Pebblebrook Hotel Trust — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Financial amounts below are in U.S. dollars; “same-property” statistics exclude the LaSalle hotels until the merger closed.
Business context
Pebblebrook is a hotel REIT focused primarily on upper-upscale hotels in major U.S. urban and coastal markets. Hotels are leased to taxable REIT subsidiaries and operated by third-party managers. At year-end, the company owned 63 hotels with 15,253 rooms.
On November 30, 2018, Pebblebrook completed its merger with LaSalle Hotel Properties, adding 36 hotels and 8,420 rooms. Merger consideration was approximately $4.1 billion, including 61.4 million common shares, 10.4 million preferred shares, approximately 0.1 million operating partnership units, and cash. The LaSalle portfolio contributed only one month of results to reported 2018 operations.
Financial and operating performance
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total revenue | $828.7 million | $769.3 million | Up 7.7%; includes LaSalle for December only |
| Operating income | $67.0 million | $135.4 million | Down 50.5%; operating margin approximately 8.1%, versus 17.6% |
| Net income | $13.4 million | $100.3 million | Down substantially |
| Net income attributable to common shareholders | Loss of $4.1 million | Income of $83.8 million | 2018 basic and diluted loss per share: $0.06 |
| FFO | $123.8 million | $191.3 million | Non-GAAP measure; FFO available to common shareholders and unit holders was $106.3 million versus $175.2 million |
| EBITDAre | $179.7 million | $229.0 million | Non-GAAP measure |
| Cash provided by operations | $135.7 million | $193.6 million | Down $57.9 million |
| Hotel capital investments | $89.6 million | $80.8 million | 2019 investment estimate: $150–$170 million |
| Total debt at year-end | $2.747 billion | $885.2 million | Increase principally reflects merger financing |
| Cash and cash equivalents | $83.4 million | $25.4 million | Also held $24.4 million of restricted cash |
Same-property occupancy was 82.1%, compared with 82.5%; ADR was $246.15, up from $242.45; and RevPAR was $202.10, up from $200.01. The reported fourth quarter had revenue of $235.6 million and a net loss of $99.3 million, or $1.16 per common share. The filing’s quarterly results should be interpreted in light of merger-related costs and the limited inclusion of acquired operations.
Material changes and unusual items
- Merger-related transaction costs were $75.0 million for 2018, including $72.7 million in transaction costs and $2.0 million in integration costs identified in the acquisition note.
- Interest expense rose to $53.9 million from $37.3 million, reflecting additional merger-related borrowing.
- LaPlaya Beach Resort reopened after Hurricane Irma damage. The company reached a $20.5 million insurance settlement and reported a $13.1 million gain in its narrative discussion; the income statement separately shows a $14.0 million gain on insurance settlement.
- The company sold The Grand Hotel Minneapolis for $30.0 million in December and recorded a $2.1 million loss.
- The LaSalle purchase-price allocation remained preliminary at the filing date and could be adjusted during the measurement period.
- Common shares outstanding increased to 130.3 million at year-end from 68.8 million; the merger also added Series E and F preferred shares. Outstanding preferred shares had an aggregate $510.0 million liquidation preference and approximately $32.6 million in annual dividends.
Liquidity, debt, and outlook
At December 31, the company had $170.0 million drawn on its $650.0 million senior unsecured revolver, leaving $480.0 million available, and no borrowings on its separate $10.0 million PHL facility. Management expected operating cash flow, cash balances, and revolver capacity to cover near-term operations, debt service, and REIT distributions. It expected to use operating cash flow, debt and equity financing, and property sales for longer-term needs.
Debt included $2.425 billion of term loans at stated value, $170.0 million on the revolver, $100.0 million of fixed-rate notes, and a $68.2 million mortgage. Most term-loan and revolver borrowings bear floating rates. The company had $1.4 billion of interest-rate swaps; management estimated that a 0.1 percentage-point change in rates on unhedged variable-rate debt would change annual interest expense by approximately $1.3 million. Debt covenants were met at year-end. The filing identifies substantial future maturities, including $500 million in 2021, $635 million in 2022, and $760 million in 2023, making refinancing and rate exposure relevant considerations.
Management said 2018 portfolio performance was at the high end of guidance, but this excerpt does not provide a clear quantified 2019 operating or earnings outlook. For 2019, management expected solid group, transient business, and leisure demand despite softening global economic growth, while noting continuing supply growth in several urban markets. It expected $150–$170 million of capital investment, including a $14.5 million renovation at Hilton San Diego Resort & Spa.
Subsequent to year-end, the company sold The Liaison Capitol Hill for $111.0 million and Hotel Palomar Washington DC for $141.5 million. The company reported no material litigation and no off-balance-sheet arrangements. It identified risks including hotel-demand cyclicality, rising operating costs and interest rates, third-party manager dependence, renovation costs, refinancing, LIBOR transition, and REIT qualification. Management and the auditor reported effective internal controls; the LaSalle hotel operations were excluded from management’s first-year internal-control assessment.
Important facts for investors to verify
- Separate merger-driven portfolio growth from underlying performance: the acquired LaSalle hotels were consolidated only from November 30, while same-property statistics exclude them.
- Review the causes and full quarterly allocation of the $99.3 million fourth-quarter net loss, including merger costs and other unusual items.
- Reconcile the $13.1 million insurance gain described in the narrative with the $14.0 million income-statement amount.
- Assess debt maturities, variable-rate exposure, swap coverage, covenant headroom, and financing needs alongside planned 2019 capital spending and distributions.
- Confirm the final LaSalle purchase-price allocation, and evaluate the effects of the two post-year-end hotel sales.
- Consider preferred-share dividend and liquidation priority when evaluating cash available to common shareholders.