Pebblebrook Hotel Trust — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Pebblebrook owned 57 hotels with 14,112 guest rooms. Results are significantly affected by the November 2018 merger with LaSalle Hotel Properties; reported year-over-year revenue growth largely reflects the enlarged portfolio, not comparable-property growth.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $423.6 million | $205.5 million | $1,232.8 million | $593.0 million |
| Operating income | $60.8 million | $40.4 million | $186.6 million | $120.2 million |
| Net income | $30.0 million | $29.9 million | $96.2 million | $112.7 million |
| Net income attributable to common shareholders | $21.8 million | $25.8 million | $71.5 million | $100.2 million |
| Diluted EPS | $0.17 | $0.37 | $0.55 | $1.44 |
| Operating cash flow | Not stated for the quarter | Not stated for the quarter | $316.1 million | $170.8 million |
| Capital improvements | Not stated for the quarter | Not stated for the quarter | $118.0 million | $56.9 million |
- Q3 same-property occupancy was 87.2% versus 88.6%; ADR was $259.96 versus $261.57; RevPAR was $226.67 versus $231.73. Same-property Total RevPAR was $323.82 versus $327.07.
- At September 30, cash and cash equivalents were $29.8 million, restricted cash was $27.0 million, and total debt was $2.230 billion, down from $2.747 billion at December 31, 2018. Shareholders’ equity was $3.646 billion.
- The $650 million senior unsecured revolver had $100 million drawn and $550 million available; an additional $10 million PHL facility was undrawn. The company reported compliance with debt covenants.
- Nine-month financing cash outflow was $686.4 million, including $451.8 million of debt repayments and $159.5 million of distributions. Investing cash inflow was $319.3 million, including $437.9 million of hotel-sale proceeds.
- Interest expense rose to $26.5 million in Q3 from $12.6 million and to $84.5 million for nine months from $33.3 million. Preferred distributions were $24.4 million for the nine-month period; common distributions were $0.38 per share/unit per quarter.
Material changes and notable items
- Q3 revenue rose $218.1 million year over year, entirely attributed by management to non-comparable properties, principally the LaSalle portfolio. For the first nine months, revenue increased $639.8 million, of which $631.7 million came from non-comparable properties.
- Although net income was nearly unchanged in Q3, common-shareholder income and diluted EPS declined, reflecting higher preferred distributions and a substantially larger common-share count after the merger. Nine-month net income and common EPS also declined versus 2018.
- Same-property Q3 RevPAR weakened, and management cited weaker-than-expected performance in San Diego, Los Angeles, San Francisco and Washington, D.C., plus lost South Florida business amid the threat of Hurricane Dorian.
- The company sold six hotels during the first nine months for aggregate stated sale prices of approximately $449.0 million; it reported no gain or loss on these dispositions. Topaz Hotel was classified as held for sale under a $33.0 million agreement, with closing expected in Q4 2019, subject to customary conditions and no assurance of completion.
- Management repaid $450 million of term loans. The Westin San Diego Gaslamp Quarter mortgage, with $66.4 million outstanding, matures in January 2020; management intended to refinance it or repay it using revolver borrowings.
- Adoption of the lease accounting standard resulted in recognition of $342.6 million of operating-lease right-of-use assets and $256.2 million of related liabilities at quarter-end; management said adoption had minimal income-statement impact.
- LaSalle merger purchase accounting remained preliminary. Q3 adjustments reduced hotel-property values by $36.0 million and intangible assets by $6.5 million, while reducing accrued liabilities by $42.5 million. The company expected to complete purchase accounting in Q4.
Outlook, risks and contingencies
- No formal earnings or operating guidance is provided in the filing. Management expected $45 million to $65 million of hotel capital investment through the remainder of 2019. Planned projects included renovations at two San Diego hotels and the Donovan Hotel, with completion expected in 2020; Donovan was expected to close for renovation in November 2019.
- Management expected operating cash flow and existing cash to support operations, debt service and REIT distributions, with revolver borrowings available if needed. Longer-term funding sources include debt or equity issuance, property sales and operating cash flow; access to capital depends on market conditions.
- Management cited moderating demand growth and continued efforts to control expenses and realize portfolio-wide cost savings and operating synergies.
- Key disclosed risks include lodging-demand and economic downturns, competition, rising labor and energy costs, interest-rate changes, dependence on third-party hotel managers, financing and capital-market availability, property redevelopment delays or cost overruns, uninsured losses, and maintaining REIT qualification.
- Interest-rate swaps hedged variable-rate debt, but their fair value was a net liability position of $27.7 million ($28.4 million liabilities less $0.7 million assets). Derivative losses in other comprehensive income were $38.0 million for nine months; approximately $10.4 million was expected to be reclassified to interest expense over the next 12 months. A 0.1 percentage-point change in rates on unhedged variable debt was estimated to change annual interest expense by about $0.4 million.
- The filing reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- How much of reported revenue and operating performance reflects LaSalle merger additions versus organic same-property trends, including ongoing RevPAR performance in weaker markets.
- Whether the Topaz sale closes on the stated terms and how the proceeds are used.
- Completion and final purchase-price allocation for LaSalle, including any further changes to property values, useful lives, depreciation or liabilities.
- Funding and execution of planned renovations, their effect on hotel availability and performance, and actual capital spending versus the stated estimate.
- Debt maturities, refinancing of the January 2020 mortgage, floating-rate exposure and compliance with covenants as debt and interest costs evolve.
- Whether operating cash flow can sustain debt service, capital spending and common and preferred distributions while maintaining adequate liquidity.