Pebblebrook Hotel Trust — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing includes fourth-quarter results; it is not a standalone quarterly report.
Business context
Pebblebrook is an internally managed hotel REIT focused on upper-upscale hotels in major U.S. urban and gateway markets, with selected resort properties. At year-end it owned 28 hotels with 6,972 guest rooms and operated them through taxable REIT subsidiaries and third-party hotel managers.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $769.3 million | $816.4 million |
| Operating income | $120.5 million | $139.3 million |
| Net income attributable to the Company | $99.9 million | $73.7 million |
| Net income attributable to common shareholders | $83.8 million | $47.0 million |
| Diluted EPS | $1.19 | $0.64 |
| FFO | $191.3 million | $217.4 million |
| FFO available to common shareholders and unit holders | $175.2 million | $190.6 million |
| EBITDA | $240.0 million | $235.2 million |
| Cash provided by operating activities | $195.1 million | $241.3 million |
| Capital improvements to hotels | $80.8 million | $121.9 million |
Same-property occupancy was 84.4% versus 85.5%; ADR was $245.73 versus $248.10; and RevPAR was $207.33 versus $212.01. These measures exclude certain properties and periods, including LaPlaya during its hurricane-related closure.
At December 31, 2017, cash and cash equivalents were $25.4 million, total assets were $2.59 billion, and total debt was $885.2 million, down from $996.3 million a year earlier. The company had $405 million of unused capacity under its main revolving facility and $10 million under PHL’s facility. Shareholders’ equity was $1.50 billion. The common dividend declared was $0.38 per share each quarter.
Fourth-quarter revenue was $179.6 million, compared with $198.9 million in fourth-quarter 2016. Fourth-quarter net income attributable to common shareholders was $7.9 million, or $0.11 diluted per share, compared with $14.3 million, or $0.20 per share.
Material changes versus the prior year
- Revenue declined $47.1 million year over year. Management attributed the change to property sales and other non-comparable portfolio changes, renovation-related disruption at certain hotels, and LaPlaya’s hurricane closure, partly offset by operating gains at hotels ramping up after renovations.
- Net income attributable to common shareholders rose to $83.8 million, but the comparison reflects lower preferred distributions and the absence of the $64.8 million joint-venture loss recorded in 2016. FFO available to common shareholders and unit holders declined, while operating income also fell.
- The company sold the Dumont NYC for $118 million and the Revere Hotel Boston Common parking garage for $95 million, recognizing a combined $14.9 million gain. It repaid the Sofitel Philadelphia and Hotel Zelos San Francisco mortgage loans, totaling about $69.6 million.
- It repurchased 3.25 million common shares for $93.4 million under its repurchase program. A further $56.6 million remained authorized under that program at year-end; a separate $100 million program was to begin after completion of the existing program.
- Comprehensive renovations were completed at Hotel Palomar Los Angeles Beverly Hills, Revere Hotel Boston Common, and Hotel Zoe San Francisco. The company invested about $80.8 million in hotel capital improvements during 2017.
Outlook, commentary, and risks
- Management expected moderate U.S. lodging revenue growth in 2018 and expected urban markets in its portfolio to underperform the industry’s modest RevPAR growth. It cited soft corporate business travel, weaker inbound international travel, and increased room supply in several urban markets; leisure demand was described as solid.
- Management expected to invest approximately $55 million to $65 million in hotel capital improvements in 2018, excluding LaPlaya hurricane repairs and remediation. This is a capital spending estimate, not earnings or revenue guidance.
- LaPlaya closed after Hurricane Irma in September 2017. The filing estimated wind and water damage of approximately $12 million to $15 million, reported a $2.8 million deductible, and said remediation was substantially complete and all rooms returned to service in the first quarter of 2018. The company had received a $10 million preliminary insurance advance; final property and business-interruption recoveries remained subject to settlement.
- Interest-rate exposure is partly hedged: $120 million of total debt was subject to variable rates at year-end, excluding term-loan balances effectively swapped to fixed rates. Management estimated a 0.1 percentage-point change in rates on unhedged variable debt would change annual interest expense by approximately $0.1 million.
- Principal risks include lodging downturns and local market supply, operating-cost and labor pressures, dependence on third-party managers, renovation cost or schedule overruns, refinancing and covenant risks, interest rates, insurance coverage and natural disasters, cyber incidents, environmental and accessibility obligations, and maintaining REIT qualification. The filing reported compliance with debt covenants and no material litigation; the auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile the reported increase in GAAP net income with declines in revenue, operating income, FFO, and same-property RevPAR; assess the effects of asset sales, preferred distributions, and the prior-year joint-venture loss.
- Track LaPlaya’s final insurance settlement, business-interruption proceeds, repair costs, and post-reopening operating performance.
- Review the 2018 capital program, including whether planned spending and ongoing renovations achieve the expected operating returns.
- Monitor debt maturities, floating-rate exposure, revolver availability, covenant headroom, and the company’s plans for refinancing or repayment.
- Confirm share repurchases, the status of the remaining authorization and subsequent $100 million program, and the sustainability of distributions alongside capital needs and REIT distribution requirements.