Pebblebrook Hotel Trust — Q3 2017 Form 10-Q
Business context and period. Pebblebrook is a lodging-focused REIT. For the quarter ended September 30, 2017, it owned 28 hotels with 6,970 rooms, primarily in U.S. urban and coastal markets. Results cover the three and nine months ended September 30, 2017, compared with the same periods in 2016.
Financial and operating performance
- Revenue: Q3 revenue was $201.8 million, down 3.4% from $209.0 million. Nine-month revenue was $589.7 million, down 4.5% from $617.5 million.
- Profit: Q3 operating income was $40.7 million, versus $35.3 million; net income attributable to the company was $30.4 million, versus a $35.4 million loss. Common-shareholder net income was $26.4 million, or $0.38 per diluted share, versus a $43.9 million loss, or $0.61 per share. For nine months, company-attributable net income was $88.0 million versus $55.3 million, and diluted EPS was $1.08 versus $0.45.
- Margins: Operating income as a share of revenue was approximately 20.2% in Q3 2017 versus 16.9% in Q3 2016; for nine months, approximately 17.2% versus 17.9%.
- Hotel operating trends: Same-property Q3 occupancy was 89.5% versus 89.7%, ADR was $256.56 versus $264.46, and RevPAR was $229.68 versus $237.15. Nine-month RevPAR was $213.54 versus $219.64.
- Cash flow and investment: Nine-month operating cash flow was $152.5 million, down from $185.6 million. Hotel improvements and additions used $63.5 million, compared with $88.8 million. Investing cash flow was $141.4 million, including $203.5 million of property-sale proceeds.
- Debt and liquidity: Total debt was $872.9 million at quarter-end, down from $996.3 million at December 31, 2016. Cash and cash equivalents were $14.2 million, with $6.5 million restricted cash. The company had $420 million of capacity on its $450 million revolver and reported compliance with debt covenants.
- Distributions and capital returns: Common distributions were $0.38 per share/unit each quarter. The company repurchased 3.25 million shares for $93.4 million during the first nine months, at an average $28.77 per share.
Changes versus the prior comparable period
- Revenue and same-property RevPAR declined, reflecting weaker results at certain properties, the sale of the Dumont NYC and the Revere parking garage, the absence of the 2016 Democratic National Convention benefit at Sofitel Philadelphia, and LaPlaya’s hurricane-related closure. Renovated Nashville and San Francisco hotels continued to ramp up.
- Q3’s improvement in GAAP net income largely reflects the prior-year $61.3 million equity-method loss from the Manhattan Collection joint venture, which Pebblebrook exited in October 2016, and lower impairment charges. Nine-month 2017 included $14.9 million of property-sale gains, compared with $40.3 million in 2016.
- FFO, a non-GAAP measure, declined to $58.2 million in Q3 from $66.8 million and to $154.6 million for nine months from $172.8 million. FFO available to common shareholders and unit holders was $54.2 million for Q3 and $142.5 million for nine months.
Outlook, risks, and unusual items
- Management expected moderate U.S. lodging revenue growth for the remainder of 2017, while describing corporate travel as soft but steady, leisure demand as solid, and international inbound travel as weak. It cautioned that supply growth was weighing on several urban markets and that near-term conditions remained uncertain.
- Hurricane Irma damaged LaPlaya Beach Resort, which remained closed at September 30. Management estimated $12–15 million of damage, subject to approximately $2.8 million in insurance deductibles; phased reopening was expected beginning in late November 2017, with full restoration expected in Q1 2018. The company recorded a net impairment of $2.8 million and $0.4 million of closure costs, and was evaluating insurance recovery, including business interruption.
- Management expected $15–30 million of hotel capital investment for the remainder of 2017, excluding LaPlaya restoration costs. No full-year earnings or FFO guidance is provided in the filing.
- After quarter-end, the company extended the revolver and First Term Loan maturities to January 2022/2023, restructured the Second Term Loan into $65 million due 2022 and $110 million due 2024, and extended the PHL facility maturity to January 2022.
- Key risks include lodging demand and competition, operating-cost inflation, interest-rate changes, third-party hotel-manager dependence, financing and capital-market access, renovation execution, natural disasters and potential uninsured losses. The company reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- LaPlaya’s reopening timetable, final repair costs, insurance proceeds, and business-interruption recovery.
- Whether hotel revenue and RevPAR stabilize amid market supply growth and weaker international demand.
- Cash generation after ongoing renovation spending, distributions, and share repurchases.
- Debt covenant headroom, floating-rate exposure, and the terms and economics of the October 2017 debt amendments.
- The sustainability of reported earnings, separating recurring hotel operations from property-sale gains, impairments, and prior-year joint-venture losses; FFO and EBITDA are non-GAAP measures.