Two relevant events have transpired since my most recent trade on Pebblebrook Hotel Trust
- The company released a shining quarterly earnings report.
- Shares have fallen more than 25%.
Operationally, Pebblebrook is firing on all cylinders right now. The vagaries of the market and the emotional selling of anything even remotely tied to the U.S. consumer have sent the stock reeling, however, and at today's levels the stock price has now disconnected from the underlying reality. I'm backing up the truck and adding 5% to our position.
I've written plenty about this company (such as here, here, and here), so here I'm just going to offer my take on the latest quarterly results.
A bull roaming among bears
Amidst many, many dismal earnings reports this quarter, Pebblebrook's numbers for the quarter, as well as the company's outlook, was decidedly bullish.
RevPAR, or revenue per available room, grew 6.6% in the quarter. RevPAR is a function of occupancy and average daily rates (ADR). That strong increase came entirely from ADR increases. Pebblebrook aggressively raised rates this quarter, and it worked -- occupancy held roughly steady, and the company made more money. RevPAR growth that comes from ADR increases is great, because the additional revenue flows more directly to the bottom line than if it had come from higher occupancy (in which incremental expenses associated with the additional occupied room would be incurred). The hotels in which Pebblebrook was most aggressively able to raise rates are the ones that are finishing up their post-acquisition renovations and repositionings, which bolsters my confidence that Pebblebrook's capital-expenditure dollars are well spent and translating directly into higher profits right out of the gate.
Along that same vein, Pebblebrook continues to spend heavily on hotels after acquiring them. Major renovations are currently under way at three hotels, and the company is already getting started on a project to increase the room count at one of its recently acquired New York City hotels. Pebblebrook expects these hotels to bounce back strongly as soon as the renovations are done.
The acquisition tear continues
Pebblebrook now owns or has an interest in 20 U.S. hotels. Since it's been just over a year, that's an extraordinary pace. CEO Jon Bortz said the average discount to replacement cost has run about 33% so far, well under even his own criteria of 10% to 15%. In other words, it would have cost Pebblebrook about a third more to build the hotels it owns than it did to buy them from pinched sellers.
Even better, Bortz's asset-management teams have identified $5 million in annual savings that have been or will be cut by the end of the year. That savings isn't included in the discount to replacement cost figures.
The management team said that the number of deals available has remained strong, but they're seeing fewer that they like at the moment. Bortz stressed that he is perfectly content to sit on his hands until he sees something he likes. That was exactly what I wanted to hear. Capital allocation is Bortz's whole game, and he has shown discipline in not straying from the plan.
About that dividend
Speaking of capital allocation, Bortz indicated that he expects the dividend to follow the same trend as cash flow in the intermediate to long term. In the short term, he wants to keep cash around in case more deals present themselves -- to paraphrase the CEO, "Why pay investment bankers fees to raise capital when we can use the cash our hotels are generating for free?" I expected the dividend to begin rising rapidly starting in 12 to 18 months or so, and Bortz's guidance was in line with that expectation.
Pebblebrook raised guidance, expecting industry RevPAR to grow 7% to 8% this year and EBITDA margins to increase another 2.5% to 3%. That doesn't include any further purchases the company might make.
The bottom line
Pebblebrook is cheap. Bortz says he had purchased the first 20 hotels at an average 33% discount to replacement cost. Right now, we can buy shares in Pebblebrook for 12% below its asset value -- which doesn't even include that additional 33% discount. As I said, I'm backing up the truck and adding 5% to our position in this opportunistic company.
