Pebblebrook Hotel Trust quarterly report, Q2 FY2012

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Pebblebrook Hotel Trust — Q2 2012 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2012. Amounts are in U.S. dollars; financial statement amounts below are rounded to millions unless noted.

Business context

Pebblebrook is a hotel REIT focused primarily on major U.S. cities and coastal gateway markets. At June 30, 2012, it owned interests in 21 hotels: 15 wholly owned properties and a 49% interest in a six-hotel Manhattan joint venture. Reported results reflect acquisitions made at different times and are not directly comparable with the prior year.

Financial and operating performance

  • Revenue: Q2 revenue was $94.2 million, up 28.8% from $73.1 million. First-half revenue was $171.6 million, up 48.3% from $115.8 million.
  • Profit: Q2 net income was $10.0 million, compared with $4.3 million; net income available to common shareholders was $5.4 million, or $0.10 per diluted share, versus $1.8 million, or $0.03. First-half net income was $7.2 million versus $1.3 million, but common shareholders had a loss of $1.8 million, or $0.04 per share, versus a loss of $1.8 million, or $0.05 per share.
  • Operating income and margin: Q2 operating income was $12.1 million, about 12.8% of revenue, versus $8.2 million, about 11.2%. First-half operating income was $13.5 million, about 7.9% of revenue, versus $7.2 million, about 6.2%.
  • Non-GAAP measures: Q2 FFO was $22.4 million and FFO available to common shareholders and unit holders was $18.0 million, versus $11.9 million and $9.4 million. First-half amounts were $31.7 million and $22.8 million, versus $13.6 million and $10.6 million. Q2 EBITDA was $30.8 million versus $16.1 million; first-half EBITDA was $44.1 million versus $20.4 million. The company cautions that FFO and EBITDA are not substitutes for GAAP results or operating cash flow.
  • Hotel operating statistics: Portfolio pro forma Q2 occupancy rose to 84.9% from 79.2%, ADR to $219.57 from $208.32, and RevPAR to $186.32 from $165.06. First-half occupancy was 79.5% versus 74.6%, ADR $206.67 versus $198.63, and RevPAR $164.33 versus $148.23. These statistics include periods before ownership and the company’s 49% JV interest.
  • Cash flow and liquidity: First-half operating cash flow was $32.1 million versus $15.4 million. Investing used $62.0 million, including $29.7 million of hotel improvements and $29.8 million for Hotel Milano. Financing provided $128.1 million, including common-share issuance and mortgage refinancing. Cash was $163.9 million at June 30, up from $65.7 million at year-end.
  • Debt and equity: Mortgage debt was $260.2 million, compared with $251.5 million at year-end; there were no borrowings on the $200 million revolving facility at June 30. The company reported compliance with debt covenants. It issued about 6.6 million common shares during the first half, raising $142.3 million net. Preferred shares had a $225 million liquidation preference and carry 7.875% and 8.00% cumulative dividend rates.

Material changes and notable items

  • Growth in reported revenue and expenses was substantially influenced by acquisitions. For Q2, hotels owned throughout both comparison periods contributed $6.1 million of the $21.1 million revenue increase; for the first half, comparable-owned hotels contributed $8.6 million of the $55.9 million increase. The remainder primarily reflected properties not owned throughout both periods.
  • The company acquired the 108-room Hotel Milano for $29.8 million in April and planned a $11–$12 million renovation and repositioning over the following 12 months, targeting completion in Q1 2013.
  • First-half corporate G&A included a $1.1 million management-contract termination expense related to the DoubleTree by Hilton Bethesda-Washington DC hotel. Acquisition costs declined from the prior year.
  • Q2 included $3.1 million of equity earnings from the Manhattan Collection joint venture; the first-half result was a $0.5 million equity loss. Preferred distributions increased, weighing on common-shareholder earnings.

Outlook, risks, and subsequent events

  • Management described lodging fundamentals as positive, citing stronger occupancy and rates, particularly in urban markets, while noting a slow-moving U.S. economy and European debt uncertainty. It expressed a view that the industry recovery would continue; no quantified earnings or revenue guidance was provided.
  • The company expected $25–$35 million of additional capital investments during the rest of 2012, in addition to the planned Hotel Milano renovation. It said current cash and operating cash flow were expected to support near-term operations, debt service, and distributions; longer-term needs may require debt or equity capital.
  • The Manhattan Collection JV had $566.9 million of variable-rate mortgage and mezzanine debt maturing in February 2013. Pebblebrook was not a guarantor apart from customary limited carve-outs, but refinancing was not assured and could require additional equity to maintain its ownership interest.
  • Company mortgage debt was fixed-rate at June 30; the JV’s variable-rate debt remained an indirect market exposure. Risks identified include acquisition execution, hotel demand and operating costs, financing availability, interest rates, reliance on third-party managers, REIT qualification, uninsured losses, and renovation delays or overruns.
  • After quarter-end, the company acquired two hotels for $63 million, amended its credit facility to $300 million (including a $100 million delayed-draw term loan), and issued additional ATM shares. It expected to draw the term loan in August and had entered into a swap to fix its rate at 2.4% based on its then-current leverage ratio.
  • Management reported effective disclosure controls, no material change in internal control, and no material litigation or material change to the prior annual report’s risk factors.

Important facts for investors to verify

  • Refinancing progress, terms, and any required equity contribution for the JV debt due February 2013.
  • Hotel-level and comparable-property operating performance, separating same-property growth from acquisition-related growth.
  • Actual renovation spending, timing, and returns—particularly for Hotel Milano—and remaining 2012 capital needs.
  • Post-quarter debt draws, interest-rate swap terms, covenant headroom, and liquidity after subsequent acquisitions and share issuance.
  • Common-share dilution and the effect of cumulative preferred distributions on earnings and cash available to common holders.