Pebblebrook Hotel Trust — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context and reporting period
Pebblebrook is a hotel-focused REIT investing primarily in major U.S. cities, particularly coastal markets. At quarter-end it held interests in 20 hotels: 14 wholly owned properties and a 49% interest in a joint venture owning six Manhattan hotels. Reported results reflect substantial portfolio growth and are not directly comparable with 2010, when the company owned fewer hotels.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $87.8 | $21.6 | $203.6 | $23.9 |
| Operating income (loss) | $7.3 | ($0.5) | $14.4 | ($6.7) |
| Net income (loss) attributable to common shareholders | $2.8 | ($0.3) | $1.0 | ($4.7) |
| Basic and diluted EPS | $0.05 | ($0.01) | $0.01 | ($0.19) |
| Operating cash flow | — | $28.4 | $1.7 | |
| FFO | $13.1 | $1.7 | $23.7 | ($2.5) |
| EBITDA | $22.1 | $2.2 | $42.5 | ($2.0) |
Q3 2011 operating margin was approximately 8.3% of revenue. Revenue growth primarily reflects acquired hotels, rather than solely same-property improvement. Management’s pro forma presentation, which assumes the acquired hotels and joint venture were owned from January 1, 2010, shows revenue of $87.8 million versus $80.3 million for Q3 and $245.8 million versus $230.2 million for the nine-month period; these unaudited figures are not actual historical results.
At September 30, cash and cash equivalents were $75.3 million, down from $220.7 million at year-end 2010; restricted cash was $8.7 million. Total assets were $1.42 billion. Mortgage debt was $251.8 million, with no balance drawn on the $200 million unsecured revolving credit facility. Total liabilities were $299.0 million. The company reported compliance with debt covenants.
For the first nine months, investing activities used $662.6 million, including $467.1 million for hotel acquisitions, $165.4 million for the joint venture investment and $26.3 million for capital improvements. Financing activities provided $488.8 million, principally from common and preferred equity issuance and mortgage proceeds. Preferred shares had a $225 million liquidation preference and annual dividends of approximately $17.8 million.
Material changes versus the prior comparable period
- Six hotels were acquired in 2011, and the company acquired a 49% interest in the Denihan joint venture on July 29 for approximately $152.6 million. The reported revenue and operating cost increases largely reflect the expanded portfolio.
- Q3 and nine-month common results improved from losses to income. However, preferred distributions of $2.9 million in Q3 and $5.9 million year to date reduce earnings attributable to common shareholders.
- Mortgage debt rose from $143.6 million at December 31, 2010 to $251.8 million at September 30, 2011. Cash declined as funds were deployed for acquisitions and investment.
- The company issued 10.9 million common shares and 9.0 million preferred shares during 2011; common weighted-average shares also increased substantially.
Outlook, commentary, risks and unusual items
- Management described hotel-industry fundamentals as positive, citing strength in corporate transient and group travel, while noting economic slowdown, stagnant unemployment and global volatility including the European debt crisis. No quantified earnings or revenue guidance was provided.
- Management expected to spend approximately $55–$60 million on 2011 renovations, repositioning and other capital improvements, including amounts paid upon acquisition of the Westin Gaslamp Quarter; approximately $20 million was expected for the remainder of 2011.
- Management said existing cash and operating cash flow were expected to meet short-term requirements, including operations, interest and REIT distributions. Longer-term needs, including acquisitions, capital investment and maturities, may be funded through equity, debt and operating cash flow.
- Debt maturities include the $56.1 million Sofitel Philadelphia loan in February 2012 and $35.0 million Monaco Washington DC and $42.0 million Argonaut loans in March 2012. The Denihan joint venture had approximately $595.3 million of non-recourse debt maturing in February 2013; Pebblebrook is not a guarantor of that debt, subject to customary limited carve-outs. Refinancing may be unavailable or unattractive and could require additional joint venture equity.
- At quarter-end, $56.1 million, or 22% of company indebtedness, was variable-rate. A 0.25 percentage-point rate change would affect annual interest expense by approximately $0.1 million, assuming the balance remained unchanged.
- Preferred shares rank senior to common shares for distributions and liquidation. Their cumulative dividends, approximately $17.8 million annually, and change-of-control provisions may affect common-share value and corporate transactions.
- The company cited risks from hotel demand and operating costs, reliance on third-party managers, financing and capital-market access, interest rates, redevelopment costs, REIT qualification and potential uninsured losses. It reported no material litigation and effective disclosure controls.
Important facts for investors to verify
- How much reported growth reflects acquisitions versus comparable-hotel operating performance; the filing does not provide a clear same-store operating comparison here.
- Liquidity and refinancing plans for the company’s February–March 2012 mortgage maturities and the joint venture’s February 2013 debt maturity.
- Actual renovation and capital spending against the $55–$60 million 2011 expectation, and its impact on available cash.
- The effect of preferred distributions and additional share issuance on common earnings per share and future distributions.
- Whether hotel-industry demand and the company’s positive recovery expectations persist amid the economic and market risks identified by management.