Pebblebrook Hotel Trust — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing.
Business context
Pebblebrook is a hotel REIT focused primarily on upper-upscale, full-service properties in major U.S. urban and gateway markets. At year-end it held interests in 25 hotels: 19 wholly owned hotels with 4,615 rooms and a 49% interest in a Manhattan joint venture owning six hotels with 1,733 rooms. Third-party managers operate the hotels through the company’s taxable REIT subsidiary structure.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $380.7 million | $288.0 million |
| Operating income | $37.1 million | $26.1 million |
| Operating margin | 9.8% | 9.1% |
| Net income | $26.5 million | $15.2 million |
| Net income attributable to common shareholders | $8.3 million | $4.4 million |
| Basic and diluted EPS | $0.14 | $0.08 |
| FFO available to common shareholders and unit holders | $61.2 million | $39.5 million |
| EBITDA | $109.1 million | $70.0 million |
| Cash from operations | $77.2 million | $48.1 million |
Revenue increased 32.2% year over year. Management attributed $78.8 million of the $92.7 million revenue increase to hotels not owned throughout both periods; eight comparable hotels contributed $13.9 million. Management reported 8.1% portfolio RevPAR growth. Pro forma portfolio occupancy was 79.1% versus 76.1%, and ADR was $200.73 versus $192.21.
Cash and cash equivalents were $85.9 million at year-end, with $12.0 million of restricted cash. Debt totaled $468.5 million: $368.5 million of mortgage debt and a $100.0 million term loan. The $200.0 million revolving facility had no year-end borrowings. The term loan was swapped to an effective fixed rate of 2.55%; management reported no debt exposed to unhedged variable rates at year-end. Total assets were $1.85 billion and total equity was $1.31 billion.
Capital spending on hotel improvements was $53.2 million. The company declared common distributions of $0.48 per share for 2012. Preferred dividends were $17.8 million for the year; outstanding preferred shares had a $225.0 million aggregate liquidation preference.
Material changes and fourth-quarter results
- The company acquired five hotels in 2012 for stated aggregate purchase prices of $275.8 million and issued 9.7 million common shares for net proceeds of $214.9 million.
- It invested $105.3 million net in the Manhattan Collection joint venture, including a $54.9 million equity contribution and a $50.0 million partner loan. The joint venture refinanced approximately $553.2 million of prior loans with a $410.0 million fixed-rate loan at 3.67%, maturing in January 2018.
- The company amended its credit facility to $300.0 million of total capacity, comprising a $200.0 million revolver and $100.0 million term loan, and extended the revolver maturity to July 2016.
- For fourth-quarter 2012, revenue was $104.7 million, net income was $7.2 million, net income attributable to common shareholders was $2.6 million, and EPS was $0.04. Fourth-quarter 2011 revenue was $84.4 million, net income was $8.1 million, common-shareholder income was $3.5 million, and EPS was $0.07.
Outlook, risks and notable items
Management described 2012 U.S. lodging conditions as strong and expected the company and industry to benefit from underlying fundamentals in 2013, while noting economic and political uncertainty. It forecast 2013 capital investments of approximately $45 million to $55 million. The Hotel Zetta renovation was expected to finish in the first quarter of 2013, with approximately $12.5 million planned for the full project.
In January 2013, Pebblebrook acquired the 337-suite Embassy Suites San Diego Bay–Downtown for $112.5 million, funded with $45.7 million of cash and assumption of a $66.8 million mortgage.
Key risks include hotel-demand and operating-cost volatility, dependence on third-party managers, refinancing and covenant risks, capital requirements, joint-venture decision-making and funding needs, and REIT qualification. The company also disclosed environmental, insurance, litigation, cyber-security, and development risks. It reported no material litigation and was in compliance with its credit-facility covenants at year-end. KPMG issued unqualified opinions on the financial statements and internal controls; controls over the five hotels acquired in 2012 were excluded from management’s and the auditor’s internal-control assessment.
FFO and EBITDA are non-GAAP measures; the filing cautions they are not substitutes for GAAP earnings or operating cash flow and do not represent cash available for distributions.
Investor verification points
- Reconcile reported 8.1% RevPAR growth with the pro forma operating-statistics table and confirm the periods and properties included.
- Review acquisition-driven growth against performance at hotels owned in both years, and assess the impact of share issuance on per-share results.
- Examine debt maturities, mortgage security, facility covenants and the company’s capacity to fund the 2013 acquisition and planned renovations.
- Assess the Manhattan joint venture’s refinancing, $50.0 million company loan, preferred capital and potential future equity requirements.
- Compare the common and preferred distributions with operating cash flow, capital needs and REIT distribution requirements.
- Review the acquired hotels excluded from the internal-control assessment and the assumptions used in hotel valuation, depreciation and impairment testing.