Pebblebrook Hotel Trust — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Unless otherwise noted, financial figures are for the year and are in U.S. dollars. Pebblebrook is a hotel REIT focused primarily on upper-upscale hotels in major U.S. gateway and urban markets. At year-end it owned 23 hotels outright and held a 49% interest in a joint venture owning six Manhattan hotels.
Financial and operating performance
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $489.2 million | $380.7 million |
| Operating income | $57.9 million | $37.1 million |
| Net income | $43.2 million | $26.5 million |
| Net income attributable to common shareholders | $20.0 million | $8.3 million |
| Diluted earnings per common share | $0.32 | $0.14 |
| Cash from operating activities | $107.5 million | $77.2 million |
| Cash and cash equivalents at year-end | $55.1 million | $85.9 million |
| Total debt at year-end | $554.2 million | $468.5 million |
Revenue increased 28.5% year over year; operating income margin was approximately 11.8% and net income margin approximately 8.8%. Same-property results for wholly owned hotels showed occupancy of 82.2% versus 80.0%, ADR of $213.93 versus $202.89, and RevPAR of $175.87 versus $162.24. Management reported same-property RevPAR growth of 8.4%, above its cited 5.4% U.S. lodging-industry growth.
Fourth-quarter revenue was $126.8 million versus $104.7 million in 2012. Fourth-quarter net income attributable to common shareholders was $4.8 million versus $2.6 million, and diluted EPS was $0.08 versus $0.04.
FFO was $107.5 million, up from $79.0 million; FFO available to common shareholders and unit holders was $84.5 million versus $61.2 million. EBITDA was $141.5 million versus $109.1 million. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Cash used in investing activities was $246.0 million, including $230.8 million for hotel acquisitions and $38.8 million for property improvements, partly offset by joint-venture distributions. Cash provided by financing activities was $107.8 million. The company reported $16.5 million of restricted cash in addition to cash and cash equivalents.
Changes versus the prior year
- Revenue rose $108.5 million: $85.8 million came from properties not comparable across both years, primarily acquisitions, and $22.7 million from comparable properties.
- Hotel operating expenses increased $62.6 million, including $53.2 million from non-comparable properties. Depreciation and amortization, property taxes and insurance, ground rent, and interest expense also increased.
- The company acquired four properties for aggregate purchase prices of $326.0 million: Embassy Suites San Diego Bay-Downtown, the Redbury Hotel, Hotel Modera, and the leasehold interest in Radisson Hotel Fisherman’s Wharf.
- It issued 2.7 million common shares and 4.0 million Series C preferred shares, generating approximately $175.6 million net proceeds. Common distributions declared were $0.16 per share each quarter, or $0.64 for the year.
Debt, outlook, risks and other matters
- Year-end debt comprised a $100 million term loan and $454.2 million of mortgage debt; the $200 million revolving facility had no borrowings. The term loan was swapped to an effective 2.55% fixed rate. Management reported compliance with debt covenants.
- Debt principal payments were concentrated in 2016 and 2017. Contractual obligations totaled $1.04 billion, including $412.7 million of ground and hotel lease payments over the stated lease terms; lease totals exclude percentage rent and CPI adjustments.
- The Manhattan Collection joint venture had $460 million of first-mortgage debt and a $50 million special loan. Pebblebrook said it did not guarantee the joint-venture debt except for customary limited carve-outs.
- Management expected positive lodging fundamentals to continue into 2014, citing demand, limited supply and rate growth, and anticipated significant potential for hotel cash-flow growth. It forecast approximately $45 million to $55 million of 2014 capital investment for wholly owned hotels; no quantified earnings or revenue guidance was provided.
- Key risks include hotel-demand and economic cyclicality, operating-cost inflation, dependence on third-party managers, renovation execution and funding, refinancing and covenant risk, potential cash-trap provisions, competition and REIT qualification. The company noted first-quarter seasonality and stronger typical third-quarter results.
- Preferred shares had a $325 million aggregate liquidation preference and approximately $24.3 million in annual dividends, senior to common distributions. No material litigation was reported. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal controls, while three 2013 acquisitions were excluded from the controls assessment.
Investor verification priorities
- Review same-property comparisons and the precise property set included in reported occupancy, ADR and RevPAR figures; acquired properties and the joint venture are excluded from that schedule.
- Assess the 2016–2017 debt maturities, refinancing capacity, covenant headroom and any property-level cash-trap triggers.
- Verify the full cost and timing of planned 2014 capital projects, including renovation commitments and lease-related percentage payments.
- Examine the Manhattan joint venture’s debt, special loan terms, distributions and Pebblebrook’s potential need for additional equity.
- Consider preferred-dividend obligations, future equity issuance and dilution when evaluating cash available to common shareholders.