Pebblebrook Hotel Trust — Q2 2017 Form 10-Q
Business context and period. Pebblebrook is a hotel REIT that owned 28 hotels with 6,970 guest rooms as of June 30, 2017. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with 2016.
Financial and operating performance
- Q2 revenue: $205.7 million, down 3.1% from $212.3 million. Room revenue was $142.5 million, food and beverage $48.4 million, and other operating revenue $14.8 million.
- Q2 earnings: Operating income was $40.2 million versus $45.3 million; net income attributable to the company was $43.5 million versus $74.2 million. Net income available to common shareholders was $39.5 million, or $0.57 per diluted share, versus $69.9 million, or $0.96 per diluted share.
- Q2 operating indicators: Same-property occupancy was 86.9% versus 87.6%; ADR was $251.08 versus $255.37; RevPAR was $218.19 versus $223.63. Same-property RevPAR declined 2.4%, while total same-property revenue declined 0.2%.
- Non-GAAP measures: Q2 FFO was $55.0 million versus $62.1 million; EBITDA was $80.7 million versus $118.2 million. These are not substitutes for GAAP earnings or cash flow.
- First-half results: Revenue was $387.9 million versus $408.5 million; operating income $60.7 million versus $75.3 million; net income attributable to the company $57.5 million versus $90.8 million; and diluted EPS $0.70 versus $1.05. FFO was $96.4 million versus $106.0 million, and EBITDA was $127.6 million versus $171.7 million.
- Cash flow, six months: Operating cash flow was $94.9 million, down from $117.1 million. Investing activities provided $155.1 million, including $203.2 million of property-sale proceeds, against $47.4 million of hotel improvements. Financing activities used $269.1 million. Cash declined by $19.1 million to $14.3 million.
- Debt and liquidity: Total debt was $886.3 million at quarter-end, down from $996.3 million at year-end 2016. Cash was $14.3 million; $43.0 million was drawn on the main revolver, leaving $407.0 million available, and the separate PHL facility had $10.0 million available. The company reported compliance with debt covenants.
- Margins: The filing does not state a headline operating-margin measure. Based on reported revenue and operating income, Q2 operating margin was approximately 19.5%, compared with 21.3% in Q2 2016.
Material changes and unusual items
- Q2 net income and EBITDA comparisons were materially affected by lower property-sale gains: $14.6 million in 2017 versus $40.3 million in 2016. The 2017 gain included $13.9 million from the Revere Hotel Boston Common parking garage sale; the Dumont NYC sale generated an immaterial gain after a $1.0 million impairment recognized earlier in 2017.
- The company sold Dumont NYC for $118.0 million and the Revere parking garage for $95.0 million. Sale proceeds were used to repay revolving borrowings and for general corporate purposes.
- Same-property RevPAR excluding San Francisco increased 2.0% in Q2; management attributed the overall decline primarily to the Moscone Convention Center renovation. Hotel Zoe San Francisco’s renovation also weighed on reported revenue.
- Management cited softer international and business travel, a strong U.S. dollar, and rising hotel supply in several urban markets as industry headwinds. It expected moderate U.S. lodging revenue growth for the remainder of 2017 and cautioned that urban markets could underperform.
- The company repurchased 3.24 million common shares for $93.3 million during the first half, at an average price of approximately $28.77. A new $100 million repurchase authorization was announced after quarter-end, to begin after the existing program is completed.
Outlook, risks and commitments
- Management expected to invest approximately $40 million to $55 million in hotel capital improvements during the remainder of 2017, following $47.4 million invested in the first half.
- Management said existing cash and operating cash flow were expected to support operations, debt service and REIT distributions. Longer-term funding needs may rely on debt or equity issuance, property sales and operating cash flow; access to capital depends on market conditions.
- Interest-rate exposure remained: $118 million of debt, or 13.3% of total indebtedness, was variable-rate after swaps. A 0.1 percentage-point rate change was estimated to alter annual interest expense by approximately $0.1 million.
- Key risks include hotel demand and supply conditions, operating-cost inflation, reliance on third-party hotel managers, financing availability and interest rates, renovation delays or cost overruns, and the ability to maintain REIT status. Management reported no material litigation and no material change to previously disclosed risk factors.
- Contractual obligations totaled $1.85 billion, including substantial long-term hotel and ground lease commitments. The filing reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether RevPAR and revenue trends improve, particularly in San Francisco and other urban markets, and how new supply affects hotel performance.
- Whether planned renovations deliver expected operating gains and remain within the stated capital-investment range.
- How property dispositions, share repurchases and distributions affect cash balances, leverage and liquidity.
- Debt maturities, covenant compliance, floating-rate exposure and the availability and cost of future financing.
- The contribution of asset-sale gains and other nonrecurring items to reported earnings, FFO and EBITDA.