Pebblebrook Hotel Trust — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Pebblebrook is a hotel REIT; at quarter-end it had interests in 35 hotels, including 29 wholly owned properties and a 49% interest in a six-hotel New York joint venture.
Financial results and operating metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $209.0 million | $216.3 million | $617.5 million | $577.4 million |
| Operating income | $35.3 million | $47.8 million | $110.7 million | $99.1 million |
| Net income (loss) attributable to common shareholders | $(43.9) million | $31.6 million | $32.6 million | $52.3 million |
| Basic earnings (loss) per common share | $(0.61) | $0.44 | $0.45 | $0.72 |
| FFO available to common shareholders and units (non-GAAP) | $58.3 million | $58.5 million | $150.1 million | $129.6 million |
Cash flow and liquidity: Nine-month operating cash flow was $185.6 million, versus $158.3 million in 2015. Investing activities provided $12.8 million, including $107.6 million of property-sale proceeds, while hotel improvements used $88.8 million. Financing activities used $178.2 million, including preferred-share redemptions and distributions. Cash and cash equivalents were $46.6 million at September 30, 2016.
Debt: Total debt was $1.129 billion, compared with $1.106 billion at December 31, 2015. The company reported $130.0 million drawn on its revolving facility and $320.0 million of remaining capacity. It was in compliance with debt covenants. About $205 million of debt was exposed to variable rates after swaps; a 0.1 percentage-point rate change was estimated to affect annual interest expense by about $0.2 million.
Hotel operations: Same-property wholly owned portfolio occupancy was 88.0% in Q3 versus 87.9%; ADR was $260.58 versus $258.84; and RevPAR was $229.40 versus $227.41. For the first nine months, occupancy was 85.9% versus 84.4%, ADR was $252.17 versus $246.83, and RevPAR was $216.64 versus $208.20. These statistics exclude the Manhattan joint venture and certain properties affected by renovations or dispositions.
Material changes and unusual items
- Q3 revenue fell year over year, largely reflecting the June 2016 sales of Viceroy Miami and The Redbury Hollywood; renovations and restaurant closures also affected some hotels. Nine-month revenue increased, supported by comparable-property growth and properties acquired in 2015.
- Q3 common-shareholders’ loss included a $62.6 million impairment of the Manhattan Collection joint-venture investment and a $12.1 million impairment on the DoubleTree Bethesda property held for sale. The joint-venture impairment reflected the shortened expected holding period associated with the planned exit.
- Nine-month results included $40.3 million in gains on sales of a land parcel and two hotels. The Bethesda hotel was classified as held for sale at $49.7 million of assets; the company expected its $50.1 million sale to close in Q4 2016.
- On October 19, 2016, after quarter-end, the company completed redemption of its 49% joint-venture interest. It became sole owner of the Manhattan NYC and Dumont NYC hotels, assumed a $140 million mortgage on Manhattan NYC, repaid Dumont NYC’s $50 million mortgage, and received repayment of its $50 million loan to the venture. It was marketing both hotels for sale.
- The company sold the Viceroy Miami and The Redbury Hollywood and repaid two mortgages during the period. It also issued $125 million of Series D preferred shares and redeemed Series A and Series B preferred shares; preferred-share balances and distribution costs changed accordingly.
Outlook, risks, and contingencies
Management described lodging fundamentals as positive but moderate, and was cautious about the remainder of 2016 given global and economic uncertainty, softer international inbound and business travel demand, and new supply in urban markets including New York, Boston, and Washington, D.C. No specific earnings or RevPAR guidance was provided in the filing. Management expected $20–$30 million of additional capital investment in wholly owned hotels through year-end, following $88.8 million invested in the first nine months.
Management expected current cash and operating cash flow to fund near-term needs, debt service, and REIT-required distributions. Longer-term needs may rely on debt or equity issuance, property sales, and operating cash flow. Risks include hotel demand and operating-cost changes, interest rates, financing and capital-market access, reliance on third-party managers, renovation delays or cost overruns, and REIT qualification. Five New York joint-venture hotels were in a cash-trigger period that restricted distributions; the venture reported covenant compliance, and Pebblebrook was not generally a guarantor of its debt. The filing reported no material litigation and no material change to previously disclosed risk factors.
Key facts for investors to verify
- Whether the planned sales of the Manhattan NYC, Dumont NYC, and Bethesda properties closed as expected, and at what proceeds relative to carrying values.
- How hotel demand, RevPAR, and operating costs developed in the urban markets management identified as weaker.
- Debt maturities and refinancing plans, especially mortgage maturities in 2017 and the newly assumed Manhattan NYC loan due October 2017.
- Cash available for distributions and planned capital spending, considering the company’s debt, preferred distributions, and liquidity needs.
- Further impairment indicators or changes in the value and distribution restrictions of the New York joint-venture assets.