Pebblebrook Hotel Trust — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Pebblebrook owned 28 hotels with 6,973 guest rooms. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and operating metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $205.5 | $201.8 | $593.0 | $589.7 |
| Operating income | $40.4 | $40.7 | $120.2 | $101.4 |
| Net income attributable to company | $29.8 | $30.4 | $112.3 | $88.0 |
| Net income available to common shareholders | $25.8 | $26.4 | $100.2 | $75.9 |
| Diluted EPS | $0.37 | $0.38 | $1.44 | $1.08 |
| FFO available to common shareholders and unit holders | $50.6 | $54.2 | $174.7 | $142.5 |
| EBITDAre | $69.0 | $68.9 | $223.9 | $183.0 |
Revenue rose 1.8% in Q3 and 0.6% year to date. GAAP operating margin was approximately 19.6% in Q3 (20.2% prior year) and 20.3% year to date (17.2% prior year). Q3 common earnings and FFO declined year over year; year-to-date earnings and FFO increased. EBITDAre was nearly flat in Q3 and increased year to date.
Same-property Q3 occupancy was 89.5%, unchanged year over year; ADR increased to $259.25 from $256.56 and RevPAR to $231.94 from $229.68. For the nine months, occupancy was 85.7% in both periods, while ADR and RevPAR rose to $253.13 and $216.97, respectively, from $250.40 and $214.46.
Cash provided by operating activities was $170.8 for the first nine months, compared with $151.1 in 2017. Hotel improvements used $56.9, versus $63.5 a year earlier. Cash and cash equivalents were $18.0 at quarter-end, with restricted cash of $8.5.
Total debt was $1,333.3 at September 30, up from $885.2 at year-end 2017. Debt included $394.0 drawn on the $450.0 revolving facility, leaving $56.0 available; the company reported covenant compliance. Net debt is not stated in the filing. Of total indebtedness, $569.0, or 43%, was exposed to variable rates after swaps; a 0.1 percentage-point rate change was estimated to affect annual interest expense by about $0.6. Interest expense was $12.6 in Q3 and $33.3 year to date, up from $9.0 and $28.0, respectively.
Material changes and unusual items
- Year-to-date other income was $29.2, including a reported $24.1 gain on marketable securities and dividend income. Pebblebrook held 10.8 million LaSalle Hotel Properties common shares, carried at fair value; the investment balance was $373.9 at September 30. Q3 other income was $3.9.
- Pebblebrook paid a $112.0 LaSalle termination fee on September 6 after LaSalle ended its prior merger agreement. The fee was recorded in prepaid expenses and other assets, not charged to current-period earnings. Prepaid expenses and other assets totaled $173.5 at quarter-end.
- The company reached a $20.5 final insurance settlement related to Hurricane Irma damage at LaPlaya and recognized a $13.1 gain during the first nine months. LaPlaya was fully reopened in January 2018.
- Q3 general and administrative expense increased to $10.3 from $4.5, primarily due to costs of the pending LaSalle merger and higher share-based compensation. Year-to-date it increased to $21.5 from $17.0.
- The company invested $356.2 in marketable securities and paid the $112.0 termination fee during the first nine months. These items contributed to investing cash outflow of $513.4; financing cash inflow was $336.6, including net revolver borrowings and a new $100.0 term loan.
Merger, outlook, risks, and contingencies
- On September 6, Pebblebrook agreed to acquire LaSalle. LaSalle common shareholders may elect $37.80 cash or 0.92 Pebblebrook common share per share, subject to a 30% cash-election cap and pro rata cutbacks. LaSalle preferred shares are to convert into new Pebblebrook preferred series. Closing was expected November 30, 2018, subject to customary conditions, including shareholder approvals.
- After quarter-end, on October 31, Pebblebrook entered into a $1.8 billion term loan agreement to fund the merger and increase liquidity and debt capacity. It had not been funded as of the filing, and fees and interest were not yet incurred. The company had also secured a commitment for up to $2.4 billion in bridge financing, available at merger closing if needed; the commitment cost $15.6 and the facility would mature 364 days after closing.
- Management expected U.S. lodging revenue growth to continue for the remainder of 2018, with modest industry RevPAR growth and larger urban markets generally performing slightly better. Management cited improving business travel, stronger group and transient bookings, fewer cancellations, and solid leisure demand. It reported better-than-expected Q3 hotel performance and gains at renovated San Francisco properties.
- Management expected $10–$20 of hotel capital investment through year-end, including an $18.0 Mondrian Los Angeles renovation expected to finish in Q1 2019. No formal earnings or RevPAR guidance is provided in the supplied filing text.
- Key risks include lodging demand and operating-cost changes, competition and new supply, interest-rate and financing risk, reliance on third-party hotel managers, renovation cost or schedule overruns, uninsured losses, and merger closing and financing risks. Management reported no material litigation and no material change to previously disclosed risk factors.
- Contractual obligations totaled $2,365.4, including debt, lease commitments and purchase commitments; $182.5 was due in less than one year. The company disclosed no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the LaSalle merger closed on expected terms and timing, and the final cash-versus-stock election and financing mix.
- How the $1.8 billion term loan and any bridge borrowing affected debt, interest costs, maturities and covenant headroom after closing.
- Whether marketable-security gains and dividends are recurring; distinguish these from hotel operating results and assess valuation exposure to the LaSalle shares.
- Whether hotel revenue and RevPAR trends persist, particularly as supply grows in several urban markets and seasonal patterns affect results.
- Progress, total cost and expected returns from the Mondrian Los Angeles renovation and other capital projects, as well as remaining Hurricane Irma insurance matters.
- Near-term liquidity and refinancing needs, including the $100.0 Fifth Term Loan due March 2019 (with an extension option) and only $56.0 remaining under the revolving facility at quarter-end.