Pebblebrook Hotel Trust — Q1 2015 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2015. Pebblebrook owned interests in 35 hotels: 29 wholly owned properties with 6,988 rooms and a 49% interest in a six-hotel New York joint venture. Results are affected by hotel seasonality and acquisitions; the first quarter is typically a weaker period.
Financial and operating performance
- Total revenue was $163.4 million, up 30.0% from $125.7 million. Management attributed $34.0 million of the $37.7 million increase to properties not owned in the comparable prior-year period; comparable properties contributed $3.7 million.
- Operating income rose to $15.9 million from $10.5 million. Operating margin was approximately 9.7%, versus 8.3% a year earlier.
- Net income attributable to the company was $7.1 million, versus $4.1 million. After $6.5 million of preferred distributions, common shareholders had $0.7 million of income, or $0.01 per diluted share, compared with a $2.0 million loss, or $(0.03) per share.
- FFO was $30.6 million, up from $22.2 million; FFO available to common shareholders and units was $24.1 million, versus $16.1 million. EBITDA was $37.8 million, versus $28.2 million. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Same-property wholly owned hotel occupancy declined to 78.2% from 80.1%, while ADR increased to $225.54 from $208.90 and RevPAR increased to $176.40 from $167.29. The statistics exclude the Manhattan joint venture and include certain hotels’ operations before Pebblebrook’s ownership.
- Operating cash flow was $30.0 million, compared with $19.3 million. Investing activities used $23.4 million, including $26.4 million of hotel improvements; financing activities used $30.9 million. Cash and cash equivalents were $28.7 million at quarter-end, down from $52.9 million at year-end.
- Total debt was $840.1 million, compared with $844.0 million at December 31, 2014. It comprised $100.0 million drawn on the $300.0 million revolving facility, a $300.0 million term loan and $440.1 million of mortgage debt. The company reported compliance with debt covenants. The term loan was swapped to effective rates of 2.93% through July 2017 and 3.51% thereafter through January 2020.
- Total assets were $2.75 billion and total equity was $1.75 billion. Restricted cash was $13.6 million. The filing does not provide a conventional current ratio.
Material changes versus the prior comparable period
- Revenue and hotel operating expenses increased substantially, primarily because six properties acquired during 2014 were included for a full quarter in 2015 but not in Q1 2014. Hotel operating expenses rose $22.6 million; depreciation and amortization rose $5.4 million.
- Comparable-property revenue increased $3.7 million, but renovations reduced revenue by $5.3 million at the W Los Angeles–Westwood, Hotel Vintage Portland and Radisson Hotel Fisherman’s Wharf. Occupancy fell across the same-property portfolio, while ADR growth lifted RevPAR.
- Interest expense increased $2.2 million, primarily due to higher debt balances associated with acquired properties. The Manhattan Collection joint venture’s reported net loss widened to $10.5 million from $7.8 million; Pebblebrook’s equity-method loss increased to $4.4 million from $3.2 million.
- Unrealized derivative losses recorded in other comprehensive income were $4.2 million, compared with $0.1 million a year earlier.
Outlook, risks, contingencies and unusual items
- Management expected positive U.S. lodging fundamentals for the remainder of 2015, citing improving employment and housing markets, strong transient travel and low supply growth. It also noted uncertainty, including currency effects that could weigh on international inbound travel. No quantified full-year earnings or operating guidance was provided.
- Management expected to invest approximately $50 million to $70 million in wholly owned hotel renovations and other capital improvements during the remainder of 2015. The Hotel Vintage Portland reopened after a $10 million renovation; the $23.5 million W Los Angeles–Westwood renovation was substantially complete at quarter-end. Planned renovation investments included $32 million at Radisson Hotel Fisherman’s Wharf and $35 million at the Prescott Hotel.
- On April 13, 2015, after quarter-end, Pebblebrook borrowed $100 million under a new term loan maturing in April 2022. Swaps fixed its effective interest rate at 3.46%.
- Key risks include hotel demand and operating-cost fluctuations, reliance on third-party managers, interest-rate and capital-market risks, acquisition and renovation execution, REIT qualification, and potential uninsured losses. The company stated that it was not subject to material litigation and reported no material change to the risk factors in its 2014 Form 10-K.
- Contractual obligations totaled $1.73 billion, including $749.7 million of hotel and ground leases; lease obligations extend substantially beyond five years. The joint venture had $460 million of first mortgage debt and a $50 million unsecured special loan; Pebblebrook did not guarantee this debt except for customary limited carve-outs.
Important facts for investors to verify
- How much of reported growth reflects acquisitions versus sustainable same-property performance, particularly given lower occupancy and ongoing renovations.
- Whether renovation spending stays within the disclosed plans and delivers expected revenue, margin and cash-flow improvements.
- The performance and debt position of the Manhattan Collection joint venture, including its worsening quarterly loss and 2018 loan maturities.
- Liquidity and refinancing capacity in light of mortgage maturities concentrated in 2016–2017, planned capital spending, distributions and the post-quarter $100 million borrowing.
- The effect of derivative fair-value changes, variable-rate debt exposure and preferred distributions on common-shareholder returns.