Pebblebrook Hotel Trust — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited consolidated results. Pebblebrook is a hotel REIT with interests in 29 hotels: 23 wholly owned and a 49% interest in a six-hotel joint venture. Results are affected by seasonality, acquisitions and property-level comparability.
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $125.7 million | $104.9 million |
| Operating income | $10.5 million | $4.9 million |
| Operating margin | 8.3% | 4.7% |
| Net income (loss) | $4.1 million | $(0.2) million |
| Net loss attributable to common shareholders | $(2.0) million; $(0.03) per share | $(4.9) million; $(0.08) per share |
| Operating cash flow | $19.3 million | $10.7 million |
| FFO | $22.2 million | $15.5 million |
| EBITDA | $28.2 million | $20.5 million |
Revenue increased approximately 19.8%; operating margin figures are calculated from reported revenue and operating income. FFO and EBITDA are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow. Preferred distributions of $6.1 million exceeded income attributable to the Company, leaving a common-shareholder loss despite consolidated net income.
For wholly owned hotels in the same-property operating-statistics presentation, occupancy was 80.0% versus 78.3%, ADR was $209.43 versus $193.53, and RevPAR was $167.47 versus $151.53. This presentation excludes the joint venture and does not imply that all reported hotel revenue is comparable: management attributed $12.4 million of the $20.8 million total revenue increase to non-comparable properties, including hotels acquired in 2013.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $44.3 million, restricted cash $14.4 million, and total assets $2.106 billion. Cash and cash equivalents declined $10.8 million from year-end 2013.
- Total debt was $551.4 million, comprising a $100 million term loan and $451.4 million of mortgage debt; there were no revolver borrowings. Debt declined from $554.2 million at December 31, 2013.
- The $200 million revolving facility was undrawn, matures in July 2016, and has a one-year extension option. The term loan matures in July 2017; interest is effectively fixed at 2.55% through swaps at the Company’s current leverage ratio. Management reported compliance with debt covenants and effectively no variable-rate debt at quarter-end.
- Cash provided by operations of $19.3 million was offset by $10.8 million used in investing and $19.4 million used in financing, producing a $10.8 million net decrease in cash. Investing included $7.5 million of hotel improvements and a $6.0 million deposit on a property under contract. Financing included $16.4 million of distributions and $2.3 million of mortgage repayments.
Changes, outlook and risks
- Compared with Q1 2013, operating income improved as higher revenue—partly from 2013 acquisitions—outpaced higher hotel expenses. Interest expense increased $0.6 million, mainly due to higher debt balances associated with acquired properties. Preferred-share distributions rose $1.4 million following Series C issuances in 2013.
- Management described lodging fundamentals as strong despite weather-related travel disruption in January and February, citing growth in business, leisure and international travel and improving occupancy and rates. It noted group travel was beginning to increase and new supply remained low in most markets.
- No quantified revenue or earnings guidance is provided. Management expected to invest approximately $40–$50 million in renovations, repositioning and other capital improvements during the remainder of 2014; $7.5 million was invested in Q1.
- Management said existing cash and operating cash flow should cover near-term operating requirements, debt service and REIT distributions. Longer-term needs may be funded through operations, debt and equity issuance; access to capital depends on market conditions. The filing also lists $41.5 million of contractual payments due within one year, including debt service, purchase commitments and office lease obligations.
- Key risks include hotel demand and operating-cost volatility, competition, reliance on third-party managers, interest rates, financing and capital-market access, acquisitions and redevelopment execution, uninsured losses, and maintaining REIT qualification. The company reported no material litigation and no material change to the risk factors in its 2013 Form 10-K.
- Unusual or relevant items: a $2.3 million income-tax benefit contributed to reported net income; the joint venture generated a $3.2 million equity-method loss for Pebblebrook. Its debt is not guaranteed by Pebblebrook except for customary limited carve-outs. The filing notes that Q1 is generally a seasonally weaker period.
Important facts for investors to verify
- How much of revenue and operating-income growth reflects same-property performance versus the 2013 acquisitions, and whether same-property gains persist.
- The expected timing, funding and returns of the planned $40–$50 million 2014 capital program and the property tied to the $6 million deposit.
- Near-term mortgage maturities and refinancing needs, covenant headroom, and the availability and cost of external capital.
- The sustainability of operating cash flow and distributions, particularly given preferred distributions and the common-shareholder loss.
- The assumptions behind the tax benefit and realization of deferred tax assets, and the financial exposure associated with the Manhattan Collection joint venture and long-term leases.