Pebblebrook Hotel Trust Reports First Quarter 2019 Results

Pebblebrook Hotel Trust (NYSE: PEB) yesterday reported results for the first quarter ended March 31, 2019. The Company’s results include the following:

“We are very pleased with our portfolio’s operating results in the first quarter,” said Jon E. Bortz, Chairman, President and Chief Executive Officer of Pebblebrook Hotel Trust. “Same-Property Total RevPAR, Adjusted EBITDAre and Adjusted FFO per diluted share beat our outlook largely due to healthy RevPAR growth of 4.3 percent, strong growth of 4.4 percent in other revenues, including food and beverage revenues, and slightly better margins than forecasted. Although March demand trends were weaker than expected for the hotel industry and our portfolio, we continue to experience solid group and transient business and leisure travel demand as our group and transient pace advantages over 2018 remain favorable. Our 2019 outlook for the hotel industry and Pebblebrook remains positive, as the U.S. economy rolls on despite geopolitical uncertainty, employment and wages continue to increase, inflation remains low, and consumer and business confidence remain strong.”

First Quarter Highlights

• Net income: The Company’s net income was $5.7 million in the first quarter of 2019, a decrease of $18.9 million as compared to the same period of 2018.
• Same-Property Total RevPAR and Same-Property RevPAR: Same-Property Total RevPAR for the quarter grew 4.4 percent over the same period of 2018. Same-Property RevPAR for the quarter increased 4.3 percent over the prior year to $187.76. Same-Property ADR rose 5.3 percent from the prior year to $249.00, and Same-Property Occupancy declined by 1.0 percent to 75.4 percent.
• Same-Property EBITDA: The Company’s hotels generated $100.1 million of Same-Property EBITDA for the quarter ended March 31, 2019, up 2.7 percent over the same period of 2018. Same-Property Revenues climbed 4.4 percent, while Same-Property Expenses increased 5.0 percent. Excluding the mandatory California Proposition 13 increases in real estate taxes for the California properties acquired as part of the Company’s corporate acquisition in November 2018, expenses increased approximately 4.0 percent. Same-Property EBITDA Margin for the quarter decreased 45 basis points to 27.6 percent as compared to the same period last year. Excluding the increase in real estate taxes due to California’s Proposition 13, Same-Property EBITDA margin would have increased 24 basis points.
• Adjusted EBITDAre: The Company’s Adjusted EBITDAre increased 52.7 percent, or $31.2 million, to $90.5 million from $59.3 million in the prior year period.
• Adjusted FFO: The Company’s Adjusted FFO grew 31.3 percent to $60.7 million from $46.2 million in the prior year period, which was impacted by the seasonal operating weakness of the first quarter and the non-seasonal increase in interest expense as a result of the Company’s corporate acquisition in November 2018. The Company’s Adjusted FFO per diluted share declined 31.3 percent to $0.46 compared to the prior year period. The decline in Adjusted FFO per diluted share is due to the increase in diluted share count as a result of the Company’s corporate acquisition in November 2018.
• Dividends: On March 15, 2019, the Company declared a regular quarterly cash dividend of $0.38 per share on its common shares as well as a regular quarterly cash dividend for the following preferred shares of beneficial interest:
  • $0.40625 per 6.50% Series C Cumulative Redeemable Preferred Share;
  • $0.39844 per 6.375% Series D Cumulative Redeemable Preferred Share;
  • $0.39844 per 6.375% Series E Cumulative Redeemable Preferred Share; and
  • $0.39375 per 6.30% Series F Cumulative Redeemable Preferred Share.

“In the first quarter, Same-Property Total RevPAR growth of 4.4 percent exceeded the upper end of our guidance due to solid room and other non-room revenue growth such as food and beverage revenues,” noted Mr. Bortz. “In addition to the incredibly strong RevPAR growth of 23.7 percent at our 12 hotels in San Francisco, we also achieved healthy RevPAR growth at our properties in South Florida, Buckhead and Boston. As anticipated, weakness in Chicago, Portland, Washington, DC and Los Angeles offset some of this strength. Hotel expense growth was slightly lower than we anticipated, which allowed better than forecasted revenues to flow to the bottom line of the portfolio. We’re also excited about the significant opportunities with increased economies of scale due to our larger portfolio, which we expect will lead to reduced hotel operating expenses and improved profitability throughout the entire portfolio. We anticipate successfully achieving these improvements throughout 2019 and 2020.”

Update on Strategic Property Redevelopment Plan

During the first quarter, the Company made considerable progress on its strategic property redevelopment plan, which includes repositioning the following select hotels and resorts in the Company’s portfolio through third-party operator or brand changes, as well as planned property reinvestment programs:

• Hotel Colonnade Coral Gables, Autograph Collection: On April 17, 2019, Hotel Colonnade Coral Gables converted to an Autograph Collection hotel from a Tribute Portfolio hotel;
• The Hotel Zags Portland (formerly Hotel Modera): On April 18, 2019, completed the $1.9 million second phase of a $6.0 million property transformation of Hotel Modera in Portland, which was relaunched as The Hotel Zags Portland, the sixth property in the “Unofficial Z Collection;”
• Skamania Lodge: On May 1, 2019, Benchmark Hotels & Resorts will become the third-party operator of this experiential resort in the Columbia River Gorge outside of Portland, Oregon. The Company should benefit from significant marketing and sales synergies between Skamania Lodge and Chaminade Resort & Spa in Santa Cruz, California, which Benchmark Hotels & Resorts also manages for the Company;
• L’Auberge Del Mar: On May 1, 2019, Noble House Hotels & Resorts will become the third-party operator of this unique, luxury San Diego area resort. The Company should benefit from the operating and sales synergies from Noble House Hotels & Resorts also operating the Hilton San Diego Resort for the Company, as well as their significant experience operating luxury resorts. The Company also plans to reconfigure, reconcept and renovate the resort’s public space and restaurant in 2020, as well as upgrade the resort’s luxurious guest rooms;
• Paradise Point Resort & Spa: On May 1, 2019, Davidson Hotels will become the third-party operator of this exceptional 44-acre San Diego island resort. The Company plans to significantly upgrade the property through a comprehensive renovation and transformation program commencing in 2020;
• Villa Florence San Francisco on Union Square: On May 1, 2019, Schulte Hospitality Group will become the third-party operator of the hotel. The Company plans to reconfigure the hotel’s lobby and retail space and enhance the overall guestroom experience through renovations in 2020; and
• The Marker San Francisco: On May 15, 2019, Access Hotels & Resorts will become the operator of the hotel. Access Hotels & Resorts currently successfully operates Hotel Spero for the Company, which is just one block from The Marker San Francisco. Combining the operations of these two property teams under one operating company should provide significant operational and sales synergies and cost benefits for both hotels. The Company plans to reconcept, redevelop and relaunch this hotel as part of the “Unofficial Z Collection” by the first half of 2021.

“We are excited about the great progress we’ve made identifying and implementing management and brand changes at numerous hotels and resorts in our portfolio as part of our strategic property redevelopment plan,” advised Mr. Bortz. “While we expect some short-term disruption, which we believe we’ve accounted for in our outlook as we transition to new operators, we expect these strategic changes will generate enhanced long-term operating profitability and value creation as we unlock the significant opportunities that we believe exist across our portfolio of unique, high-quality, lifestyle hotels and resorts. We have several additional third-party management company and brand changes that we anticipate making and announcing later in 2019 as these agreements and redevelopment plans are finalized.”

Capital Reinvestments

In the first quarter, the Company completed $36.5 million of capital reinvestments throughout its portfolio. The Company intends to start or complete additional renovation and repositioning projects including:

• Hilton San Diego Resort (estimated at $21.0 million), which continues its guestroom and meeting center renovation, expected to be completed in the third quarter of 2019;
• Westin San Diego Gaslamp Quarter (estimated at $13.0 million), which consists of a guestroom, lobby and restaurant and bar renovation to commence in the fourth quarter of 2019, expected to be completed in the first quarter of 2020;
• Embassy Suites San Diego (estimated at $13.0 million), which will receive a guestroom renovation to commence in the fourth quarter of 2019, expected to be completed in the first quarter of 2020;
• Viceroy Santa Monica (estimated at $12.0 million), which will undergo a lobby and public area renovation, both interior and exterior, to commence in the fourth quarter of 2019, expected to be completed in the second quarter of 2020;
• Le Parc Suite Hotel (estimated at $12.0 million), which will consist of a complete hotel renovation, including the guestrooms, lobby and public areas, to commence in the first quarter of 2020, expected to be completed in the second quarter of 2020; and
• Chaminade Resort and Spa (estimated at $10.0 million), which will begin a public space, restaurant, lobby, porte-cochere/entry, exterior patio, and venues renovation in the fourth quarter of 2019, expected to be completed in the second quarter of 2020.

Update on Strategic Disposition Plan

During the first quarter, the Company sold two hotels, Liaison Capitol Hill and Hotel Palomar Washington, DC, for a total of $252.5 million, continuing its previously detailed strategic disposition plan. The Company expects to sell additional assets over the remainder of the year to optimize the portfolio’s growth profile and pay down debt and lower its leverage ratio to a target of 4.0 times to 4.25 times.

In April 2019, the Company executed a contract to sell the 112-room Onyx Hotel in Boston, Massachusetts for approximately $58.3 million to a third party. The contracted sale price reflects a 15.3x EBITDA multiple and a 5.9 percent net operating income capitalization rate (after an assumed annual capital reserve of 4.0 percent of total hotel revenues) based on the hotel’s operating performance for 2018. The sale of the Onyx Hotel is subject to normal closing conditions, and the Company offers no assurances that this sale will be completed on these terms, or at all. The Company is targeting to complete the sale in the second quarter of 2019 and continues to be encouraged with pricing levels and overall buyer interest in the investment markets.

Since the Company commenced its strategic disposition plan on November 30, 2018, and assuming the sale of the Onyx Hotel is completed, 9 hotels will have been successfully sold, generating approximately $1.16 billion of gross sales proceeds. Assuming the sale of the Onyx Hotel is completed, the Company remains on track to generate additional gross sales proceeds during the remainder of 2019 of approximately $290.0 million as part of the plan. The sales to date, including the assumed sale of the Onyx Hotel, reflect a 15.4x EBITDA multiple and a 5.55 percent net operating income capitalization rate (after an assumed annual capital reserve of 4.0 percent of total hotel revenues) based on the operating performance for 2018 of the properties sold.

Capital Markets and Balance Sheet

As of March 31, 2019, the Company had $2.5 billion in consolidated debt at an effective weighted-average interest rate of 3.7 percent. Approximately $1.5 billion, or 60 percent of the Company’s total outstanding debt, was at a weighted-average fixed interest rate of 3.4 percent, and approximately $1.0 billion, or 40 percent, was at a weighted-average floating interest rate of 4.1 percent. The Company had $2.4 billion outstanding in the form of unsecured term loans and no balance outstanding on its $650.0 million senior unsecured revolving credit facility. As of March 31, 2019, the Company had $77.1 million of consolidated cash, cash equivalents and restricted cash.

As of March 31, 2019, the Company’s fixed charge coverage ratio was 3.2 times, and total net debt to trailing 12-month corporate EBITDA was 4.7 times. The Company has no debt maturities until 2020.

2019 Outlook

The Company is revising its 2019 Outlook on the low end of the range to account for the better than forecasted operating performance during the first quarter of 2019. The Company is also updating its outlook for $2.0 million of one-time costs incurred in the first quarter related to last year’s corporate acquisition and approximately $6.5 million of one-time expenses associated with the third-party management company and brand transition costs as part of its strategic property redevelopment plan, of which $3.2 million have already been recorded in the first quarter.

The current 2019 Outlook, which assumes $600.0 million of assets are sold over the course of 2019, with $252.5 million of assets having been sold in February 2019 (Liaison Capitol Hill and Hotel Palomar Washington, DC), $250.0 million of assets being sold in the second quarter of 2019, and $100.0 million of assets being sold at the end of the third quarter of 2019, is as follows:

The Company’s Outlook for the second quarter of 2019 is as follows:

The 2019 Outlook excludes Liaison Capitol Hill and Hotel Palomar Washington, DC from Same-Property RevPAR, Same-Property RevPAR growth rate, Same-Property EBITDA, Same-Property EBITDA growth rate, Same-Property EBITDA Margin and Same-Property EBITDA Margin growth rate for all quarters of both 2019 and 2018 due to their sales during the first quarter of 2019.

If any of the foregoing estimates and assumptions prove to be inaccurate, actual results, including the outlook, may vary and could vary significantly, from the amounts shown above.

About Pebblebrook Hotel Trust

Pebblebrook Hotel Trust is a publicly traded real estate investment trust (“REIT”) organized to opportunistically acquire and invest primarily in upper upscale, full-service hotels located in urban markets in major gateway cities. The Company owns 61 hotels, totaling approximately 14,600 guest rooms, located in 10 states and the District of Columbia, including: Del Mar, California; Los Angeles, California (Beverly Hills, Santa Monica and West Hollywood); San Diego, California; San Francisco, California; Santa Cruz, California; Washington, DC; Coral Gables, Florida; Key West, Florida; Naples, Florida; Buckhead, Georgia; Chicago, Illinois; Boston, Massachusetts; New York, New York; Portland, Oregon; Philadelphia, Pennsylvania; Nashville, Tennessee; Columbia River Gorge, Washington; and Seattle, Washington.