Pebblebrook Hotel Trust — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; filed April 25, 2013. Pebblebrook is a hotel REIT focused primarily on major U.S. cities. At quarter-end it owned interests in 26 hotels: 20 wholly owned properties and a 49% interest in a six-hotel joint venture.
Financial and operating results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $104.9 million | $77.5 million |
| Operating income | $4.9 million | $1.4 million |
| Net loss attributable to common shareholders | $4.9 million; $0.08 per share | $7.2 million; $0.14 per share |
| Operating cash flow | $10.7 million | $10.6 million |
| Capital investment in hotel properties | $15.3 million | $17.0 million |
| Cash and cash equivalents, at period-end | $115.6 million | $85.9 million at Dec. 31, 2012 |
| Total debt, at period-end | $537.8 million | $468.5 million at Dec. 31, 2012 |
Same-property results for the reported wholly owned hotel portfolio showed occupancy of 78.0% versus 73.5%, ADR of $199.89 versus $193.94, and RevPAR of $155.89 versus $142.53. FFO was $15.5 million versus $9.2 million; FFO available to common shareholders and unit holders was $10.9 million versus $4.8 million. FFO and EBITDA are non-GAAP measures, not substitutes for GAAP earnings or cash flow.
Changes and significant transactions
- Revenue rose $27.4 million year over year, but the comparison is materially affected by acquisitions: Q1 2013 included 20 wholly owned hotels, while Q1 2012 included 14. Of the revenue increase, $5.8 million came from hotels owned in both periods; $21.6 million came from properties not owned throughout both periods.
- Hotel operating expenses increased $17.0 million, including $2.0 million at the 14 hotels owned throughout both periods and $15.0 million from properties not owned throughout both periods. Higher depreciation, property taxes, insurance, ground rent, acquisition costs and interest expense also contributed to higher costs.
- On January 29, the company acquired the 337-suite Embassy Suites San Diego Bay-Downtown for $112.5 million, funded with $45.8 million of cash and assumption of a $66.7 million mortgage. The acquired hotel contributed $4.2 million in revenue and $2.1 million in hotel operating expenses during the quarter.
- The company issued 3.6 million Series C preferred shares at $25 per share, receiving approximately $87.1 million net proceeds. Preferred distributions increased to $4.7 million from $4.5 million.
Liquidity, debt and outlook
- At March 31, debt comprised a $100.0 million term loan and $437.8 million of mortgage debt, including mortgage premiums; there were no borrowings on the $200.0 million revolving facility. The company reported covenant compliance and no unhedged variable-rate debt. The term loan’s effective rate was fixed at 2.55% through swaps.
- Management expected cash balances and operating cash flow to cover near-term operating needs, debt service and REIT distributions. Longer-term needs, including acquisitions, redevelopment and debt maturities, may be funded through operations, debt and additional equity or preferred-share issuances; access to capital depends on market conditions.
- The company expected to invest approximately $30 million to $40 million in renovations, repositioning and other capital improvements for the remainder of 2013. The Hotel Milano renovation was completed and the property reopened as Hotel Zetta in late February.
- Management cited improving U.S. employment, housing and consumer confidence, continued strength in corporate, group and leisure travel, and historically low new hotel supply. It also noted economic, global and government fiscal uncertainties. Q1 is generally seasonally weaker for hotel revenue, income and cash flow; interim results may not indicate full-year performance.
- Subsequent events: the joint venture obtained a $50 million mortgage on April 4, and Pebblebrook received a $23 million joint-venture distribution on April 10. On April 12, the company issued 400,000 additional Series C preferred shares for approximately $9.6 million net proceeds.
Risks, contingencies and other items
Risks identified include hotel demand and operating-cost changes, competition, dependence on third-party managers, interest rates and financing availability, acquisition and renovation execution, real-estate and environmental matters, uninsured losses, and maintaining REIT status. The company reported no material litigation and no material changes to the risk factors in its 2012 Form 10-K. It was not a guarantor of the joint venture’s debt except for limited customary carve-outs. Contractual obligations totaled approximately $1.065 billion, including mortgage and term-loan payments and long-term ground leases; the ground-lease estimate excludes CPI adjustments and percentage rent.
Important facts for investors to verify
- Separate organic hotel performance from acquisition-driven growth; reported year-over-year results are not directly comparable.
- Review the company’s renovation and repositioning budget, execution and funding needs, including remaining 2013 capital spending.
- Assess debt maturities, mortgage terms, available revolver capacity, covenant headroom and reliance on future capital-market access.
- Review the joint venture’s leverage, special-loan repayment terms and subsequent financing and distribution activity.
- Consider preferred-share distributions and seniority alongside common-share distributions, and distinguish GAAP results from FFO and EBITDA.