Pebblebrook Hotel Trust — Q1 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2019. Pebblebrook owned 61 hotels with 14,575 guest rooms at quarter-end. Results include the 36-hotel LaSalle portfolio acquired on November 30, 2018; reported year-over-year comparisons therefore are not on a like-for-like basis.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $367.2 million | $181.1 million |
| Operating income | $29.9 million | $31.4 million |
| Net income | $5.7 million | $24.5 million |
| Net income (loss) attributable to common shareholders | $(2.5) million | $20.4 million |
| Diluted EPS | $(0.02) | $0.29 |
| Cash from operating activities | $56.3 million | $41.3 million |
| FFO | $59.9 million | $49.4 million |
| EBITDA / EBITDAre | $84.2 million | $58.8 million |
Hotel operating expenses were $236.8 million; depreciation and amortization was $54.3 million; and interest expense was $29.3 million, up from $9.8 million in Q1 2018. The increase in interest expense largely reflected higher debt balances following the merger. FFO and EBITDA/EBITDAre are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Same-property occupancy was 75.4%, versus 76.1%; ADR was $249.00, up from $236.40; RevPAR was $187.76, versus $179.98; and Total RevPAR was $276.76, versus $265.20. The company says first-quarter results exceeded its outlook. On a merger-adjusted pro forma basis, revenue was $367.2 million versus $364.2 million in Q1 2018, while operating income fell to $29.9 million from $41.7 million and common-shareholder results shifted to a $2.5 million loss from $9.3 million of income.
At March 31, cash and cash equivalents were $51.4 million, restricted cash was $25.7 million, and total debt was $2.507 billion, compared with $2.747 billion at December 31, 2018. The company had no borrowings on its $650 million senior revolver and $10 million PHL facility, and reported compliance with debt covenants. Hotel improvements and additions used $43.3 million in Q1. Total assets were $6.833 billion and total equity was $3.707 billion.
Material changes and significant transactions
- The LaSalle merger materially expanded the portfolio and makes reported year-over-year results less comparable; acquired hotels contributed $184.0 million of revenue and $63.2 million of operating income in Q1 2019.
- In February, Pebblebrook sold The Liaison Capitol Hill for $111.0 million and Hotel Palomar Washington DC for $141.5 million, recognizing no gain or loss on either sale.
- The company repaid $70.0 million of its 2020 term-loan tranche and repaid $171.9 million under revolving facilities. It ended the quarter with no revolving borrowings.
- Adoption of the new lease standard resulted in recognition of $325.5 million of operating-lease right-of-use assets and $247.2 million of related liabilities, primarily for ground leases; management said the income-statement impact was minimal.
Outlook, risks and unusual items
Management described the 2019 lodging outlook as positive, citing economic growth, employment and wage gains, low inflation, and consumer and business confidence. It noted weaker-than-expected industry and portfolio demand trends in March, while group and transient demand and booking pace remained favorable. No specific full-year revenue or earnings guidance is provided in the supplied filing text. The company expects to invest approximately $110 million to $140 million in hotel capital improvements through the remainder of 2019, including a $21 million Hilton San Diego Resort & Spa renovation.
Management expects operating cash, existing cash and, if needed, revolver borrowings to meet short-term requirements; longer-term needs may be funded through operations, property sales, debt or equity issuance. It expects increased dividend outflows following the LaSalle merger to be supported by cash flows from acquired hotels. The filing notes typical hotel-industry seasonality, with lower first-quarter and higher third-quarter revenue and cash flow. Key risks include hotel demand and operating-cost changes, interest rates, access to capital, reliance on third-party managers, acquisition and renovation execution, and uninsured losses.
Other notable items include $3.2 million of management-transition expenses and $2.2 million of merger integration costs during the quarter. Interest-rate swaps had $1.4 billion of aggregate notional value; $997.5 million of debt remained exposed to variable rates after excluding debt effectively fixed by swaps. A 0.1 percentage-point rate movement was estimated to change annual interest expense by approximately $1.0 million. In April 2019, the company agreed to sell the Onyx Hotel for $58.3 million. The LaSalle purchase-price allocation remained preliminary. No material litigation or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of reported operating performance and cash generation is attributable to acquired LaSalle hotels, and how comparable-property trends develop.
- Whether the company’s operating outlook and projected $110–$140 million of remaining 2019 capital spending are achieved, including the San Diego renovation.
- Debt maturities, floating-rate exposure, swap coverage and continuing compliance with credit covenants.
- Completion and final purchase-price allocation for the LaSalle merger, and closing of the Onyx Hotel sale agreement.
- Whether cash flows from the expanded portfolio adequately support debt service, capital needs and common and preferred distributions.