Pebblebrook Hotel Trust — Q2 2014 Form 10-Q
Business context and period. The unaudited filing covers the three and six months ended June 30, 2014. Pebblebrook is a hotel REIT focused primarily on major U.S. cities and coastal gateway markets. At quarter-end it had interests in 30 hotels: 24 wholly owned hotels with 5,711 rooms and a 49% interest in a six-hotel joint venture with 1,775 rooms.
Financial and operating results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $147.5 million | $126.3 million | $273.2 million | $231.2 million |
| Operating income | $26.4 million | $18.7 million | $36.9 million | $23.6 million |
| Net income attributable to company | $22.7 million | $14.8 million | $26.8 million | $14.6 million |
| Net income attributable to common shareholders | $16.6 million | $8.7 million | $14.6 million | $3.8 million |
| Diluted EPS | $0.26 | $0.14 | $0.22 | $0.06 |
| FFO available to common shareholders and unit holders* | $35.2 million | $24.5 million | $51.3 million | $35.4 million |
| EBITDA* | $52.0 million | $40.5 million | $80.2 million | $60.9 million |
| Cash provided by operating activities | — | $59.1 million | $37.6 million |
*Non-GAAP measures; the company cautions that neither FFO nor EBITDA is a substitute for GAAP earnings or operating cash flow.
Q2 operating income margin was approximately 17.9%, compared with 14.8% a year earlier, based on reported revenue and operating income. Same-property wholly owned hotel statistics improved: Q2 occupancy was 87.0% versus 86.2%, ADR was $230.27 versus $212.04, and RevPAR was $200.24 versus $182.72. The same-property comparison excludes the Prescott Hotel and the Manhattan Collection joint venture.
At June 30, total assets were $2.16 billion, cash and cash equivalents were $38.5 million, and restricted cash was $15.3 million. Total debt was $584.7 million, up from $554.2 million at December 31, 2013. Debt comprised $36.0 million drawn on the $200 million revolving facility, a $100 million term loan, and $448.7 million of mortgage debt. The term loan is effectively fixed at 2.55% under swaps; the company reported covenant compliance. Six-month investing cash outflow was $69.1 million, including $50.3 million for hotel acquisitions and $16.1 million for improvements. Financing cash outflow was $6.7 million; cash declined by $16.7 million during the period.
Changes and material developments
- Q2 revenue rose $21.2 million year over year; management attributed $14.8 million of the increase to non-comparable properties and $6.4 million to comparable properties. For the first half, revenue rose $42.0 million, including $28.8 million from non-comparable properties and $13.2 million from comparable properties.
- Management cited higher ADR, particularly at West Coast properties, as a key driver. Higher revenues and cost-control initiatives affected comparable hotel expenses; expenses also rose as newly acquired properties entered the results.
- On May 22, the company acquired the 160-room Prescott Hotel in San Francisco for $49.0 million, plus $1.3 million of seller costs. The purchase-price allocation remained preliminary. The acquisition included a leasehold interest and a recorded $10.8 million capital lease obligation.
- On July 17, after quarter-end, the company acquired the 331-room Nines hotel in Portland for $127.0 million, funded with $76.3 million of credit-facility borrowings and assumption of $50.7 million in mortgage loans. Those loans mature March 5, 2015.
Outlook, risks, and unusual items
Management described lodging fundamentals as strong through the first half of 2014, citing business, leisure and international travel, improving group demand, and generally low new supply. It noted economic and global uncertainty, rising costs, and the possibility that financing availability could increase new hotel construction. No specific full-year revenue or earnings guidance was provided.
The company expected to invest approximately $40–$50 million in capital improvements and repositioning for wholly owned hotels during the remainder of 2014. It expected short-term liquidity needs to be met with operating cash flow, existing cash and, if needed, revolving-credit borrowings; longer-term needs may require debt or equity financing. Access to capital depends on market conditions. Hotel operations are seasonal, generally weaker in the first quarter and stronger in the third quarter.
The Nines acquisition carries a contingent indemnity to certain tax-credit investors of up to $28.3 million, plus related interest, penalties and expenses, if specified conditions occur before March 5, 2015. Management considered payment remote because compliance is within the company’s control. Other disclosed risks include hotel demand and operating-cost changes, reliance on third-party managers, interest rates, acquisition and renovation execution, real-estate risks, uninsured losses, and maintaining REIT qualification. The company reported no material litigation and no material changes to the risk factors in its 2013 Form 10-K.
Important facts for investors to verify
- How much reported growth reflects same-property performance versus acquired properties, and whether higher ADR and RevPAR persist.
- Funding and returns for the projected $40–$50 million of remaining 2014 capital spending and the integration and performance of recent acquisitions.
- Debt repayment and refinancing plans, including mortgage maturities concentrated in 2016–2017, the 2016 revolving facility maturity, and the Nines loans due in March 2015.
- Available liquidity after the Nines acquisition, distributions, and planned capital spending; assess cash separately from restricted cash.
- Exposure to the Manhattan Collection joint venture, including its debt and the company’s $50 million unsecured special loan; confirm the scope of guarantees and contingent obligations.
- Conditions and expiration of the Nines tax-credit indemnity, and the effect of preferred distributions on cash available to common shareholders.
- Reconcile non-GAAP FFO and EBITDA to GAAP results and cash flows when assessing operating performance and dividend capacity.