Pebblebrook Hotel Trust — Q1 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2016. Pebblebrook owned interests in 37 hotels: 31 wholly owned hotels and a 49% interest in a six-hotel New York joint venture. Its hotels are concentrated in major U.S. urban and coastal markets.
Key financial and operating metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $196.2 million | $163.4 million |
| Operating income | $30.0 million | $15.9 million |
| Operating margin | 15.3% | 9.7% |
| Net income attributable to company | $16.6 million | $7.1 million |
| Net income attributable to common shareholders | $6.6 million | $0.7 million |
| Basic and diluted EPS | $0.09 | $0.01 |
| Operating cash flow | $46.5 million | $30.0 million |
| Capital spending on hotel properties | $35.8 million | $26.4 million |
| Company-reported FFO available to common shareholders and units | $33.9 million | $24.1 million |
| Company-reported EBITDA | $53.5 million | $37.8 million |
At March 31, cash and cash equivalents were $28.3 million and restricted cash was $10.0 million. Total debt was $1.268 billion, compared with $1.106 billion at year-end 2015. The revolving credit facility had $270 million of remaining availability; the company reported compliance with debt covenants. The company reported $255 million, or 20% of indebtedness, exposed to variable rates after swaps; a 0.1 percentage-point rate change was estimated to change annual interest expense by approximately $0.3 million.
Same-property wholly owned hotel occupancy was 82.2% versus 78.5%; ADR was $242.28 versus $232.79; and RevPAR was $199.08 versus $182.84. These statistics exclude the Manhattan Collection joint venture and certain hotels closed for renovation.
Material changes versus the prior comparable period
- Revenue increased 20.1%; management attributed $20.2 million of the $32.8 million increase in hotel revenue to properties acquired in 2015, with the remainder from comparable properties.
- Operating income rose to $30.0 million from $15.9 million. Hotel operating expenses, depreciation, and interest expense also increased; interest expense was up $2.5 million.
- Common-shareholder earnings included $4.2 million of costs associated with redeeming Series A preferred shares. The company redeemed all 5.6 million Series A shares for $140 million in March, reducing outstanding preferred shares from 14.0 million to 8.4 million.
- Term-loan borrowings increased by $150 million during the quarter. Total debt increased by approximately $162 million from December 31, 2015.
- Cash from operations exceeded hotel-property capital spending by approximately $10.6 million, before other investing and financing cash flows. Cash increased by $1.9 million during the quarter.
- Comprehensive income was $5.2 million, including an $11.5 million unrealized loss on derivative instruments recorded in other comprehensive income.
Outlook, management commentary, risks and unusual items
- Management said U.S. lodging fundamentals remained positive but expected more modest hotel-demand growth for the rest of 2016. It cited slower global growth, weaker job gains, a softer corporate-profit outlook, a strong U.S. dollar, and lower international inbound travel demand; it expected urban markets to underperform national RevPAR growth.
- The company expected to invest approximately $65 million to $75 million in capital improvements at wholly owned hotels during the remainder of 2016. The filing provides no specific company-wide earnings or RevPAR guidance.
- After quarter-end, on April 5, 2016, the company repaid the $62.8 million Embassy Suites San Diego Bay–Downtown mortgage using revolving-credit-facility proceeds. It intended to repay the $22.7 million Hotel Modera mortgage with operating cash, existing cash, and/or revolver borrowings.
- The five Manhattan Collection properties securing a $410 million loan were in a cash-trigger period because trailing-twelve-month net operating income was below a loan threshold. This restricts distributions from those properties to partners, including Pebblebrook. The joint venture was reported in covenant compliance; Pebblebrook is not a guarantor of its debt apart from customary limited carve-outs.
- Interest-rate swaps had an aggregate fair-value liability of $18.0 million. The company recorded $1.8 million of expense for hedge ineffectiveness and expected approximately $5.0 million of accumulated derivative losses to be reclassified to interest expense over the next 12 months.
- Management highlighted hotel-industry, operating-cost, financing, interest-rate, third-party-manager, renovation, and REIT-qualification risks. It reported no material litigation and no material change to the risk factors in its 2015 Form 10-K. First-quarter results are seasonally weaker and are not necessarily indicative of full-year performance.
Important facts for investors to verify
- How much of reported revenue and profit growth came from acquired properties versus same-property operating improvement, and how renovation closures affect comparisons.
- Whether hotel demand and RevPAR trends develop as management anticipated, particularly in New York and Washington, D.C., and how the joint venture’s cash-trigger status changes.
- Debt maturities, available revolver capacity, the effect of post-quarter mortgage repayment on borrowings, and exposure to unhedged variable rates.
- The funding plan and expected returns for the stated 2016 capital program, including renovations and contractual purchase commitments.
- The effect of the preferred-share redemption on ongoing distributions and common-shareholder returns; common distributions declared were $0.38 per share/unit for the quarter.