Pebblebrook Hotel Trust — Q3 2014 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2014. Pebblebrook owned interests in 31 hotels: 25 wholly owned hotels and a 49% interest in a six-hotel New York joint venture. The company is a hotel REIT and hotels are operated by third-party managers.
Financial and operating results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $169.7m | $131.2m | $442.8m | $362.4m |
| Operating income | $35.8m | $21.7m | $72.7m | $45.4m |
| Operating margin | 21.1% | 16.6% | 16.4% | 12.5% |
| Net income attributable to common shareholders | $23.7m | $11.3m | $38.3m | $15.1m |
| Diluted EPS | $0.36 | $0.18 | $0.59 | $0.24 |
| FFO available to common shareholders and units | $43.6m | $27.4m | $95.0m | $62.7m |
| EBITDA | $61.8m | $43.0m | $142.1m | $103.9m |
For wholly owned same-property hotels, Q3 occupancy was 89.8% versus 87.6%, ADR was $244.18 versus $223.62, and RevPAR was $219.36 versus $195.92. Nine-month RevPAR was $196.58 versus $177.54. Management attributed comparable-property revenue gains primarily to higher ADR, particularly at West Coast hotels. FFO and EBITDA are non-GAAP measures and are not substitutes for GAAP cash flow or net income.
Cash, debt and liquidity
- Nine-month operating cash flow was $118.9m; investing cash outflow was $159.5m and financing cash inflow was $104.7m. Cash and cash equivalents ended the period at $119.3m; restricted cash was $17.9m.
- Total debt was $597.2m: $100.0m term loan and $497.2m mortgage debt. There were no borrowings under the $200m revolving facility at September 30. The company reported compliance with debt covenants.
- The $100m term loan was effectively fixed at 2.55% through interest-rate swaps. The Nines Hotel mortgages totaled $50.7m, carried a weighted-average 7.39% rate and were scheduled to mature in March 2015.
- During the nine months, the company raised approximately $170.8m net from common and preferred share offerings and paid $58.2m in distributions. Common shares outstanding increased to 67.6m from 63.7m at year-end 2013; preferred liquidation preference rose to $350m.
Changes, outlook and notable items
- Revenue rose 29% in Q3 and 22% year to date. Growth reflected both acquisitions and improved comparable-property performance; reported hotel operating results include newly acquired properties, so reported growth is not wholly same-property growth. The company acquired the 160-room Prescott Hotel for $49m and the 331-room Nines Hotel for $127m during 2014.
- Management cited stronger business, leisure and international travel, improving group demand and generally limited new hotel supply. It expects to invest $15m–$25m in wholly owned hotel capital improvements during the remainder of 2014. No formal earnings or operating guidance is provided in the filing.
- Subsequent to quarter-end, Pebblebrook agreed to acquire a Boston-area hotel and adjacent real estate for $261m, subject to customary closing conditions, with closing expected before year-end. On October 16, it amended its credit agreement: the revolver and term-loan facilities became $300m each, with maturities extended to 2019/2020; the agreement also allows an option for an additional $200m term loan.
- A tax-credit indemnity associated with the Nines acquisition could range from zero to $28.3m plus related charges if specified conditions are breached before March 5, 2015. Management considered payment remote. The company reported no material litigation and no material changes to previously disclosed risk factors.
- Key risks include lodging-demand and economic changes, hotel operating-cost increases, reliance on third-party managers, interest rates, access to capital, acquisition execution and renovation cost or timing risks. The business is seasonal, generally with lower first-quarter and higher third-quarter revenue and cash flow.
Important facts for investors to verify
- How much of reported growth and margin improvement reflects acquired hotels versus comparable-property performance and operating efficiencies.
- The refinancing or repayment plan for the Nines’ $50.7m mortgage loans due March 2015 and the company’s broader mortgage maturity schedule.
- Funding, closing conditions and expected financing for the proposed $261m Boston-area acquisition, including its effect on leverage and liquidity.
- Whether planned capital improvements remain within the $15m–$25m estimate and deliver expected operating benefits.
- The terms and potential exposure of the Nines tax-credit indemnity, and the financial risks associated with joint-venture debt; Pebblebrook reported it does not guarantee that debt except for customary limited carve-outs.