Pebblebrook Hotel Trust — Q1 2018 Form 10-Q
Business context and period. The unaudited quarter ended March 31, 2018. Pebblebrook owned 28 hotels with 6,972 guest rooms, primarily in major U.S. urban and coastal markets. Results are seasonal, and first-quarter performance is generally weaker than in the third quarter.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $181.1 million | $182.2 million | Down 0.6% |
| Operating income | $31.4 million | $20.5 million | Up 53% |
| Net income | $24.5 million | $14.1 million | Up 74% |
| Net income attributable to common shareholders | $20.4 million | $10.0 million | Up 104% |
| Diluted earnings per common share | $0.29 | $0.14 | |
| Operating cash flow | $41.3 million | $37.2 million | Up $4.1 million |
| FFO available to common shareholders and unit holders | $45.3 million | $37.4 million | Up 21% |
| EBITDA | $58.8 million | $46.9 million | Up 25% |
Operating margin was approximately 17.3%, versus 11.3% a year earlier. The higher reported profit included a $4.9 million insurance settlement gain; earnings also benefited from lower general and administrative costs and higher dividend income. Interest expense rose $0.5 million to $9.8 million, principally due to higher revolving-credit borrowings.
Same-property occupancy was 79.8% versus 80.5%; ADR was $244.44 versus $242.82; and RevPAR was $195.17 versus $195.53. Management said hotels performed better than expected, citing improved business travel, group bookings and spending, and solid leisure demand.
Balance sheet, cash flow and liquidity
- Total debt was $1.043 billion at March 31, up from $885.2 million at year-end, principally reflecting increased revolving-credit borrowings. Cash and cash equivalents were $16.0 million; restricted cash was $7.3 million. Total assets were $2.742 billion.
- Revolver borrowings were $203.0 million, leaving $247.0 million available; the separate PHL facility had $10.0 million available. The company reported compliance with debt covenants.
- Cash from operations was $41.3 million. Investing activities used $174.4 million, including $158.3 million invested in marketable securities and $16.2 million in hotel improvements. Financing activities provided $123.8 million.
- The marketable securities investment was approximately $157.8 million and represented about 4.8% of LaSalle Hotel Properties’ outstanding shares. Management said it had proposed a business combination with LaSalle.
- Approximately 27% of indebtedness, or $278.0 million, was exposed to variable rates after accounting for swaps. Management estimated a 0.1 percentage-point rate move would change annual interest expense by about $0.3 million.
Material changes, outlook and risks
Year-over-year revenue declined modestly, while operating income and net income rose substantially. The comparison reflects the $4.9 million insurance settlement for LaPlaya Hurricane Irma business-interruption and expense-reimbursement claims through December 2017, as well as reduced corporate expenses. LaPlaya was fully reopened in January 2018; remaining property and business-interruption claims were still being resolved.
Management expected moderate U.S. lodging revenue growth in 2018, but said increased hotel supply in several urban markets and weaker international inbound travel could constrain market RevPAR. It said positive business-travel trends appeared to continue into the second quarter. The filing gives no specific earnings or RevPAR guidance. Planned hotel capital investment for the remainder of 2018 was approximately $40 million to $50 million, including about $17 million at the Mondrian Los Angeles.
Key risks include lodging demand and local economic conditions, increased competition and supply, rising labor and other operating costs, interest-rate exposure, reliance on third-party hotel managers, financing and capital-market access, renovation delays or cost overruns, and potential uninsured losses. Management reported no material litigation and no material changes to the risk factors in its 2017 Form 10-K. The company stated it expected available cash and operating cash flow to fund operating needs, debt service and distributions, while longer-term needs could require additional financing, equity issuance, asset sales or operating cash.
Important facts for investors to verify
- Whether the LaSalle shareholding and proposed business combination proceed, and their funding and strategic implications.
- Collection and timing of remaining Hurricane Irma insurance claims, and whether further gains or costs arise.
- Whether hotel operating trends and same-property RevPAR improve, particularly given supply growth and softer international demand.
- How the increased revolving debt, variable-rate exposure and planned capital spending affect liquidity, interest expense and covenant headroom.
- That reported profit growth includes the insurance settlement and other comparison effects; FFO and EBITDA are non-GAAP measures and are not substitutes for operating cash flow.