Pebblebrook Hotel Trust — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unless noted, financial amounts are in millions of dollars. Pebblebrook is a hotel-focused REIT; at quarter-end it owned interests in 24 hotels: 18 wholly owned properties and a 49% interest in a six-hotel New York joint venture.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $104.3 | $87.8 | $275.9 | $203.6 |
| Operating income | $15.6 | $7.3 | $29.1 | $14.4 |
| Net income | $12.1 | $5.8 | $19.3 | $7.1 |
| Net income attributable to common shareholders | $7.5 | $2.8 | $5.6 | $1.0 |
| Basic and diluted EPS | $0.13 | $0.05 | $0.10 | $0.01 |
| FFO available to common shareholders and units | $21.1 | $13.1 | $43.9 | $23.7 |
| EBITDA | $34.5 | $22.1 | $78.6 | $42.5 |
Revenue increased 18.8% in Q3 and 35.5% year to date. Calculated operating margin was 14.9% versus 8.3% in Q3 and 10.5% versus 7.1% for the nine-month periods. Common-shareholder earnings reflect preferred distributions of $4.5 million in Q3 and $13.4 million year to date. FFO and EBITDA are non-GAAP measures and are not substitutes for GAAP cash flow or net income.
- Hotel indicators: Pro forma portfolio occupancy was 86.8% in Q3 versus 84.7%; ADR was $215.69 versus $208.04; and RevPAR was $187.18 versus $176.16. Nine-month occupancy, ADR, and RevPAR also improved. These portfolio statistics exclude W Los Angeles–Westwood and Hotel Milano and include certain periods before Pebblebrook owned the hotels.
- Cash flow and investment: Nine-month operating cash flow was $57.1 million versus $28.4 million. Investing cash outflow was $258.0 million, including $217.4 million for hotel acquisitions and $40.5 million for property improvements. Financing cash inflow was $282.7 million. Cash and cash equivalents were $147.5 million at September 30.
- Debt and liquidity: Mortgage debt was $259.1 million and the term loan was $100.0 million; there were no revolver borrowings at quarter-end. The $200 million revolving facility was available, subject to its terms. The $100 million term loan was hedged to an effective fixed rate of 2.55% and matures in 2017. The company reported compliance with debt covenants. The $225 million liquidation preference of cumulative preferred shares is also relevant to capital structure.
Material changes and notable items
- Reported growth reflects substantial portfolio expansion and is not directly comparable with the prior periods. Same-property results also improved: management attributed comparable-property revenue gains to higher occupancy and ADR, with cost increases partly offset by cost initiatives.
- During the nine months, Pebblebrook acquired Hotel Milano, Hotel Vintage Park Seattle, Hotel Vintage Plaza Portland, and W Los Angeles–Westwood for a combined $217.4 million. It raised approximately $211.5 million net from common-share issuances, including a June public offering and sales through an at-the-market program.
- In October, the company acquired the 196-room Hotel Palomar in San Francisco for $58.0 million, funded with cash and assumption of a $27.2 million mortgage. This occurred after quarter-end.
- Q3 acquisition costs fell from $3.9 million to $0.5 million, principally because of costs associated with the 2011 Manhattan Collection joint venture investment. Nine-month G&A included a $1.1 million management-contract termination expense.
- Management expected to spend approximately $17–$20 million on capital projects during the remainder of 2012, including a planned $12.5 million renovation and repositioning of Hotel Milano over the following 12 months. No formal earnings or operating guidance was provided.
Outlook, risks, and contingencies
Management cited continued strength in corporate, group, and leisure travel, low new-hotel supply, and improving lodging fundamentals, while noting a slow-moving U.S. economy and global volatility. It expects short-term needs to be met with operating cash, existing cash, and, if needed, revolver borrowings; longer-term plans depend in part on access to debt and equity markets. These are expectations, not guarantees.
The Manhattan Collection joint venture had $560.8 million of variable-rate mortgage and mezzanine debt maturing in February 2013. Pebblebrook is not generally a guarantor, apart from customary carve-outs, but refinancing on acceptable terms is uncertain and could require additional equity to preserve its ownership interest. Other risks include acquisition execution, operating-cost inflation, reliance on third-party hotel managers, interest rates, renovation costs, and REIT qualification. Management reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls.
Most important facts for investors to verify
- How much reported growth came from acquisitions versus comparable-property operating improvement.
- Whether the Manhattan Collection debt was refinanced at maturity, on what terms, and whether additional equity was required.
- Capital spending and renovation timing, particularly for Hotel Milano, and the returns expected from those investments.
- Future financing needs and dilution risk given continued acquisition plans, outstanding preferred distributions, and the available ATM equity program.
- Whether hotel operating trends and liquidity support debt service and distributions through seasonal and economic fluctuations.