Pebblebrook Hotel Trust — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Pebblebrook is a hotel REIT focused primarily on major U.S. cities and gateway coastal markets. At quarter-end it held interests in 20 hotels: 14 wholly owned hotels and a 49% interest in six Manhattan hotels through a joint venture.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $77.5 million | $42.7 million |
| Operating income (loss) | $1.4 million | $(1.1) million |
| Net loss attributable to common shareholders | $(7.2) million; $(0.14) per share | $(3.6) million; $(0.09) per share |
| Cash from operating activities | $10.6 million | $0.2 million |
| Cash used in investing activities | $(19.7) million | $(62.4) million |
| Cash used in financing activities | $(20.2) million | Cash provided: $182.1 million |
| Cash and cash equivalents at period-end | $36.4 million | $340.6 million |
Total operating expenses were $76.0 million, including $58.1 million of hotel operating expenses and $9.7 million of depreciation and amortization. Operating margin was approximately 1.8%, compared with approximately negative 2.5% in Q1 2011. FFO, a non-GAAP measure, was $4.8 million versus $1.2 million; EBITDA, also non-GAAP, was $13.3 million versus $4.2 million. The company cautions that neither measure represents GAAP operating cash flow or funds available for distributions.
Pro forma portfolio occupancy was 74.2% versus 70.0%, ADR was $191.90 versus $187.55, and RevPAR was $142.34 versus $131.25. These statistics include properties for periods before Pebblebrook owned them and the joint venture’s properties.
Material changes and capital position
- Revenue increased $34.8 million; five hotels acquired after March 31, 2011 contributed approximately $28.9 million of the increase. The comparison is therefore substantially affected by portfolio growth.
- The company recorded a $3.6 million equity-method loss from the Manhattan Collection joint venture, which it acquired an interest in during 2011. The venture reported a $6.4 million quarterly net loss.
- Mortgage debt was $211.1 million at March 31, down from $251.5 million at year-end. The company had no borrowings under its $200 million revolving facility and reported compliance with debt covenants. Cash plus unused revolver capacity provides liquidity, though the filing gives no explicit total liquidity figure.
- Quarterly financing included $31.9 million net proceeds from ATM common-share sales, $93.0 million of mortgage proceeds, and $133.5 million of mortgage repayments. Common shares outstanding rose to 52.2 million from 50.8 million at year-end.
- The Manhattan joint venture had $572.6 million of mortgage and mezzanine debt maturing in February 2013. Pebblebrook is not a guarantor except for customary limited carve-outs, but may need to contribute additional equity to maintain its ownership interest if refinancing requires it.
Outlook, risks, and unusual items
Management described U.S. lodging fundamentals as positive, citing stronger corporate, group, and leisure travel, improved occupancy and rates, and historically low expected new supply. It also noted economic and European debt-crisis uncertainty. Management expected existing cash and operating cash flows to support near-term operations, debt service, and REIT distributions; long-term plans may require debt or equity capital, whose availability depends on market conditions. No quantified earnings or revenue guidance was provided.
- The company invested $17.0 million in hotel improvements during Q1 and expected to invest approximately $30–$40 million during the remainder of 2012.
- On April 4, 2012, it acquired the 108-room Hotel Milano in San Francisco for $29.8 million using available cash, with planned renovation and repositioning spending of $8–$10 million over the next 12 months.
- In April, it terminated the DoubleTree Bethesda management agreement, expecting approximately $1.1 million in termination and transition expenses, and appointed Davidson Hotel Group.
- Hotel results are seasonal, with management generally expecting lower revenue, operating income, and cash flow in Q1 and higher results in Q3. Other stated risks include hotel demand and operating-cost pressures, interest rates, financing access, reliance on third-party managers, REIT qualification, and renovation delays or overruns.
- The filing reported no material litigation, no derivatives, no variable-rate debt at March 31, and no material change in risk factors from the 2011 Form 10-K. Disclosure controls were assessed as effective.
Investor facts to verify
- Whether the Manhattan Collection joint venture can refinance its February 2013 debt on acceptable terms, and whether Pebblebrook must contribute equity.
- Actual spending, completion timing, and operating results for the Hotel Milano repositioning and the planned 2012 capital program.
- Whether portfolio operating gains persist after separating same-hotel performance from acquisitions and accounting effects.
- Cash needs and distribution coverage given quarterly capital investment, preferred distributions, and the decline in cash balances.
- The effect of the Bethesda management change and its expected termination and transition costs.