Pebblebrook Hotel Trust — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Pebblebrook is a hotel REIT focused primarily on major U.S. gateway markets. At quarter-end, it held interests in 26 hotels: 20 wholly owned and a 49% interest in six joint-venture hotels.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $126.3M | $94.2M | $231.2M | $171.6M |
| Operating income | $18.7M | $12.1M | $23.6M | $13.5M |
| Net income attributable to company | $14.8M | $9.9M | $14.6M | $7.1M |
| Net income attributable to common shareholders | $8.7M | $5.4M | $3.8M | $(1.8)M |
| Common EPS, basic and diluted | $0.14 | $0.10 | $0.06 | $(0.04) |
| FFO available to common shareholders and unit holders | $24.5M | $18.0M | $35.4M | $22.8M |
| EBITDA | $40.5M | $30.8M | $60.9M | $44.1M |
Reported operating margin was approximately 14.8% in Q2 2013 versus 12.8% a year earlier, and 10.2% for the first half versus 7.9%. FFO and EBITDA are non-GAAP measures; the company cautions that neither represents operating cash flow or funds available for distributions.
Same-property performance: For wholly owned hotels, Q2 occupancy rose to 85.6% from 83.2%, ADR to $215.85 from $205.27, and RevPAR to $184.77 from $170.87. First-half occupancy was 81.9% versus 78.4%, ADR $208.27 versus $200.02, and RevPAR $170.58 versus $156.85.
Cash flow, balance sheet and capital
- First-half operating cash flow was $37.6M, compared with $32.1M in 2012. Investing used $41.9M; financing provided $70.0M. Cash increased to $151.6M from $85.9M at year-end 2012.
- At June 30, total debt was $535.3M, up from $468.5M at year-end; this included $100M of term debt and $435.3M of mortgage debt. The $200M revolving facility was undrawn. The company reported compliance with debt covenants.
- The $100M term loan is hedged to an effective fixed rate of 2.55%; the company reported no unhedged variable-rate debt. Mortgage debt is generally non-recourse, subject to customary carve-outs.
- Total assets were $2.017B and total equity $1.402B. Preferred shares outstanding increased from 9.0M to 13.0M after issuance of $100M of Series C preferred shares. The company also raised $4.7M net through its common-share ATM program.
- Quarterly common distributions were $0.16 per share/unit. Preferred distributions increased with the Series C issuance.
Material changes and unusual items
- Revenue increased 34% in Q2 and 35% for the first half, but acquisitions materially affect year-over-year comparability. Management attributed $6.3M of Q2 growth and $12.1M of first-half growth to 14 hotels owned throughout both comparison periods; the remaining increases came from hotels not held in both periods.
- The company acquired the 337-suite Embassy Suites San Diego Bay-Downtown on January 29 for $112.5M, funded with $45.8M cash and assumption of a $66.7M mortgage. The acquired hotel contributed $5.2M of Q2 revenue and $9.4M for the first half.
- The Manhattan Collection joint venture distributed $23M following new financing on one property. The company’s net investing cash inflow from its joint venture was $26.3M for the first half. The venture had approximately $460M of first-mortgage debt, a $50M unsecured special loan from Pebblebrook, and approximately $40M of preferred capital; Pebblebrook does not guarantee its debt except for customary carve-outs.
- Q2 interest expense rose $2.5M year over year, and first-half expense rose $4.7M, primarily due to higher debt balances. First-half common-shareholder income improved to $3.8M from a $1.8M loss, while preferred distributions increased to $10.8M from $8.9M.
Outlook, risks and contingencies
Management described U.S. lodging fundamentals as positive, citing strength in transient business and leisure travel, improving occupancy, and demand growth exceeding supply growth; it also noted economic uncertainty and signs that hotel construction supply was beginning to increase. Management expected to invest approximately $15M–$25M in renovations, repositioning and other capital improvements at wholly owned hotels during the remainder of 2013, after investing $22.7M in the first half. No quantified earnings or revenue guidance was provided.
The company expects short-term needs to be funded from operating cash flow, cash balances and, if needed, its revolver; longer-term needs may require debt or equity issuance. Access to capital depends on market conditions. Key risks include hotel-demand and operating-cost volatility, competition, reliance on third-party managers, interest rates, acquisition and renovation execution, financing availability, potential uninsured losses, and maintaining REIT status. The filing reports no material litigation, no material change to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- How much of reported growth reflects same-property improvement versus acquisitions, and how pro forma results compare: six-month pro forma common income was $3.0M in 2013 versus $3.2M in 2012.
- Whether same-property occupancy, ADR and RevPAR gains persist, and whether higher hotel costs and property taxes constrain margins.
- Debt maturities, mortgage terms and covenant headroom, including the effect of the 2016–2017 maturities and the 2017 term-loan maturity.
- The joint venture’s leverage, preferred capital terms, and repayment or refinancing of Pebblebrook’s $50M special loan.
- Capital spending needs, liquidity after distributions and acquisitions, and the potential dilution and distribution priority associated with additional common or preferred issuance.