Pebblebrook Hotel Trust — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparatives are the corresponding 2012 periods. Pebblebrook is a hotel REIT focused primarily on major U.S. cities and coastal gateway markets. At quarter-end it held interests in 28 hotels: 22 wholly owned hotels with 5,191 rooms and a 49% interest in six joint-venture hotels with 1,733 rooms.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $131.2M | $104.3M | $362.4M | $275.9M |
| Operating income | $21.7M | $15.6M | $45.4M | $29.1M |
| Operating margin | 16.6% | 14.9% | 12.5% | 10.5% |
| Net income attributable to company | $17.4M | $11.9M | $32.0M | $19.0M |
| Net income attributable to common shareholders | $11.3M | $7.5M | $15.1M | $5.6M |
| EPS available to common shareholders, diluted | $0.18 | $0.13 | $0.24 | $0.10 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $75.1M | $57.1M |
| FFO available to common shareholders and units | $27.4M | $21.1M | $62.7M | $43.9M |
| EBITDA | $43.0M | $34.5M | $103.9M | $78.6M |
FFO and EBITDA are non-GAAP measures; the filing cautions that neither represents operating cash flow or funds available for distributions.
- Same-property operating metrics: Q3 occupancy was 86.3% versus 85.8%, ADR was $225.32 versus $210.02, and RevPAR was $194.53 versus $180.27. For the nine months, occupancy was 83.4% versus 80.9%, ADR was $214.28 versus $203.63, and RevPAR was $178.78 versus $164.84. These statistics exclude specified newer acquisitions and the Manhattan Collection joint venture.
- Cash and investment: Cash and cash equivalents were $110.0M at September 30, 2013, up from $85.9M at year-end 2012; restricted cash was $15.9M. Nine-month investing cash outflow was $102.5M, including $99.3M for acquisitions and $27.7M for hotel improvements, partly offset by a $26.3M net joint-venture distribution.
- Debt and liquidity: Total debt was $556.8M, up from $468.5M at year-end 2012; this included $100.0M of term debt and $456.8M of mortgage debt. The $200.0M revolving facility had no borrowings, and the company reported covenant compliance. The $100.0M term loan was hedged to an effective fixed rate of 2.55%; the filing states there was no unhedged variable-rate debt at quarter-end.
- Equity and distributions: The company issued 4.0M Series C preferred shares for approximately $96.7M net proceeds and raised $4.8M net under its common-share ATM program during the nine-month period. Preferred distributions increased to $16.9M from $13.4M; common-share/unit distributions were $29.5M in the equity statement.
Material changes versus prior periods
- Revenue rose 25.8% in Q3 and 31.3% for the nine months. Management attributed most of the reported increase to properties not owned in the comparable 2012 periods; same-property revenue also benefited from higher ADR and RevPAR.
- Operating income increased to $21.7M in Q3 and $45.4M year to date. Higher revenue was accompanied by increased hotel operating costs, depreciation, property taxes, ground rent, and interest expense.
- Common-shareholder income and EPS increased despite higher preferred distributions. The Q3 and nine-month comparisons include changes in portfolio size and share count, so reported growth is not solely organic.
- Three hotels were acquired in 2013: Embassy Suites San Diego Bay-Downtown for $112.5M, Redbury Hotel for $34.0M, and Hotel Modera for $47.5M. The latter two acquisitions occurred in August; Modera purchase-price allocation remained preliminary.
Outlook, commentary, and risks
- Management described lodging fundamentals as positive through the first nine months, citing strong transient business and leisure travel, higher rates, and historically low national new-supply growth. It also noted weak group demand and uncertainty from government travel reductions and the federal shutdown.
- No quantified earnings or operating guidance is provided. Management expected to spend approximately $15M–$20M on renovations, repositioning, and other capital improvements at wholly owned hotels during the remainder of 2013; $27.7M had been invested in the first nine months.
- Management expected operating cash flow and existing cash to cover short-term needs, debt service, and REIT distributions. Longer-term needs, including acquisitions and maturities, may require operating cash, debt, or additional equity and preferred-share issuance; access to capital depends on market conditions.
- The filing added a risk concerning delayed federal funding or another government impasse, which could discourage travel and adversely affect group and transient revenues and cash available for distributions. Other identified risks include hotel demand and cost pressures, interest rates, financing availability, reliance on third-party managers, renovation execution, and maintaining REIT qualification.
- The company reported no material litigation, was in compliance with debt covenants, and management concluded disclosure controls were effective. The Manhattan Collection joint venture had approximately $460M of first-mortgage debt and a $50M unsecured special loan; Pebblebrook stated it did not guarantee the joint-venture debt except for customary limited carve-outs.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects comparable-property performance versus acquisitions, and how the same-property portfolio definitions affect comparisons.
- Debt maturity and refinancing exposure, including mortgage maturities concentrated in 2016–2017 and the joint venture’s 2018 loan maturities.
- Actual renovation spending, project returns, and any cost overruns relative to the stated remaining-2013 capital plan.
- The performance and repayment terms of the $50M, 9.75% unsecured loan to the Manhattan Collection joint venture, as well as any preferred-capital distributions to the joint-venture partner.
- Whether government-related travel disruption, weaker group demand, rising operating costs, or tighter capital markets affect hotel performance, liquidity, or distributions.