Pebblebrook Hotel Trust — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results; annual figures below are for the full fiscal year. Amounts are in U.S. dollars.
Business context
Pebblebrook is a hotel REIT focused on upper-upscale, full-service hotels in major U.S. urban and gateway markets. At year-end it owned 29 hotels outright (6,948 rooms) and held a 49% interest in a Manhattan joint venture owning six hotels (1,775 rooms). Hotels are leased to taxable REIT subsidiaries and operated by third-party managers.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $598.8 million | $489.2 million |
| Operating income | $91.3 million | $57.9 million |
| Net income | $73.5 million | $43.2 million |
| Net income attributable to common shareholders | $47.8 million; diluted EPS $0.71 | $20.0 million; diluted EPS $0.32 |
| FFO available to common shareholders and unit holders (non-GAAP) | $125.6 million | $84.5 million |
| EBITDA (non-GAAP) | $190.3 million | $141.5 million |
| Cash from operations | $161.3 million | $107.5 million |
| Cash and cash equivalents at year-end | $52.9 million | $55.1 million |
| Total debt at year-end | $844.0 million | $554.2 million |
Revenue grew 22.4%, operating income 57.8%, and net income 70.3% year over year. Operating margin was approximately 15.2% versus 11.8% in 2013; net margin was approximately 12.3% versus 8.8%. Growth reflects both improved comparable-hotel performance and the addition of acquired properties. These margins are calculated from reported GAAP figures.
Same-property results for the wholly owned portfolio showed occupancy of 84.3% versus 82.9%, ADR of $227.85 versus $210.44, and RevPAR of $191.98 versus $174.53. Management reported same-property RevPAR growth of 10.0%, ahead of industry growth of 8.3%; the comparison includes certain hotels’ operating results before Pebblebrook owned them and excludes the Manhattan joint venture.
Cash used in investing activities was $631.3 million, including $575.7 million for hotel acquisitions and $52.6 million for property improvements. Cash provided by financing activities was $467.8 million. The company had $50.0 million drawn on its $300.0 million revolving facility and $300.0 million outstanding on its term loan; the term loan was hedged with swaps. The company reported covenant compliance at year-end. Cash plus undrawn revolver capacity was approximately $302.9 million, before other restrictions or needs.
Fourth-quarter results and changes
Fourth-quarter 2014 revenue was $155.9 million, net income was $16.1 million, income attributable to common shareholders was $9.5 million, and basic and diluted EPS were $0.13. In fourth-quarter 2013, revenue was $126.8 million, net income was $11.0 million, common income was $4.8 million, and EPS was $0.08.
During 2014, Pebblebrook acquired six hotels for aggregate purchase prices of $626.8 million, issued 7.5 million common shares and 1.0 million Series C preferred shares, and expanded its unsecured credit agreement to $600 million, split between a $300 million revolver and a $300 million term loan. The common quarterly distribution increased to $0.23 per share from $0.16 in 2013. Annual preferred-share distributions were approximately $26 million.
Outlook, risks and unusual items
- Management expected positive lodging fundamentals to continue into 2015, citing strong transient travel, high occupancy, limited supply growth, and scope for higher room rates and operating cash flow. This is management’s outlook, not a quantified earnings forecast.
- Management expected $75 million to $95 million of capital investments in wholly owned hotels in 2015. Planned renovation work included the Hotel Vintage Plaza Portland, Radisson Fisherman’s Wharf, and W Los Angeles–Westwood.
- Near-term refinancing is important: $50.7 million of assumed, non-recourse Nines mortgage loans carried a 7.39% weighted-average rate and matured in March 2015. Mortgage principal maturities were concentrated in 2016 and 2017 as well. The filing said the Nines loans were intended to be repaid through credit-facility borrowings.
- The Manhattan joint venture had $460 million of secured mortgage debt plus a $50 million unsecured special loan. Pebblebrook was not a guarantor except for customary limited carve-outs, but refinancing needs or property performance could affect its investment and distributions.
- Key risks include hotel-demand and economic cycles, competition and new supply, operating-cost increases, reliance on third-party managers, renovation execution and cost overruns, interest rates and refinancing, ground-lease obligations, and potential limits on distributions under debt covenants or cash-trap provisions.
- A tax-credit indemnity associated with the Nines could range from zero to $28.3 million plus related costs if specified conditions were breached before March 5, 2015; management considered payment remote. No material litigation was reported.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Controls at five hotels acquired during 2014 were excluded from management’s and the auditor’s internal-control assessment.
Important facts for investors to verify
- Confirm that the Nines mortgage loans due March 2015 were refinanced or repaid, and review the subsequent maturity schedule and financing cost.
- Assess the effect of the 2014 acquisitions and share issuances on per-share performance, leverage, and future returns; separate comparable-hotel growth from portfolio expansion.
- Review the scope, timing, and cost of the 2015 renovations, including their impact on room availability, cash flow, and expected returns.
- Track debt covenants, liquidity, joint-venture refinancing, and the company’s capacity to sustain common and preferred distributions.
- Review the full audited financial statements and notes for lease commitments, debt terms, acquisition accounting, and the Nines indemnity; FFO and EBITDA are non-GAAP measures and are not substitutes for operating cash flow.