Check Into This Fast-Growing Hotel REIT

If the business world were a Monopoly board, Pebblebrook Hotel Trust (NYSE: PEB  ) would have red hotels on all the best spots. This REIT capitalized on a woeful economy and lousy real estate market to cheaply buy swanky lodgings in and around oft-visited cities. Based on recent results, Pebblebrook's now laughing all the way to Park Place.

May we take your bags?
Chairman and CEO Jon Bortz has been strategically buying hotels for nearly 20 years. Since starting Pebblebrook in late 2009, he's invested more than $1 billion to snag 17 upscale hotels in popular cities nationwide, plus a 49% stake in six more hotels in New York City.

The company seeks properties where permits and land for new hotels are hard to come by. Pebblebrook lets other companies run its hotels, takes a generous cut, and distributes the lion's share as dividends.

Earnings as cozy as a fluffy bathrobe
Pebblebrook hasn't looked back since it turned its first profit in fiscal 2011. In its latest quarter, revenue grew 30% year over year to $59.6 million, outpacing the 25.6% increase in expenses.

The growing gap between income and costs fattened operating and net margins; operating income jumped 46.7%, while net income exploded by 132%. Occupancy, revenue per available room, and average daily room rate all climbed year over year in Q1 2012.

That said, Pebblebrook bought six new hotels (plus its share of those NYC hotels) in fiscal 2011, and two more so far this year. How do we know that it's not relying on expansion -- instead of strong operations -- to grow its top and bottom lines?

In its latest annual report, Pebblebrook helpfully breaks out numbers for hotels acquired before 2011. Expenses for those properties grew 210% year over year, but revenue grew an even faster 221%. However narrowly, the company seems to be pumping up profits at its prior purchases.

A box of chocolates on the pillow
REIT investors depend on dividends, and for now, Pebblebrook yields a modest 2.1%. The company also periodically dilutes investors by issuing new shares to raise money. However, Pebblebrook seems to be using the new cash shrewdly and profitably. Its dizzying revenue, margin, and net income growth suggest that Pebblebrook's payouts could rise in the years ahead.

Matched against several rivals, Pebblebrook performs respectably:

Company

Dividend Yield

Price-to-Book

Debt-to-Equity

Return on Assets (TTM)

Pebblebrook 2.1% 1.06 21% 1.5%
LaSalle Hotel Properties (NYSE: LHO  ) 2.9% 1.44 72% 2.5%
RLJ Lodging Trust (NYSE: RLJ  ) 3.7% 1.03 78% 2%
Strategic Hotels & Resorts (NYSE: BEE  ) N/A 3.21 138% 1%
Chesapeake Lodging Trust (NYSE: CHSP  ) 5.2% 1.05 82% 2.6%

Sources: Yahoo! Finance, S&P Capital IQ.

While it pays the lowest dividend, Pebblebrook also has some of the smallest debt, which gives it greater flexibility to make future purchases.

Only Chesapeake, with its much larger yield and similar price-to-book value, seems even more promising. However, Pebblebrook shares have thrashed Chesapeake's in the past year:

PEB Chart

PEB data by YCharts

Fast growth, smart management, and efficient operations all make Pebblebrook an impressive-looking REIT. (I'm giving it a thumbs-up in Motley Fool CAPS.) Investing in hotels here could leave you with a lot more than Monopoly money to show for it.

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Fool writing coach Nathan Alderman can check out any time he likes, but he can never leave. He holds no financial position in any company mentioned here. The Motley Fool owns shares of Pebblebrook, and Motley Fool newsletter services have recommended buying shares of Pebblebrook. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool's disclosure policy calls dibs on the Scottie dog, or failing that, the race car.


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  • Report this Comment On August 11, 2012, at 2:56 PM, Calimesa wrote:

    "Furthermore, its return on assets beats every competitor save LaSalle."

    WTH, PEB's 1.5% RoA beats BEE's 1%, RLJ's 2%, and CHSP's 2.6% but not LHO's 2.5% RoA? What part of Statistical comparisons do I not understand? Please educate me.

  • Report this Comment On August 13, 2012, at 11:35 AM, TMFNato wrote:

    Looks like one of our Foolish financial editors updated my chart before publication with more recent numbers than I was able to obtain, throwing my conclusions out of whack. Needless to say, I'm quite chagrined, and I'm working with the editor to correct the text appropriately. Thanks for pointing this out!

  • Report this Comment On August 17, 2012, at 12:32 AM, goalie37 wrote:

    I bought shares of PEB a few months after the IPO. It has continued to be the stock I am most enthusiastic about.

    Nathan, you have a done a great job with this article, but I notice you don't include their impressive Funds From Operations numbers, since it is so frequently used with REITS.

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