Pebblebrook Hotel Trust — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone Q4 report. Pebblebrook is a hotel REIT focused mainly on upper-upscale hotels in major U.S. markets. At year-end, it owned 14 hotels outright (3,812 rooms) and held a 49% interest in a six-hotel Manhattan joint venture (1,733 rooms); hotels are operated by third-party managers.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $288.0 million | $57.8 million |
| Operating income (loss) | $26.1 million | $(8.1) million |
| Net income (loss) | $15.2 million | $(6.6) million |
| Net income (loss) attributable to common shareholders | $4.4 million; $0.08 per share | $(6.6) million; $(0.23) per share |
| Cash from operating activities | $48.1 million | $3.5 million |
| Cash and cash equivalents at year-end | $65.7 million | $220.7 million |
| Mortgage debt at year-end | $251.5 million | $143.6 million |
| Total assets / total equity at year-end | $1,416.6 million / $1,116.3 million | $855.5 million / $688.5 million |
- Calculated GAAP operating margin was about 9.1% and net margin about 5.3% in 2011. The filing’s non-GAAP FFO was $39.5 million and EBITDA was $70.0 million; neither measure is a substitute for GAAP income or operating cash flow.
- Pro forma portfolio operating statistics, including periods before Pebblebrook owned the hotels and the joint venture hotels, were occupancy of 78.1%, ADR of $203.31 and RevPAR of $158.75 in 2011, versus 76.2%, $188.83 and $143.96 in 2010, respectively. These are not directly comparable to reported consolidated results.
- Common dividends declared were $0.48 per share for 2011. Preferred distributions were $10.4 million in 2011; the outstanding Series A and B preferred shares had $225.0 million aggregate liquidation preference and approximately $17.8 million in annual dividends.
Material changes versus the prior period
- Revenue increased $230.2 million year over year, but the comparison is substantially affected by acquisitions: Pebblebrook acquired eight hotels in 2010 and six more in 2011. Management states the operating results are not comparable on a year-over-year basis.
- 2011 operating results included six 2011 hotel acquisitions and the Manhattan joint venture from July 29. The company paid aggregate purchase prices of $508.2 million for the six hotels and invested $152.6 million for its 49% joint venture interest.
- Operating cash flow rose to $48.1 million from $3.5 million. Investing activities used $681.8 million, including hotel acquisitions, $40.5 million of hotel improvements and additions, and $169.4 million of joint-venture contributions. Financing activities provided $478.6 million, primarily from common and preferred share offerings and mortgage proceeds.
- Common shares outstanding increased to 50.8 million at year-end from 39.8 million. The company also issued 9.0 million preferred shares during 2011.
- The revolving credit facility was amended to become unsecured, with capacity increased to $200 million and maturity extended to June 2014, plus a one-year extension option. No amount was outstanding at year-end.
Outlook, risks and notable items
- Management expected the hotel recovery to continue and anticipated that Pebblebrook’s properties would exceed industry RevPAR and margin growth in 2012, citing asset management initiatives and capital reinvestment. This is management’s expectation, not formal earnings guidance.
- Management expected 2012 hotel capital investment of approximately $45 million to $55 million; 2011 capital investment and maintenance was approximately $44.1 million.
- Refinancing is a significant risk. Pebblebrook’s mortgage debt had a weighted-average maturity of 1.9 years at year-end, and $134.7 million of principal was scheduled for 2012. Several property loans were due in 2012; subsequent refinancing and repayment actions are described below.
- The Manhattan joint venture had approximately $581 million of mortgage and mezzanine debt maturing in February 2013. Pebblebrook was not a guarantor except for customary limited carve-outs, but may need to contribute additional equity to maintain its ownership interest; successful refinancing on acceptable terms is not assured.
- After year-end, Pebblebrook obtained a $46 million Monaco Washington, D.C. loan at 4.36% and a $47 million Argonaut loan at 4.25%, both maturing in 2017. It also repaid the Argonaut’s former $42 million loan and the Sofitel Philadelphia’s $56.1 million loan, using cash and/or revolver borrowings.
- Other key risks include hotel demand and operating-cost volatility, reliance on third-party managers, capital requirements, cash-trap provisions in property debt, interest-rate and credit-market exposure, REIT qualification and environmental or accessibility liabilities. No material litigation was reported.
- KPMG issued unqualified opinions on the financial statements and internal controls. Management excluded controls at two hotels acquired in 2011 from its internal-control assessment; those hotels represented $129.5 million of assets and $28.0 million of revenue in 2011.
Important facts for investors to verify
- Review the timing, terms and funding plans for the 2012 mortgage maturities and the February 2013 Manhattan joint-venture debt maturity.
- Assess whether operating cash flow can support dividends, debt service and planned 2012 capital spending, given year-end cash of $65.7 million and significant recent investment outflows.
- Separate acquisition-driven revenue growth from same-property operating performance; verify the basis and scope of the pro forma occupancy, ADR and RevPAR figures.
- Evaluate the effects of common-share dilution and preferred distributions on common-share earnings and available cash.
- Monitor joint-venture refinancing needs, potential additional equity contributions, and property-level cash-trap or covenant triggers.
- Confirm post-year-end loan repayments and refinancing balances, including any resulting revolver usage; the filing does not provide a clear consolidated post-transaction debt and liquidity balance.