Pebblebrook Hotel Trust — 2019 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2019, including quarterly results for the fourth quarter. Pebblebrook is a hotel REIT focused primarily on upper-upscale full-service hotels in major U.S. urban and resort markets. At year-end, it owned 56 hotels with 14,013 rooms; hotel operations are conducted through taxable subsidiaries and third-party managers.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $1,612.2 million | $828.7 million |
| Operating income | $229.3 million | $67.0 million |
| Operating margin, calculated | 14.2% | 8.1% |
| Net income | $115.7 million | $13.4 million |
| Net income attributable to common shareholders | $82.9 million | Loss of $4.1 million |
| Diluted earnings per common share | $0.63 | Loss of $0.06 |
| FFO available to common shareholders and unit holders, non-GAAP | $314.9 million | $106.3 million |
| Cash provided by operating activities | $395.2 million | $135.7 million |
| Capital improvements and additions | $169.6 million | $89.6 million |
- Annual revenue increased 94.5%, primarily because 2019 included a full year of the 36 hotels acquired in the November 2018 LaSalle merger. Of the $783.5 million increase, $767.6 million came from those non-comparable properties; comparable properties contributed $15.9 million.
- Same-property occupancy was 82.2% versus 82.4%; ADR was $256.17 versus $252.76; RevPAR was $210.65 versus $208.19; and Total RevPAR was $308.01 versus $302.28.
- Fourth-quarter revenue was $379.4 million versus $235.6 million. Net income was $19.6 million versus a loss of $99.3 million; net income attributable to common shareholders was $11.4 million versus a loss of $104.3 million.
- At December 31, cash and cash equivalents were $30.1 million, restricted cash was $26.8 million, total assets were $6.50 billion, and debt was $2.23 billion. Debt was down from $2.75 billion at year-end 2018.
- The $650 million senior unsecured revolver had $165 million drawn and $482.2 million of stated remaining capacity; a separate $25 million PHL facility was undrawn. The company reported compliance with debt covenants.
- About $1.6 billion of term loans was effectively fixed through interest-rate swaps; approximately $510 million of total debt was exposed to variable rates. Interest expense was $108.5 million, up from $53.9 million.
Material changes versus the prior period
- The LaSalle merger materially expanded the portfolio and changed the scale of reported revenue, expenses, debt, depreciation, and preferred distributions, limiting direct year-over-year comparability.
- During 2019, Pebblebrook sold seven hotels for aggregate proceeds of $481.9 million, repaid $450 million of term loans and repaid a $65.4 million mortgage on The Westin San Diego Gaslamp Quarter. The sales generated a reported net gain of $2.8 million.
- Interest expense rose by $54.6 million, principally because of higher debt balances. Preferred-share distributions increased by $15.1 million following issuance of Series E and F preferred shares in the LaSalle merger.
- Merger-related transaction costs declined to $8.7 million from $75.0 million. 2019 also included $5.9 million of hotel management transition expenses; 2018 included a $13.1 million insurance settlement gain related to Hurricane Irma damage at LaPlaya.
- Operating cash flow increased, while year-end cash fell to $30.1 million from $83.4 million. Investing cash flow was positive $300.0 million, including $470.4 million of hotel-sale proceeds and $169.6 million of property improvements.
Outlook, management commentary, risks and unusual items
- Management said fourth-quarter results exceeded its outlook, citing unexpected demand increases in November and December in markets including San Francisco, Los Angeles, South Florida, and Boston.
- Management described improved booking trends through January 2020 but expressed concern about the emerging coronavirus situation. Its outlook did not include a coronavirus impact because the potential effects were not then knowable or forecastable. The filing gives no clear numerical earnings or revenue guidance.
- Management expected 2020 capital investments of approximately $165 million to $185 million. Planned work included renovations at The Westin San Diego Gaslamp Quarter and Embassy Suites San Diego Bay–Downtown, and the Donovan Hotel renovation and repositioning as Hotel Zena.
- On January 9, 2020, the company agreed to sell InterContinental Buckhead Atlanta and Sofitel Washington DC Lafayette Square for $331 million, expected to close in the first quarter of 2020 subject to customary conditions; completion was not assured.
- Key risks include hotel-industry cyclicality, economic and travel-demand shocks, supply growth in certain markets, rising labor and other operating costs, reliance on third-party managers, renovation costs and delays, debt refinancing and floating-rate exposure, and the transition away from LIBOR. The portfolio’s concentration in major gateway urban markets adds exposure to regional downturns.
- Preferred shares had a $510 million aggregate liquidation preference and approximately $32.6 million in annual dividends, senior to common-share distributions. The company stated it had no off-balance-sheet arrangements and was not subject to material litigation. KPMG issued unqualified opinions on the financial statements and internal control; management also concluded controls were effective.
- The 2019 cash-flow hedge fair-value change included a $26.0 million unrealized loss recorded in other comprehensive income. FFO, EBITDA, and EBITDAre are non-GAAP measures and should not be treated as cash flow or liquidity measures.
Important facts for investors to verify
- Assess underlying hotel trends using comparable-property results, separately from the effect of the LaSalle acquisition, hotel sales, and changing property mix.
- Confirm whether the $331 million announced asset sale closed on expected terms, and how proceeds affected debt, liquidity, or investment plans.
- Review subsequent demand, booking pace, and management’s updated estimates for travel disruptions, including coronavirus-related effects not captured in the filing’s outlook.
- Check debt maturities, covenant headroom, actual revolver availability, floating-rate exposure, hedging arrangements, and LIBOR-transition terms.
- Monitor delivery and final costs of the 2020 capital program, hotel repositionings, and the company’s capacity to fund capital needs and distributions alongside preferred-share obligations.
- Review hotel-property valuation and impairment assumptions, including projected cash flows, holding periods, and terminal capitalization rates; these were identified as significant audit judgment areas.