Pebblebrook Hotel Trust annual report, FY2015

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Pebblebrook Hotel Trust — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015; quarterly results are also reported. Amounts are in U.S. dollars. Pebblebrook is a hotel investment REIT; it owned interests in 37 hotels, including 31 wholly owned properties with 7,408 rooms and a 49% interest in six Manhattan hotels with 1,787 rooms.

Financial performance and liquidity

  • Revenue: $770.9 million, up 28.7% from $598.8 million in 2014. Growth included acquisitions; management attributed $150.2 million of the $172.1 million increase in hotel revenue to non-comparable properties.
  • Profit: Operating income was $127.6 million, versus $91.3 million. Net income was $95.0 million, versus $73.5 million. Net income attributable to common shareholders was $68.7 million, or $0.95 per diluted share, versus $47.8 million, or $0.71 per diluted share.
  • Operating indicators: Same-property occupancy declined to 83.3% from 84.3%; ADR increased to $241.39 from $227.77; RevPAR increased to $200.99 from $192.07. These figures exclude specified properties and the Manhattan joint venture.
  • Margins: Operating margin was approximately 16.6%, versus 15.2% in 2014. Hotel operating expenses rose to $468.1 million from $374.0 million. Depreciation and amortization increased to $95.9 million from $68.3 million.
  • FFO and EBITDA: FFO was $199.2 million, up from $150.7 million; FFO available to common shareholders and unit holders was $173.3 million, versus $125.6 million. EBITDA was $249.9 million, versus $190.3 million. These are non-GAAP measures, not substitutes for operating cash flow or liquidity.
  • Cash flow: Operating cash flow was $220.7 million, versus $161.3 million. Investing used $399.9 million, including $305.1 million for hotel acquisitions and $99.8 million for property improvements. Financing provided $152.6 million. Cash and cash equivalents ended the year at $26.3 million, down from $52.9 million.
  • Debt and liquidity: Total debt was $1.110 billion, up from $844.0 million; year-end equity was $1.758 billion. Debt comprised $165.0 million drawn on the revolver, $525.0 million in term loans, $100.0 million in unsecured notes, and $320.1 million in mortgage debt. The $450 million revolver had $285 million available. The company reported compliance with debt covenants. Term loans were hedged to fixed effective rates; $165 million of debt remained exposed to variable rates.
  • Distributions: Common distributions declared were $0.31 per share each quarter, or $1.24 for the year. Preferred distributions were senior to common distributions; outstanding preferred shares had an aggregate $350 million liquidation preference and approximately $26 million in annual dividends.

Material changes versus 2014

  • Acquired LaPlaya Beach Resort and LaPlaya Beach Club for $185.5 million and The Tuscan Fisherman’s Wharf for $122.0 million.
  • Expanded unsecured credit-facility capacity by $150 million to $750 million; raised $225 million through new term loans and issued $100 million of unsecured notes.
  • Repaid approximately $162.3 million of mortgage loans on four hotels. Despite these repayments, total debt increased, principally as the company funded acquisitions and investments.
  • Invested $99.8 million in hotel improvements, compared with $52.6 million in 2014. Management and franchise transition costs included approximately $1.4 million related to changing managers at four San Francisco hotels.
  • Joint-venture earnings fell to $6.2 million from $10.1 million, reflecting lower revenue, including weaker ADR at the Manhattan properties.
  • Common-share price closed 2015 at $28.02, versus a 2015 high of $50.11; the annual common distribution increased from $0.92 in 2014 to $1.24 in 2015.

Outlook, risks, and unusual items

  • Management said 2015 U.S. lodging fundamentals remained positive but were more moderate than expected. It anticipated more modest hotel-demand growth in 2016, citing slower global growth, weaker job gains, a strong U.S. dollar, softer inbound international travel, and increased supply in some urban markets. Management expected urban markets to underperform U.S. RevPAR growth.
  • Management estimated 2016 capital investment of approximately $95 million to $105 million for wholly owned hotels. Renovations included projects at the Westin Colonnade Coral Gables, Prescott Hotel San Francisco, and Union Station Hotel; the Prescott was closed for renovation and expected to reopen by the second quarter of 2016.
  • On January 5, 2016, the company drew $150 million under expanded term-loan facilities. On February 8, it announced redemption of Series A preferred shares on March 11, 2016, at $25 per share plus accrued distributions. On February 10, it authorized a common-share repurchase program of up to $150 million.
  • The Manhattan joint venture’s five hotels securing a $410 million loan entered a cash-trigger period at year-end after trailing NOI fell below a threshold. Distributions from those properties were restricted until the threshold is met. The joint venture was reported in compliance with debt covenants; its debt was non-recourse to Pebblebrook except for customary carve-outs.
  • Key risks include hotel-cycle and market concentration, operating-cost inflation, new room supply, dependence on third-party managers, renovation cost and disruption, refinancing and covenant risk, REIT qualification and distribution requirements, and exposure to interest rates, labor, cyber incidents, environmental matters, and uninsured losses. Hotel demand is seasonal, generally weaker in the first quarter and stronger in the third.
  • The filing reported no material litigation and no unresolved SEC staff comments. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and controls. The Tuscan’s controls were excluded from the company’s assessment following its 2015 acquisition.

Important facts for investors to verify

  • How much of reported revenue, earnings, FFO, and RevPAR growth reflects comparable-property performance versus acquisitions, renovations, closures, and other non-comparable factors.
  • The 2016 performance and reopening timetable of renovation properties, and whether the stated capital-investment estimate is sufficient to complete planned work.
  • The company’s post-year-end debt balance, interest costs, liquidity, and refinancing needs, including the effect of the January 2016 $150 million term-loan draw and the debt maturities listed for 2016–2020.
  • Whether the Manhattan joint venture’s cash-trigger restriction is lifted and whether its debt maturities or operating results affect future distributions or Pebblebrook’s investment value.
  • The funding and effect of the announced Series A redemption and common-share repurchase program on liquidity, leverage, preferred dividends, and common-share distributions.
  • Whether hotel demand, supply growth, operating expenses, and management’s 2016 outlook develop as expected; the filing does not provide formal numerical earnings or RevPAR guidance.