Pebblebrook Hotel Trust — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts below are in millions of dollars unless stated otherwise. Pebblebrook is a hotel REIT with interests in 37 hotels: 31 wholly owned and a 49% interest in six Manhattan joint-venture hotels.
Financial and operating performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $216.3 | $169.7 | $577.4 | $442.8 |
| Operating income | $47.8 | $35.8 | $99.1 | $72.7 |
| Operating margin | 22.1% | 21.1% | 17.2% | 16.4% |
| Net income attributable to common shareholders | $31.6 | $23.7 | $52.3 | $38.3 |
| Diluted EPS | $0.43 | $0.36 | $0.72 | $0.59 |
| FFO available to common shareholders and units | $58.5 | $43.6 | $129.6 | $95.0 |
| EBITDA | $80.4 | $61.8 | $186.8 | $142.1 |
Same-property wholly owned portfolio metrics: Q3 occupancy was 87.7% versus 89.2%, ADR was $257.75 versus $242.62, and RevPAR was $226.14 versus $216.31. For the nine-month period, occupancy was 84.2% versus 85.7%, ADR was $244.09 versus $228.31, and RevPAR was $205.62 versus $195.61.
Cash from operating activities was $158.3 million for the nine months, compared with $118.9 million. Investing activities used $376.9 million, including $305.1 million for acquisitions and $74.3 million for hotel improvements. Financing activities provided $204.2 million. Cash and cash equivalents ended the period at $38.6 million; restricted cash was an additional $14.5 million.
At September 30, total debt was $1.134 billion, up from $844.0 million at year-end 2014. It comprised $175.0 million on the revolving facility, $525.0 million of term loans, and $434.3 million of mortgage debt. The company reported $275.0 million of remaining revolver capacity and compliance with debt covenants. Total assets were $3.091 billion and total equity was $1.759 billion. Preferred shares had a $350 million liquidation preference.
Changes versus prior period
- Q3 revenue increased 27.5% and nine-month revenue increased 30.4%; much of the growth reflected hotels acquired in 2014 and 2015 rather than comparable-property growth.
- Comparable-property RevPAR rose 4.5% in Q3 and 5.1% for the nine months, as higher ADR more than offset lower occupancy.
- Q3 common net income rose 33.3%; nine-month common net income rose 36.5%. Increased property count and revenue contributed, while higher interest expense, depreciation, and property costs also reflected the expanded portfolio.
- The company acquired LaPlaya Beach Resort and Club for $185.5 million in May and The Tuscan Fisherman’s Wharf for $122.0 million in June. It also added $225 million of term loans and increased aggregate credit-facility capacity to $750 million.
- Interest expense increased by $3.8 million in Q3 and $9.1 million for the nine months. Unrealized losses on interest-rate swaps reduced other comprehensive income by $10.7 million for the nine months.
Outlook, risks, and notable items
- Management expected positive U.S. lodging fundamentals for the rest of 2015, but at a more moderate pace. It cited the slowing global economy, weaker job gains, a stronger U.S. dollar, and softer international inbound travel demand as factors that could restrain hotel demand.
- Management expected to spend approximately $15 million to $25 million on capital improvements during the remainder of 2015. Major renovation activity included projects at The Westin Colonnade Coral Gables and The Prescott Hotel San Francisco; the Prescott was expected to close for renovation and reopen as Hotel Zeppelin San Francisco.
- After quarter-end, on October 6, the company repaid the $48.6 million mortgage on InterContinental Buckhead Atlanta. It intended to repay mortgages on Skamania Lodge and DoubleTree Bethesda at or before maturity, using revolver borrowings.
- Term-loan borrowings were hedged with swaps; $175 million, or 15% of total indebtedness, remained variable-rate debt after excluding swapped term loans. Management estimated that a 0.1 percentage-point rate change would affect annual interest expense by approximately $0.2 million. The swaps had an $11.1 million liability fair value, and approximately $5.8 million of accumulated losses was expected to be reclassified to interest expense over the next 12 months.
- Hotel demand is seasonal, typically weaker in the first quarter and stronger in the third. Key risks include operating-cost increases, local or broader economic downturns, interest rates, reliance on third-party hotel managers, renovation delays or cost overruns, acquisition and financing availability, and REIT qualification. The filing reported no material litigation and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much reported revenue and earnings growth came from acquired properties versus organic performance; compare reported results with the filing’s pro forma information.
- Whether occupancy weakness and management’s more moderate demand outlook affect future RevPAR, margins, and hotel cash flows.
- Debt maturities, refinancing plans, remaining revolver capacity, covenant headroom, and exposure to floating rates; also assess the effect of swap valuations and future reclassifications.
- Expected total renovation spending, project timing and closures, and whether planned improvements meet return expectations.
- Cash available after capital spending, debt service, and distributions, including the company’s reliance on additional capital markets access for long-term needs.