Pebblebrook Hotel Trust — 2020 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2020, not a standalone quarterly filing. The fourth-quarter results are also summarized below. Pebblebrook is a hotel REIT focused primarily on upper-upscale hotels in major U.S. urban and resort markets. At year-end it owned 53 hotels with 13,236 guest rooms; 37 hotels were open and 16 remained temporarily suspended due to COVID-19.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $442.9 million | $1,612.2 million |
| Operating income (loss) | $(292.7) million | $229.3 million |
| Net income (loss) | $(392.6) million | $115.7 million |
| Net income (loss) attributable to common shareholders | $(424.3) million; $(3.25) per diluted share | $82.9 million; $0.63 per diluted share |
| Operating cash flow | $(201.8) million | $395.2 million |
| EBITDA / EBITDAre | $(67.6) million / $(110.5) million | $464.3 million / $461.4 million |
| Debt at year-end | $2.280 billion | $2.229 billion |
| Cash and cash equivalents at year-end | $124.3 million | $30.1 million |
Same-property occupancy fell to 25.0% from 82.3%; ADR declined to $232.61 from $258.10; RevPAR dropped to $58.13 from $212.51; and Total RevPAR declined to $89.14 from $310.62. Annual operating margin was approximately negative 66% (operating loss divided by revenue). The filing does not provide a comparable hotel operating margin measure.
At December 31, 2020, the company reported $40.0 million drawn on its $650 million senior unsecured revolver, $6.8 million of letters of credit and $603.2 million of remaining capacity. Total assets were $6.076 billion and total equity was $3.264 billion. Cash plus restricted cash totaled $136.3 million. The company had approximately $510 million of preferred-share liquidation preference, with annual preferred dividends of about $32.6 million.
For fourth-quarter 2020, revenue was $74.2 million and net loss attributable to common shareholders was $181.0 million, or $1.39 per share. By comparison, fourth-quarter 2019 revenue was $379.4 million and common-shareholder net income was $11.4 million, or $0.08 per share.
Material changes versus the prior comparable period
- Annual revenue fell $1.169 billion, primarily because of the pandemic, reduced demand and hotel suspensions; dispositions accounted for $105.3 million of the decrease.
- Hotel operating expenses declined $594.7 million, reflecting fewer operating hotels, dispositions and cost reductions, but did not offset the revenue collapse.
- The company recorded a $74.6 million impairment loss on two hotels and the retail component of another hotel. It also recognized a $117.4 million gain on the sale of three hotels, compared with a $2.8 million gain in 2019.
- Operating cash flow swung from $395.2 million provided in 2019 to $201.8 million used in 2020. Investing activities provided $250.1 million, including $375.1 million of hotel sale proceeds, partly offset by $125.0 million of property improvements.
- Debt increased by $51.3 million year over year. The company issued $500 million of 1.75% convertible notes due 2026 and used proceeds in part to repay revolver and term-loan borrowings. The reported debt carrying value reflects discounts and financing costs.
Outlook, management commentary, risks and unusual items
- Management expects COVID-19 to continue materially affecting results, financial position and cash flow in 2021, and says it cannot estimate when travel demand will recover. Management anticipates leisure travel will recover before business travel, with group demand likely the slowest to return.
- Management expects 2021 capital investments of approximately $60–$70 million, subject to recovery pace and decisions on deferred renovations. It believes liquidity will be sufficient for obligations over the next 12 months, based on debt amendments and expense and cash-burn reductions.
- In February 2021, after year-end, the company issued another $250 million of 1.75% convertible notes, amended debt agreements, and extended covenant relief. Certain covenant waivers run through the first quarter of 2022; minimum fixed-charge coverage and unsecured-interest-coverage requirements were extended through December 31, 2021. Management cautions that covenant compliance after relief ends is uncertain.
- Debt amendments restrict common distributions above $0.01 per share per quarter unless higher distributions are required to preserve REIT status. Common dividends were reduced to $0.01 per share quarterly; preferred dividends continued. The filing reports $0.03 per common share distributed for 2020 tax purposes.
- Other material actions included a March 2020 full draw on the $650 million revolver, expense and staffing reductions, reduced executive and employee compensation, and reduced planned capital spending. The company sold three hotels for an aggregate $387.0 million and recorded $16.0 million of accelerated compensation expense after canceling certain retention awards.
- Key risks include a prolonged or renewed travel downturn, hotel closures and operating costs, financing access and refinancing, covenant compliance, debt maturities, interest rates and LIBOR transition, and property impairment. The company reported no material litigation. Its financial statements received an unqualified audit opinion; the auditor identified hotel-property impairment testing as a critical audit matter.
Important facts for investors to verify
- Whether hotel reopening, occupancy, ADR and RevPAR trends recover, particularly in the company’s urban markets, and how quickly group and business travel return.
- Available liquidity after the February 2021 convertible-note issuance, debt repayments, cash burn and planned capital spending; confirm the terms and remaining capacity of credit facilities.
- The timing and terms of covenant relief, compliance tests when they resume, and maturities requiring repayment or refinancing.
- The effect of the February 2021 debt amendments, including higher borrowing spreads, on interest expense and covenant headroom.
- The expected completion and net proceeds of the announced Sir Francis Drake sale, and whether other property sales or impairments occur.
- The assumptions supporting the $74.6 million impairment and the valuation allowance against deferred tax assets, including projected hotel cash flows and recovery timing.
- Common-dividend restrictions and the continuing obligations on the $510 million liquidation preference of preferred shares.