Pebblebrook Hotel Trust — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Pebblebrook is a hotel REIT that owned 53 hotels with 13,236 rooms at quarter-end. The pandemic sharply curtailed travel demand; 35 hotels were open and 18 temporarily suspended operations at September 30. Four additional hotels reopened after quarter-end.
Financial and operating results
Amounts below are in millions of dollars except per-share data and hotel statistics.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $77.0 | $423.6 | $368.7 | $1,232.8 |
| Operating income (loss) | $(97.4) | $60.8 | $(153.2) | $186.6 |
| Net income (loss) | $(130.6) | $30.0 | $(219.4) | $96.2 |
| Net income (loss) attributable to common shareholders | $(138.4) | $21.8 | $(243.3) | $71.5 |
| Basic and diluted EPS | $(1.06) | $0.17 | $(1.86) | $0.55 |
| EBITDAre | $(40.5) | $130.6 | $(81.5) | $364.0 |
| FFO available to common shareholders and unit holders | $(82.1) | $91.6 | $(172.9) | $248.9 |
Hotel performance: Same-property Q3 occupancy was 19.5% versus 87.5%; ADR was $215.95 versus $262.63; RevPAR was $42.17 versus $229.75; and Total RevPAR was $63.22 versus $327.44. For the first nine months, occupancy was 26.5% versus 83.3%, and RevPAR was $64.15 versus $218.01.
Cash flow and liquidity: Operating activities used $146.9 million in the first nine months, compared with $316.1 million generated in 2019. Investing activities provided $264.7 million, including $375.1 million of hotel-sale proceeds, against $110.4 million of hotel improvements. Financing activities provided $42.3 million. Cash and cash equivalents were $204.6 million at September 30; including restricted cash, the balance was $217.0 million.
Debt and balance sheet: Debt was $2.354 billion, up from $2.229 billion at December 31, 2019. The company had $290.0 million drawn on its $650.0 million senior unsecured revolver, $6.8 million of letters of credit, and $353.2 million of remaining capacity; its separate $25.0 million PHL facility was undrawn. Total assets were $6.266 billion and total equity was $3.360 billion. About $635 million, or 27% of indebtedness, was exposed to floating rates after swaps; a 0.1 percentage-point rate change was estimated to alter annual interest expense by about $0.6 million.
Material changes and unusual items
- Q3 revenue fell $346.6 million year over year; management attributed most of the decline to COVID-19 demand losses and hotel suspensions. Nine-month revenue fell $864.1 million.
- Management reported improving weekly revenue trends through the summer, particularly at leisure-oriented drive-to properties, but expected group demand to recover slowly. Business travel showed only a slight uptick.
- Three hotel sales generated $387.0 million of proceeds and a $117.4 million gain in the first nine months. The properties sold contributed $4.9 million of operating income during that period.
- The company recorded a $20.6 million impairment on a hotel retail component and a $10.0 million tax valuation allowance. It reported an $11.7 million tax asset related to an NOL carryback.
- Cancellation of February 2020 retention awards resulted in $16.0 million of accelerated compensation expense. The company also incurred approximately $10.7 million of hotel suspension-related expenses.
- Interest-rate swap liabilities had a fair value of $66.2 million. The company expected approximately $27.6 million to be reclassified from accumulated other comprehensive loss to interest expense over the next 12 months.
Outlook, financing actions, and risks
- The company said COVID-19 was expected to materially harm results, financial position, and cash flow through the remainder of 2020 and into 2021, and that it could not estimate when travel demand would recover.
- Management stated that, following cost reductions and debt amendments, it believed liquidity would be sufficient to meet obligations for the next 12 months. This is an assessment under substantial demand and recovery uncertainty, not a guarantee.
- June 2020 debt amendments waived existing financial covenants through Q1 2021 and provided less restrictive covenants through Q2 2022. They extended $242.6 million of a term-loan tranche from November 2021 to November 2022, fixed the borrowing spread at the highest threshold during the waiver period, and allow for collateral pledges in certain circumstances. The company reported covenant compliance at quarter-end.
- Common dividends were reduced to $0.01 per share per quarter; preferred dividends continued. Capital spending was reduced, and management expected $15–$20 million of capital investments for the remainder of 2020. The debt amendments permit up to $90 million of capital improvements and redevelopment projects through the waiver period.
- Key risks include prolonged travel weakness, hotel suspensions potentially affecting maintenance-covenant compliance, debt and refinancing needs, floating-rate exposure, reliance on third-party managers, and uncertainty about realization of deferred tax assets. Contractual obligations totaled $3.896 billion, including debt, leases, and other commitments. No material litigation was reported.
Key facts for investors to verify
- Whether hotel reopenings, occupancy, room rates, and cash generation improve enough to support management’s 12-month liquidity assessment.
- Revolver availability, debt maturities, covenant requirements after the waiver periods, and any collateral or repayment triggers.
- Progress against the remaining-2020 capital investment estimate and the company’s ability to fund required hotel maintenance and lease obligations.
- Whether the NOL carryback tax asset is realized and whether further valuation allowances or hotel impairments are required.
- The ongoing cash burden of preferred distributions, swap-related interest expense, and the reduced common dividend.