Pebblebrook Hotel Trust — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; balance-sheet comparisons are with December 31, 2010. Pebblebrook is a hotel REIT that owned 14 hotels with 3,812 rooms at quarter-end. Its taxable REIT subsidiary leases the properties to third-party hotel managers.
Financial results and position
| Metric | Q2 2011 | Six months 2011 | Comparable 2010 |
|---|---|---|---|
| Revenue | $73.1 million | $115.8 million | $2.2 million |
| Operating income (loss) | $8.2 million | $7.2 million | $(4.7) million / $(6.3) million |
| Net income (loss) attributable to common shareholders | $1.8 million; $0.03/share | $(1.8) million; $(0.05)/share | $(3.8) million; $(0.19)/share / $(4.4) million; $(0.22)/share |
| Company-reported FFO | $9.4 million | $10.6 million | $(3.6) million / $(4.2) million |
| Company-reported EBITDA | $16.1 million | $20.4 million | $(3.6) million / $(4.2) million |
Approximate operating margin was 11.2% for Q2 and 6.2% for the first half. Revenue and operating expenses rose sharply because the 2011 results include a much larger hotel portfolio; 2010 included only two hotels for the relevant periods. The filing’s pro forma presentation, assuming acquired hotels were owned from January 1, 2010, reports Q2 revenue of $84.9 million versus $81.4 million and common-shareholder income of $4.0 million versus $7.3 million. These unaudited figures are illustrative, not actual results.
- Cash flow: First-half operating cash flow was $15.4 million, investing cash outflow was $496.6 million, and financing cash inflow was $400.5 million. Cash declined $80.7 million to $140.0 million; restricted cash was $6.7 million.
- Debt and liquidity: Mortgage debt was $252.1 million, up from $143.6 million at year-end; no credit-facility borrowings were outstanding at June 30. The amended unsecured revolver had $200 million capacity, a June 2014 maturity and a one-year extension option. The company reported compliance with debt covenants. About $144.3 million of scheduled mortgage payments, including interest, were due within one year.
- Capital and equity: Total assets were $1.320 billion and total equity was $1.024 billion. The company raised $226.5 million net in an April common-share offering and approximately $120.9 million net from issuing $125 million of 7.875% Series A preferred shares. Common distributions were $0.12 per share for each of the first two quarters.
Material changes, outlook and risks
- During the first half, Pebblebrook acquired six hotels for approximately $467.1 million of cash consideration reported in investing activities, including the Argonaut, Westin Gaslamp Quarter, Hotel Monaco Seattle, Mondrian Los Angeles, Viceroy Miami and W Boston. Hotel-property net book value increased to $1.120 billion from $599.7 million.
- In July, the company closed a $153.6 million investment for a 49% interest in a joint venture owning six Manhattan hotels. Funding included $101.6 million of cash, a previously placed $10 million deposit and $42 million of revolver borrowings. The joint venture hotels had approximately $596.6 million of mortgage and mezzanine debt maturing in February 2013; Pebblebrook said it was not a guarantor except for limited customary carve-outs. The company also incurred approximately $8.2 million of acquisition costs.
- Management expected to invest approximately $63–68 million in 2011 on renovations, repositioning and other capital improvements; $17.1 million had been invested in the first half, with $45.9–50.9 million expected for the remainder of the year. No specific earnings or revenue guidance was provided.
- Management described the lodging recovery as continuing, citing stronger corporate and group travel, international demand, occupancy and room rates. It expected industry supply growth below 1% and saw scope for further occupancy and rate increases, while noting broader economic uncertainty. Results are seasonal, generally weaker in the first and fourth quarters.
- Key risks include hotel demand and operating-cost changes, reliance on third-party managers, availability and cost of financing, interest-rate movements, acquisition and renovation execution, possible uninsured losses, and maintaining REIT qualification. Variable-rate debt was $56.1 million; a 0.25% rate movement was estimated to change annual interest expense by about $0.1 million. No material litigation or material changes to the prior annual report’s risk factors were reported.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. FFO and EBITDA are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Important facts for investors to verify
- How much of reported growth reflects same-hotel operating improvement versus the rapid expansion of the portfolio; assess comparable property RevPAR, occupancy and ADR.
- Near-term refinancing plans for mortgage maturities, particularly the $42 million Argonaut loan maturing in March 2012 and other 2012 maturities, and post-quarter revolver usage.
- The Manhattan joint venture’s operating performance, debt terms and February 2013 maturity, as well as Pebblebrook’s exposure under the limited carve-outs.
- Actual renovation spending versus the $63–68 million 2011 expectation, and the effect of capital needs and preferred distributions on cash available for common shareholders.
- Whether the company can sustain liquidity and access capital on acceptable terms while continuing acquisitions and meeting debt covenants.