Pebblebrook Hotel Trust — Q1 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2021. Pebblebrook owned 53 hotels with 13,236 rooms, primarily in major U.S. cities. COVID-19 continued to sharply constrain lodging demand. At quarter-end, 40 hotels were open and 13 were temporarily suspended; the company said it reopened eight additional hotels in April.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $83.6 million | $269.1 million |
| Operating income (loss) | $(96.1) million | $54.9 million |
| Net income (loss) attributable to the company | $(120.6) million | $41.9 million |
| Net income (loss) attributable to common shareholders | $(128.7) million; $(0.98) per share | $33.8 million; $0.26 per share |
| Operating cash flow | $(7.1) million | $1.5 million |
| FFO available to common shareholders and unit holders | $(59.4) million | $(7.2) million |
| EBITDAre | $(25.8) million | $13.9 million |
Revenue fell about 69% year over year. Same-property occupancy was 18.8% versus 56.7%; ADR was $240.27 versus $249.64; RevPAR was $45.28 versus $141.43; and Total RevPAR was $70.83 versus $213.13. The filing does not provide a single overall hotel operating margin measure. Comparisons are affected by pandemic-related operating disruptions and by the prior-year $117.4 million gain on hotel sales, which was absent in 2021.
Balance sheet and liquidity. At March 31, 2021, cash and cash equivalents were $113.3 million, restricted cash was $11.3 million, total assets were $6.01 billion, and debt was $2.43 billion, up from $2.28 billion at December 31, 2020. Total equity was $3.02 billion. The company reported $767.8 million of liquidity, including cash, restricted cash and available revolving credit capacity; $643.2 million was available on its senior unsecured revolver, with no revolver borrowings outstanding. The company said it believed available liquidity was sufficient for obligations over the next 12 months.
Investing cash outflow was $9.7 million, including $9.6 million of hotel improvements. Financing cash flow was $5.1 million provided, including $263.8 million of convertible-note proceeds, $177.0 million of debt repayments, and $21.0 million spent on capped calls. On April 1, the company completed the sale of the Sir Francis Drake hotel for $157.6 million; this transaction occurred after quarter-end.
Material changes versus the prior comparable period
- COVID-19-related demand declines drove the substantial revenue and operating-result deterioration; hotel operating expenses also declined, but not enough to offset lost revenue.
- Q1 2020 included a $117.4 million gain from sales of two hotels. Q1 2021 recorded a $14.9 million impairment loss on one hotel, compared with a $20.6 million impairment loss on a hotel retail component in Q1 2020.
- Interest expense rose to $25.3 million from $23.6 million, mainly due to higher effective borrowing costs and deferred financing-cost amortization.
- In February, the company issued an additional $250 million principal amount of 1.75% convertible notes due 2026, at a 5.5% premium to par. Debt amendments extended covenant relief and maturities for certain loans, while increasing borrowing spreads and certain note rates.
Outlook, risks and unusual items
- Management said hotel demand recovery remained uncertain and expected COVID-19 to continue to materially affect 2021 results, financial position and cash flow. It provided no specific revenue or earnings guidance.
- The company expected to invest a further $60 million to $80 million in capital improvements during the remainder of 2021, while noting that additional renovations could be considered as fundamentals improve.
- Most financial covenant waivers were extended through the end of Q1 2022; minimum fixed-charge coverage and minimum unsecured-interest-coverage relief was extended through December 31, 2021. The company reported covenant compliance at March 31, 2021. Interest spreads and certain senior-note rates increased during the waiver period.
- COVID-19-related hotel suspensions, continued travel uncertainty, the possibility of covenant pressure if operations do not resume, financing availability and interest-rate changes are key risks. About $168 million of debt was subject to floating rates after accounting for swaps; a 0.1 percentage-point rate move was estimated to change annual interest expense by about $0.2 million.
- The company adopted ASU 2020-06 on January 1, 2021, changing convertible-debt accounting and reducing reported debt discount amortization. It recorded a $14.9 million hotel impairment and a valuation allowance against deferred tax assets due to uncertainty about their realization.
- Management reported no material litigation, no off-balance-sheet arrangements, and effective disclosure controls and procedures.
Important facts for investors to verify
- Whether reopened hotels and recovering travel demand can materially improve occupancy, RevPAR, operating cash flow and liquidity.
- The timing and cost of reopening suspended properties and executing the planned $60–$80 million of 2021 capital investments.
- Liquidity after the Sir Francis Drake sale proceeds, ongoing cash burn, debt service and the January 2022 revolver maturity and extension options.
- The precise covenant requirements and waiver terms, increased borrowing costs, and refinancing needs across the debt maturity schedule.
- Potential dilution or cash settlement under the $750 million convertible notes, including the $25.47 initial conversion price and capped-call limits.
- The extent to which impairments, tax valuation allowances and reported non-GAAP measures affect future financial results; FFO and EBITDAre are not substitutes for operating cash flow.