Pebblebrook Hotel Trust — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. Pebblebrook owned 29 hotels with 7,222 rooms at quarter-end. It is a hotel REIT; third-party managers operate its properties.
Key financial and operating metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $182.2 million | $196.2 million |
| Operating income | $20.5 million | $30.0 million |
| Net income | $14.1 million | $16.6 million |
| Net income attributable to common shareholders | $10.0 million | $6.6 million |
| Diluted earnings per common share | $0.14 | $0.09 |
| Operating cash flow | $37.6 million | $46.5 million |
| FFO | $41.4 million | $43.9 million |
| EBITDA | $46.9 million | $53.5 million |
Revenue declined 7.2% year over year and operating income fell 31.6%; operating margin was approximately 11.3%, versus 15.3%. Net income margin was approximately 7.7%, versus 8.5%. Common-shareholder income increased despite lower company net income, principally because preferred distributions and preferred-share redemption costs were lower than in Q1 2016.
Same-property occupancy was 80.6% (83.4%); ADR was $239.22 ($238.00); and RevPAR was $192.92 ($198.61), a 2.9% decline. Statistics exclude Hotel Zeppelin San Francisco in both periods because it was closed for renovation in Q1 2016.
Cash and cash equivalents were $31.9 million at March 31, 2017. Operating cash flow less $21.8 million of hotel improvements was approximately $15.8 million. Total debt was $1.073 billion, up from $996.3 million at year-end 2016. The $450 million revolving facility had $204 million drawn and $246 million available. Total liabilities were $1.278 billion and total equity was $1.534 billion. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Management attributed most of the $14.1 million revenue decline and $7.5 million reduction in hotel operating expenses to the prior-period comparison with properties sold: DoubleTree Bethesda, Viceroy Miami, and The Redbury Hollywood. Renovations also reduced revenue at several hotels; Hotel Zeppelin’s reopening partly offset the declines.
- Lower same-property occupancy contributed to RevPAR softness despite slightly higher ADR. Management cited urban-market demand headwinds and increased supply.
- Operating cash flow decreased $8.8 million. Hotel capital improvements were $21.8 million, down from $35.8 million a year earlier.
- Debt increased mainly as revolving-credit borrowings rose to fund, among other items, repayment of the $44.1 million Sofitel Philadelphia mortgage. The company also repurchased $62.4 million of common shares during the quarter.
- Interest expense declined by $1.5 million, largely reflecting lower mortgage debt balances. Q1 2016 included a $4.9 million equity-method loss from a joint venture that was liquidated in October 2016.
Outlook, commentary, risks, and unusual items
- Management expected positive but more moderate U.S. lodging revenue growth in 2017. It identified a strong U.S. dollar, softer international inbound travel, tepid business travel, and rising supply in several urban markets as headwinds. It also warned that the Moscone Center renovation and expansion could negatively affect San Francisco hotels during 2017.
- Management expected to invest approximately $60–$80 million in hotel capital improvements during the remainder of 2017, including about $22.5 million for the Revere Hotel Boston Common and $16.0 million for The Tuscan Fisherman’s Wharf. The $12 million Hotel Palomar Los Angeles–Beverly Hills renovation was completed during the quarter.
- The company agreed to sell the Dumont NYC for $118 million, classified it as held for sale, and recorded a $1.0 million impairment. Closing was expected in Q2 2017, but management gave no assurance the sale would close on time or at all. The hotel contributed $0.4 million of operating income in Q1 2017.
- Interest-rate exposure remains: $279 million of debt was subject to variable rates after swaps; a 0.1 percentage-point rate change was estimated to change annual interest expense by approximately $0.3 million. The $75 million unhedged portion of the Second Term Loan was floating-rate debt. The Hotel Zelos mortgage, approximately $25.6 million, matured in September 2017; management intended to repay it using the revolver.
- Management said existing cash and expected operating cash flow should cover operating needs, debt service, and REIT distributions; longer-term needs may be funded through debt or equity issuance, property sales, or operating cash. Access to capital depends on market conditions. The filing describes hotel-industry, economic, geopolitical, operating-cost, financing, interest-rate, renovation, manager-dependence, and REIT-qualification risks.
- Common distributions declared were $0.38 per share for the quarter. Subsequent to quarter-end, the company repurchased 524,550 additional shares for $15.1 million. No material litigation was reported; management stated disclosure controls were effective.
Important facts for investors to verify
- Whether the Dumont NYC sale closed in Q2 2017, at what net proceeds, and how those proceeds were used.
- Trends in comparable-hotel occupancy and RevPAR, renovation disruption, and the expected effect of new supply and the Moscone Center project.
- Debt maturities and refinancing plans, availability under the revolver, covenant headroom, and exposure to floating interest rates.
- Actual 2017 capital spending versus the $60–$80 million expectation, including renovation costs and execution timelines.
- Cash generation and the sustainability of common and preferred distributions alongside share repurchases and debt obligations.