Pebblebrook Hotel Trust — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts are in millions, except per-share data, hotel statistics, and where noted. Pebblebrook is a hotel REIT focused primarily on major U.S. gateway markets. At quarter-end it held interests in 37 hotels: 31 wholly owned and a 49% interest in a six-hotel joint venture.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $197.7 | $147.5 | $361.1 | $273.2 |
| Operating income | $35.4 | $26.4 | $51.3 | $36.9 |
| Net income attributable to company | $26.5 | $22.7 | $33.6 | $26.8 |
| Net income attributable to common shareholders | $20.0 | $16.6 | $20.7 | $14.6 |
| Diluted EPS | $0.27 | $0.26 | $0.28 | $0.22 |
| FFO available to common shareholders and unit holders | $47.0 | $35.2 | $71.1 | $51.3 |
| EBITDA | $68.6 | $52.0 | $106.5 | $80.2 |
Revenue increased 34% in Q2 and 32% in the first half, largely reflecting hotels acquired since the comparable periods. Operating margin was approximately 17.9% in Q2 versus 17.9% a year earlier, and 14.2% for the first half versus 13.5%. FFO and EBITDA are non-GAAP measures; the filing cautions they are not substitutes for GAAP earnings or operating cash flow.
- Same-property wholly owned portfolio: Q2 occupancy was 86.4%, down from 87.4%; ADR was $245.30, up from $229.96; RevPAR was $211.90, up from $200.97. For the first half, occupancy was 82.4% versus 83.8%, ADR $236.08 versus $220.04, and RevPAR $194.45 versus $184.37.
- Cash flow: First-half operating cash flow was $90.4, compared with $59.1. Investing activities used $355.6, including $305.1 for acquisitions and $53.4 for hotel improvements. Financing activities provided $245.6. Cash and cash equivalents were $33.2 at June 30, down from $52.9 at year-end.
- Debt and liquidity: Total debt was $1,147.2 at quarter-end, up from $844.0 at December 31, 2014. This included $310.0 drawn on the revolving facility, $400.0 in term loans, and $437.2 in mortgage debt. The company reported $750.0 total capacity under its amended credit agreement, including a $450.0 revolver, and was in compliance with debt covenants. Term-loan balances were hedged with swaps; $310.0 of debt, or 27% of total indebtedness, remained variable-rate. A 0.1 percentage-point rate change was estimated to affect annual interest expense by about $0.3.
- Distributions: Common distributions were $0.31 per share/unit each quarter. Preferred distributions totaled $13.0 for the first half.
Material changes and unusual items
- Acquired LaPlaya Beach Resort and Beach Club in Naples for $185.5 million on May 21 and The Tuscan Fisherman’s Wharf in San Francisco for $122.0 million on June 11. Purchase-price allocations were preliminary at quarter-end.
- Acquisition-driven non-comparable properties contributed $44.1 of the $50.2 Q2 revenue increase and $78.2 of the $88.0 first-half increase. Comparable-property revenue also rose, particularly at West Coast hotels, while renovations reduced revenue at certain properties.
- Acquisition costs rose to $4.3 in Q2 and $4.5 for the first half, primarily due to costs associated with the two 2015 acquisitions. Interest expense increased to $9.3 in Q2 and $17.6 for the first half, reflecting higher debt balances.
- The company repaid $50.7 of mortgage loans on The Nines in March, expanded credit capacity by $150.0, and entered into a $100.0 second term loan. After quarter-end, on July 10, it drew $125.0 under a third term loan, with a January 2021 maturity; it reported an effective rate of 3.29% after swaps.
- Renovations affected operating results at several hotels. The company reported $53.4 of capital investment in the first half and expected a further $30–$50 for the remainder of 2015.
Outlook, risks, and contingencies
Management expected generally positive U.S. lodging fundamentals through the rest of 2015, citing stronger employment and housing markets, healthy transient travel, low supply growth, and rising occupancy and room rates. It also noted uncertainty from global volatility and currency headwinds that could weigh on international inbound travel. The filing gives no specific earnings or RevPAR guidance.
Management expected operating cash flow and existing cash to cover near-term operations, debt service, and distributions, while longer-term needs—including acquisitions, renovations, and debt maturities—could be funded through cash flow, borrowings, or debt and equity issuance. These plans depend in part on access to capital on favorable terms. Risks include hotel-demand and cost pressures, interest-rate movements, reliance on third-party hotel managers, acquisition and renovation execution, financing availability, and REIT qualification. The company reported no material litigation and no material change to previously disclosed risk factors. The filing notes seasonality, with typically lower first-quarter and higher third-quarter hotel revenue and cash flow.
Important facts for investors to verify
- Whether acquisitions and renovation-related closures deliver expected revenue, margins, and returns, and whether preliminary purchase accounting changes.
- Debt growth, near-term mortgage maturities, revolving-credit availability, covenant headroom, and the effect of interest rates despite hedges.
- Same-property performance trends: ADR and RevPAR gains occurred alongside lower occupancy.
- Funding plans for remaining 2015 capital projects, future acquisitions, distributions, and longer-term obligations, including substantial lease commitments.
- How much reported growth reflects acquired properties versus underlying comparable-hotel performance; FFO and EBITDA should be considered alongside GAAP results and cash flow.