Pebblebrook Hotel Trust — Q2 2018 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2018. Pebblebrook owned 28 hotels with 6,973 guest rooms. Its hotels are operated by third-party managers.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $206.5m | $205.7m | $387.6m | $387.9m |
| Operating income | $48.5m | $40.2m | $79.9m | $60.7m |
| Net income | $58.3m | $43.7m | $82.8m | $57.8m |
| Net income attributable to common shareholders | $54.1m | $39.5m | $74.5m | $49.5m |
| Diluted EPS | $0.78 | $0.57 | $1.07 | $0.70 |
| FFO available to common shareholders and unit holders | $78.8m | $51.0m | $124.1m | $88.3m |
| EBITDAre | $96.0m | $66.2m | $154.8m | $114.1m |
Reported operating margin was approximately 23.5% in Q2 2018 versus 19.5% in Q2 2017, and 20.6% for the first half versus 15.6%. These reported margins include insurance-settlement gains. Same-property occupancy was 87.8% in Q2 versus 86.9%; ADR was $254.81 versus $251.08; and RevPAR was $223.81 versus $218.19. For the first half, same-property RevPAR was $209.57 versus $206.93.
For the first six months, operating cash flow was $102.5m, versus $93.5m. Investing activities used $382.2m, including $356.2m of marketable-security purchases and $35.3m of hotel improvements. Financing provided $272.7m. Cash and restricted cash totaled $25.5m at June 30, 2018.
Total debt carrying value was $1.223bn, up from $885.2m at year-end 2017, principally reflecting increased revolving-credit borrowing. The company had $383.0m drawn on its $450m revolving facility, leaving $67m available; the separate $10m PHL facility was undrawn. It reported compliance with debt covenants. Of aggregate indebtedness, $458m, or 37%, was exposed to variable rates after considering swaps; a 0.1 percentage-point rate change was estimated to alter annual interest expense by about $0.5m.
Material changes and unusual items
- Revenue was nearly flat year over year in both the quarter and first half. Management attributed Q2 gains at San Francisco hotels partly to completed renovations, offset by prior-year property sales. First-half revenue was also affected by those sales.
- Net income included a $8.2m Q2 and $13.1m first-half gain from the final $20.5m Hurricane Irma insurance settlement for LaPlaya. Additional repair work was expected through Q3 2018.
- “Other” income was $22.9m in Q2 and $25.4m for the first half, primarily reflecting unrealized gains and dividend income from marketable securities. Pebblebrook held 10.8m LaSalle Hotel Properties shares, valued at $370.0m at quarter-end, representing approximately 9.8% of LaSalle’s outstanding common shares.
- Interest expense rose to $10.8m in Q2 from $9.7m, and to $20.6m for the first half from $19.0m, mainly due to higher revolver borrowings associated primarily with the securities investment.
- Prior-year comparisons included $14.6m of gains on hotel-property and parking-garage sales; no hotel dispositions occurred in the first half of 2018.
Outlook, risks, and contingencies
- Management expected U.S. lodging revenue to grow in the second half of 2018, citing improving business travel, solid leisure demand, and increased bookings. It cautioned that new supply in many urban markets could limit performance relative to modest industry RevPAR growth. No numerical company-wide earnings or revenue guidance is provided in the filing text.
- Management expected to invest approximately $30m–$40m in hotel capital projects during the remainder of 2018, including the start of an $18m Mondrian Los Angeles renovation, anticipated to finish in Q1 2019.
- Pebblebrook continued to pursue a proposed business combination with LaSalle Hotel Properties after its most recent offer was rejected; the offer remained outstanding at the filing date. The filing notes additional corporate costs associated with pursuing the transaction.
- Key stated risks include hotel demand and cost pressures, competition and new supply, interest-rate increases, access to financing and capital, dependence on third-party managers, renovation delays or cost overruns, uninsured losses, and REIT qualification. Management reported no material litigation, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether reported earnings and margins are sustainable apart from the LaPlaya insurance gain and LaSalle investment gains and dividends.
- The status, financing, and potential costs or outcome of the proposed LaSalle transaction, and the value and funding of the LaSalle shareholding.
- Debt repayment and liquidity plans, including the substantial increase in revolver borrowings, remaining capacity, floating-rate exposure, and covenant headroom.
- Whether hotel demand, renovation performance, and LaPlaya repairs support management’s outlook and capital-spending plans.