Pebblebrook Hotel Trust — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Pebblebrook is a hotel REIT; following its November 2018 merger with LaSalle Hotel Properties, it owned 60 hotels with 14,463 rooms at quarter-end. Unless noted, amounts are in millions.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $442.1 | $206.5 | $809.3 | $387.6 |
| Operating income | $95.8 | $48.5 | $125.7 | $79.9 |
| Net income attributable to common shareholders | $52.2 | $54.1 | $49.7 | $74.5 |
| Diluted EPS | $0.40 | $0.78 | $0.38 | $1.07 |
| Operating cash flow | — | $194.1 | $102.5 |
- Q2 GAAP operating margin was approximately 21.7%, versus 23.5% a year earlier. The quarter’s revenue and expense comparisons are substantially affected by the LaSalle merger and the larger portfolio.
- On a pro forma basis, assuming the merger had occurred earlier, Q2 revenue was $442.1 million versus $459.5 million; operating income was $95.8 million versus $110.5 million; and common-shareholder income was $52.2 million versus $64.8 million.
- Same-property Q2 occupancy was 86.8% versus 87.1%; ADR was $266.56 versus $262.00; RevPAR was $231.47 versus $228.30; and Total RevPAR was $334.96 versus $328.43. Management reported modest RevPAR growth. These statistics may include periods before Pebblebrook owned certain hotels.
- Q2 FFO was $113.8 million, or $105.6 million available to common shareholders and unit holders; EBITDA/EBITDAre was $149.1 million. These are non-GAAP measures and are not substitutes for cash flow or GAAP earnings.
- Six-month investing cash flow was $226.0 million, including $302.3 million of hotel-sale proceeds and $75.9 million of hotel improvements. Financing cash outflow was $457.7 million, including debt repayments and distributions. Cash and cash equivalents were $42.0 million; restricted cash was $28.3 million.
Debt, liquidity and capital
- Debt was $2.399 billion at June 30, down from $2.747 billion at year-end 2018. The company had no borrowings on its $650 million senior revolving facility and $10 million PHL facility; $2.3 million of standby letters of credit reduced senior-facility availability.
- At quarter-end, $615 million of debt (25.6% of total indebtedness) was exposed to variable rates after accounting for swaps. A 0.1 percentage-point rate change would change annual interest expense by about $0.6 million. Interest expense rose to $28.7 million in Q2 from $10.8 million, principally reflecting higher debt balances.
- The company reported compliance with debt covenants. Management expected cash, operating cash flow and available revolving credit to meet short-term needs; longer-term funding may include borrowings, equity issuance, property sales and operating cash flow.
- Capital spending was $75.9 million in the first half. Management expected a further $75–$110 million through year-end 2019, including a $21 million Hilton San Diego Resort & Spa renovation expected to finish in Q3.
Material changes, outlook and risks
- The LaSalle merger significantly expanded the portfolio and share count: weighted-average common shares were about 130.5 million in Q2 2019 versus 68.9 million in Q2 2018. Accordingly, reported year-over-year totals and per-share comparisons are not directly comparable.
- Management said Q2 results were in line with its outlook, citing modest RevPAR growth, strength in other revenues including food and beverage, and margins in line with forecast. It noted hotel-industry demand was weaker than expected, while describing its 2019 industry and company outlook as positive. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Three hotels were sold in the first half for a combined $280.8 million, with no gain or loss reported. Hotel Amarano Burbank was sold for $72.9 million on July 16, after quarter-end; the remaining $70 million of a 2020 term-loan tranche was also repaid in July. The Rouge Hotel was held for sale at June 30 under a $42 million agreement, with closing expected in Q3 subject to customary conditions.
- Derivative fair-value changes produced a $21.1 million Q2 unrealized loss in other comprehensive income; accumulated other comprehensive loss was $28.8 million at quarter-end. The filing expected approximately $6.5 million to be reclassified to interest expense over the next 12 months.
- Adoption of the lease standard resulted in $323.9 million of right-of-use assets and $247.2 million of related lease liabilities at June 30. Operating-lease payments were heavily weighted to periods beyond five years.
- Management cited hotel-demand and economic conditions, operating-cost increases, interest rates, access to financing, reliance on third-party managers, renovation delays or cost overruns, and uninsured losses among risks. It reported no material litigation, no material change to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Use the pro forma merger comparison and same-property operating statistics to assess underlying trends, while checking portfolio composition and ownership-period limitations.
- Track occupancy, ADR, RevPAR and hotel margins against management’s outlook, particularly given its comment that demand was weaker than expected.
- Review debt maturities, floating-rate exposure, swap terms, covenant headroom and the July repayment when evaluating leverage and interest-rate sensitivity.
- Confirm completion and proceeds of the Rouge Hotel sale and follow the use of hotel-sale proceeds and planned capital spending.
- Assess dividend funding and coverage alongside cash flow, preferred distributions, lease commitments and the continuing integration of the LaSalle portfolio.