Pebblebrook Hotel Trust Earnings Outperform Low Expectations

Manhattan NYC. Image source: Pebblebrook Hotel Trust.

Demand for hotel rooms remains weak due to slowing business travel. However, that is not stopping Pebblebrook Hotel Trust (PEB 0.97%) from delivering high-end results. While its third-quarter results were just marginally better than the year-ago quarter, they trounced the company's guidance. Meanwhile, it continues to see strong demand for hotels assets, leading it to sell another of its facilities in the quarter and detailing an agreement to close up shop on its Manhattan joint venture.

Pebblebrook results: The raw numbers

Data source: Pebblebrook Hotel Trust; RevPAR: revenue per available room; AFFO: adjusted funds from operations.

What happened with Pebblebrook this quarter?

Pebblebrook outperformed a weak hotel market.

• While Same-Property RevPAR slipped from the year-ago quarter, it was in-line with guidance of $229 to $234.
• Adjusted AFFO and AFFO per share, on the other hand, might have only increased by roughly 1%, but that was much better than its guidance. Heading into the quarter Pebblebrook expected AFFO to range between $52.2 million and $55.7 million, while AFFO per share guidance was $0.72 to $0.77.
• Driving these results was the strong performance of its west coast hotels due to high demand for hotel rooms in LA while San Diego benefited from conventions.
• Partially offsetting the west coast was the company's Manhattan Collection joint venture, with Same-Property EBITDA slumping 19.8%. That said, the company recently announced its intention to exit this joint venture by securing a redemption and asset exchange agreement. It is assuming full ownership of two of the six hotels, which along with the cash it receives values the Collection at $820 million. That is down from the $910 million initial value the company paid for its share in the Collection in 2011, however, Pebblebrook is actively marketing the two hotels it receives as part of the exchange agreement.

What management had to say

CEO Jon Bortz had this to say about the company's results:

We were pleased with our operating results during the third quarter, despite headwinds from continued weakness in business travel demand. The west coast again led our performance in the third quarter. We experienced strong demand in Los Angeles and benefited from healthy convention calendars in San Diego and Philadelphia, which was also the host city for the Democratic National Convention in July... Although hotel demand trends remain soft, the Company continues to make progress executing its strategic disposition plan, which included recently completing the Redemption and Asset Exchange Agreement of the Company's 49% interest in its six-hotel joint venture (the "Manhattan Collection") with Denihan Hospitality Group ("Denihan")... By assuming 100% ownership of the Manhattan NYC and Dumont NYC hotels and converting the related management agreements to terminable-at-will arrangements, we have substantially improved the valuation and saleability of both hotels.

While Bortz notes that overall hotel travel demands are soft, that is not having any impact on demand for hotel assets, which remains robust and is allowing the company to continue its strategic disposition plan. In addition to marketing the two Manhattan hotel assets, the company secured a contract to sell its DoubleTree by Hilton Hotel Bethesda - Washington DC for $50.5 million, which it expects to close next month.

The hotel sector has been a hotbed of M&A activity this year. Not only have dozens of hotel properties changed hands, but operators have invested billions in strategic transactions. Earlier this month, for example, Hilton Worldwide's (HLT 3.89%) private equity sponsor sold a 25% stake in the company to Asian hospitality company HNA Group for $6.5 billion. Meanwhile, Marriott (MAR 1.82%) completed its takeover of Starwood earlier this year. As part of that deal, Marriott assumed Starwood's owned portfolio, which it plans to sell off over the next few years. These deals clearly signal that operators and hotel buyers do not see the recent weakness in travel as anything more than a bump in the road.

Looking forward

Despite that long-term bullish view, the short-term outlook for the sector is not quite as hot. Because of that, Pebblebrook sees Same-Property RevPAR slipping next quarter to a range of $192 to $196, which is down 0.5% to 2.5% from last year's fourth-quarter. That will push Adjusted FFO down to a range of $35.1 million to $38.5 million, or $0.48 to $0.53 per share, which represents declines of 14.5% to 22.6% year over year.