Pebblebrook Hotel Trust — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also provides fourth-quarter results. Pebblebrook is a hotel REIT focused primarily on upper-upscale properties in major U.S. urban and resort markets. At year-end it owned 29 hotels with 7,219 rooms.
Financial and operating performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $816.4 million | $770.9 million | +5.9% |
| Operating income | $139.3 million | $127.6 million | +9.2% |
| Net income | $74.0 million | $95.0 million | −22.1% |
| Net income attributable to common shareholders | $47.0 million | $68.7 million | −31.7% |
| Diluted EPS | $0.64 | $0.94 | −31.9% |
| FFO | $217.4 million | $199.2 million | +9.1% |
| EBITDA | $235.2 million | $249.9 million | −5.9% |
| Cash from operations | $241.3 million | $220.7 million | +9.3% |
Same-property occupancy was 84.7%, versus 83.6%; ADR was $248.55, up 1.8%; and RevPAR was $210.56, up 3.1%. Based on reported figures, operating income margin was approximately 17.1%, compared with 16.6% in 2015. Fourth-quarter revenue was $198.9 million, net income was $18.4 million, and diluted common EPS was $0.20.
Year-end cash and cash equivalents were $33.4 million, with $7.4 million in restricted cash. Total debt was $996.3 million, down from $1.106 billion; shareholders’ equity was $1.606 billion. The $450 million revolving facility had $82 million drawn and $368 million of remaining capacity. Debt included $675 million in term loans, $100 million in senior notes, and $142.9 million in mortgage principal. The company reported compliance with debt covenants. Operating cash flow was $241.3 million; investing activities provided $298.7 million, including property-sale proceeds, while financing activities used $532.9 million. Capital investment in hotels was $121.9 million.
Material changes and unusual items
- Revenue increased by $45.6 million. Management attributed $23.6 million of the increase to comparable properties and the balance to non-comparable properties, acquisitions, and dispositions.
- Common-shareholder earnings fell despite higher revenue and operating income. Results included a $62.6 million impairment of the Manhattan Collection joint-venture investment and $12.1 million impairment on the DoubleTree Bethesda property held for sale. These were partly offset by $40.7 million of gains on property and land sales.
- Pebblebrook redeemed all Series A and Series B preferred shares, issued $125 million of Series D preferred shares for approximately $120.8 million net proceeds, and retained Series C and D preferred shares with a combined $250 million liquidation preference. Annual preferred dividends on the outstanding series were approximately $16.1 million.
- The company redeemed its 49% interest in the Manhattan Collection joint venture, took full ownership of Manhattan NYC and Dumont NYC, then sold Manhattan NYC for $217.5 million. It also sold Viceroy Miami, The Redbury Hollywood, DoubleTree Bethesda, and an adjacent Revere Hotel land parcel. Dumont NYC was being marketed for sale at the filing date.
- Common distributions were declared at $0.38 per share each quarter in 2016, up from $0.31 per quarter in 2015. A $150 million share-repurchase authorization had no repurchases through year-end.
Outlook, commentary, and risks
Management expected more modest hotel demand growth in 2017, citing a slowing global economy, modest job gains, a weaker corporate profit outlook, the strong U.S. dollar, and softer international inbound and business travel. It expected urban markets including New York, Boston, Los Angeles, Miami, Portland, and Washington, D.C. to underperform the already modest U.S. lodging industry RevPAR growth, amid greater room supply. Management remained cautious about economic and geopolitical uncertainty while noting opportunities to gain market share and improve recently renovated properties.
Management forecast 2017 hotel capital investment of approximately $90 million to $100 million, including Revere Hotel Boston Common ($22.5 million), Hotel Palomar Los Angeles–Beverly Hills ($12 million), and The Tuscan Fisherman’s Wharf ($15 million). Liquidity needs were expected to be met with operating cash, existing cash, and revolving-credit borrowings as needed; longer-term needs could require debt or equity issuance, property sales, or operating cash flows.
Key risks include hotel-demand and supply cycles, market concentration, rising labor and other operating costs, dependence on third-party hotel managers, renovation costs and disruption, refinancing and interest-rate exposure, restrictive debt covenants and potential cash traps, and the ability to access capital. REIT qualification, environmental and ADA compliance, cyber incidents, labor actions, uninsured losses, and long-term ground-lease obligations are also risks. The filing reports no material litigation and no off-balance-sheet arrangements. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Assess how much reported earnings and FFO depend on the joint-venture impairment, held-for-sale impairment, and property-sale gains; reconcile those items to recurring hotel performance.
- Review same-property results and property-level trends, including effects of renovation closures, unusual local demand events, and the exclusions used in the comparable-property set.
- Check debt maturities, floating-rate exposure, hedge coverage, covenant headroom, and the plan for the $72.3 million of scheduled 2017 principal payments and remaining 2017 mortgage maturities.
- Track whether Dumont NYC is sold and how proceeds, sale price, and any resulting gain or loss compare with carrying value and management’s liquidity plans.
- Evaluate the funding and expected returns for the 2017 capital program, alongside the common distribution and cumulative preferred dividend obligations.
- Compare management’s 2017 market and RevPAR outlook with subsequent lodging-industry and portfolio results; the filing gives no specific numerical company earnings or RevPAR guidance.