320.0 million.
- General and administrative expense rose $11.5 million, principally reflecting $16.0 million of accelerated share-based compensation after cancellation of February retention awards.
- Financing cash flow was $418.5 million, primarily reflecting revolving-credit borrowings. Cash and restricted cash together increased to $746.8 million.
Outlook, risks and unusual items
- Management said the full financial impact of COVID-19 could not be reasonably estimated and expected the pandemic could significantly affect 2020 results, financial position and cash flow.
- The company drew down its $650 million senior unsecured revolver in March; it had $643.2 million outstanding and no remaining capacity on that facility at quarter-end. A separate $25 million PHL revolver remained undrawn.
- Although Pebblebrook was in compliance with debt covenants at March 31, management considered covenant violations within the next 12 months probable absent waivers. Waivers were under negotiation, but lender approval was discretionary. The filing states there is substantial doubt about the company’s ability to continue as a going concern for one year after issuance if the uncertainty is not resolved. Management believed waivers would be obtained and also cited potential hotel sales or debt or equity financing as alternatives; neither outcome was assured.
- No scheduled debt maturities were reported before the fourth quarter of 2021; all debt was unsecured. Covenant waivers, if obtained, could involve higher costs or rates and additional restrictions.
- The common quarterly dividend was reduced to $0.01 per share, which management said was likely to continue for the remainder of 2020. Executive, trustee and employee compensation was reduced; planned capital spending was curtailed; and hotel operating costs were cut.
- Management expected $70–$90 million of capital investment for the remainder of 2020, with major nonessential projects postponed and selected projects already underway expected to continue. Litigation disclosures reported no material pending or threatened litigation.
Important facts for investors to verify
- Progress and final terms of lender covenant waivers, including any added costs, restrictions or covenant changes.
- Cash burn and operating cash flow as hotel closures continue, and the timing and cost of reopening properties.
- Actual hotel demand, occupancy, RevPAR and revenue recovery after restrictions ease.
- Whether planned capital spending, asset sales or additional financing change, and the implications for liquidity and debt.
- Dividend policy and the extent to which reported earnings are affected by property-sale gains, impairments and accelerated compensation expense.