Pebblebrook Hotel Trust — Q2 2016 Form 10-Q
Business context and period. This unaudited report covers the three and six months ended June 30, 2016. Pebblebrook owned interests in 35 hotels: 29 wholly owned hotels and a 49% interest in a six-hotel New York joint venture. It sold Viceroy Miami, The Redbury Hollywood, and adjacent land during the quarter.
Financial and operating highlights
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $212.3 million | $197.7 million | $408.5 million | $361.1 million |
| Operating income | $45.3 million | $35.4 million | $75.3 million | $51.3 million |
| Net income attributable to common shareholders | $69.9 million | $20.0 million | $76.5 million | $20.7 million |
| Diluted earnings per common share | $0.96 | $0.27 | $1.05 | $0.28 |
| FFO available to common shareholders and unit holders | $57.9 million | $47.0 million | $91.8 million | $71.1 million |
| Cash provided by operating activities | — | — | $117.1 million | $90.4 million |
Revenue and hotel operations. Q2 revenue rose about 7% year over year; first-half revenue rose about 13%. Same-property wholly owned portfolio occupancy was 87.4% versus 86.5% in Q2 and 84.8% versus 82.6% for the first half. Same-property ADR increased to $252.76 from $246.90 in Q2 and to $247.72 from $240.28 for the first half. Same-property RevPAR was $221.04 versus $213.46 in Q2 and $210.14 versus $198.36 for the first half.
Profit quality and margins. Q2 net income included $40.3 million of gains on hotel and land sales; the filing’s FFO measure excludes those gains. FFO increased to $57.9 million for Q2 and $91.8 million for the first half. Interest expense increased to $11.4 million for Q2 from $9.3 million and to $22.2 million for the first half from $17.6 million. The filing does not provide a single company-wide operating-margin measure.
Cash, debt, and liquidity. At June 30, cash and cash equivalents were $36.3 million, restricted cash $7.9 million, total assets $3.00 billion, and total liabilities $1.24 billion. Debt was $1.03 billion, down from $1.11 billion at year-end 2015. The company had $30 million drawn on its $450 million revolving facility, with $420 million available; it reported compliance with debt covenants. Six-month capital improvements were $60.1 million. Financing cash outflow was $158.4 million, including $62.3 million of distributions and the preferred-share redemption and issuance transactions.
Material changes and unusual items
- Hotel and land sales generated $107.6 million of proceeds and $40.3 million in recognized gains. No hotel acquisitions occurred in the first half.
- The company redeemed all 5.6 million Series A preferred shares for $140 million and issued 5.0 million Series D preferred shares, producing approximately $121.1 million net proceeds.
- It increased term-loan borrowings by $150 million and repaid $88.9 million of mortgage debt, including repayment of two property mortgages.
- Interest-rate swaps had a $22.7 million aggregate liability fair value. First-half unrealized swap losses were $16.1 million in other comprehensive income; $75 million of the Second Term Loan remained floating-rate.
- The Manhattan Collection joint venture reported a $9.3 million first-half net loss. Five properties securing its $410 million loan were in a cash-trigger period, restricting distributions from those properties; the joint venture was covenant-compliant.
Outlook, commentary, and risks
Management said industry fundamentals remained positive but growth was moderate. It cautioned that softer international and business travel demand, slower global growth, and greater supply in urban markets—including New York, Boston, and Washington, D.C.—could constrain lodging and RevPAR growth for the remainder of 2016. No full-year earnings or RevPAR guidance is provided. The company expected $32–$42 million of capital investment in wholly owned hotels during the remainder of 2016 and described ongoing renovations. It expects short-term needs to be met with operating cash, cash balances, and, if needed, revolver borrowings; longer-term funding may include debt, equity, property sales, and operating cash.
Disclosed risks include economic and lodging-market weakness, rising operating costs and interest rates, financing and capital-market access, reliance on third-party hotel managers, renovation delays or cost overruns, and REIT qualification. The filing added that Brexit-related economic or market instability could adversely affect the lodging industry. Management reported effective disclosure controls and no material litigation.
Most important facts for investors to verify
- Separate recurring hotel performance from the $40.3 million sale gain when assessing reported earnings.
- Track same-property RevPAR and the effect of renovations, temporary closures, and sold hotels on period comparisons.
- Review debt maturities, covenant headroom, floating-rate exposure, and the fair value and effectiveness of interest-rate swaps.
- Monitor the joint venture’s cash-trigger status, operating results, and ability to resume distributions.
- Compare planned renovation spending and distributions with operating cash flow and available liquidity.