When the Young Gun Portfolio first bought shares in Pebblebrook Hotel Trust (NYSE: PEB) six long weeks ago, the company was a bit like Shaq in high school: impressive for its age, but you couldn't help but think how great it could be down the road.
At the time of our initial purchase in mid-November, Pebblebrook had already purchased its first six hotels in just the preceding five months. CEO Jon Bortz was positively blazing through the roughly $700 million he raised in equity offerings, commenting that the pace put shareholders "well ahead of our investment plan." The long-term plans for the company to start paying a dividend, move toward being fully invested, and qualify for REIT status were still just specks on the horizon -- definitely there, but still a ways out.
Well, a lot of things can happen in just six weeks, and for Pebblebrook, many of them did. Here's what Young Gunners need to know.
Deal 'em up
Bortz has continued his breakneck deal pace since our investment. The day after we bought shares, he closed a $103 million deal to buy the Sheraton Delfina Santa Monica, outside of Los Angeles, Calif. Then, in early December, he purchased the Sofitel Philadelphia Hotel for $87 million, and Pebblebrook has also announced an upcoming $84 million hotel acquisition in the San Francisco Bay Area.
|
Date |
Hotel |
Metropolitan Area |
Price (in millions) |
SEC Filing |
|---|---|---|---|---|
| 6/4/2010 | Doubletree Bethesda | Washington, DC | $67.1 | Click here |
| 6/22/2010 | Sir Francis Drake | San Francisco, CA | $90.0 | Click here |
| 7/1/2010 | Intercontinental Buckhead | Atlanta, GA | $105.0 | Click here |
| 9/9/2010 | Hotel Monaco | Washington, DC | $74.0 | Click here |
| 9/29/2010 | Grand Hotel Minneapolis | Minneapolis, MN | $33.0 | Click here |
| 11/3/2010 | Skamania Lodge | Portland, OR | $55.8 | Click here |
| 11/19/2010 | Sheraton Delfina Santa Monica | Los Angeles, CA | $102.8 | Click here |
| 12/3/2010 | Sofitel Hotel Philadelphia | Philadelphia, PA | $87.0 | Click here |
Thanks to all this deal activity, Pebblebrook is quickly running out of cash. Through its IPO last December and a subsequent equity offering in July, Pebblebrook raised just less than $700 million in cash to invest in hotels. Including the as-yet-unclosed San Francisco deal, Pebblebrook has committed $699 million to hotel investments, mostly in cash.
Bortz continues to see opportunistic deals; to finance them, he is beginning to turn to debt. I expected this to begin eventually, though I didn't think we'd be here quite so soon. Debt financing allows Pebblebrook to continue taking advantage of the deals out there at a cheap cost of capital, especially given today's historically low interest rates.
Let's get levered!
Pebblebrook has begun assuming interest-only loans in connection with some of its deals, including a $56 million loan in connection with its latest purchase in Philadelphia. The company has also taken out a $52.5 million loan from Goldman Sachs, putting its current debt load at $143.6 million. It is a testament both to the low interest rate environment and Pebblebrook's strength in the eyes of creditors that its average interest rate is a mere 3.78%.
At that cost of debt, it's no wonder Bortz is happy to lever up some of his deals. Nonetheless, Bortz has said that he intends to run a relatively low-leverage operation. Unlike rival hotel investors FelCor Lodging Trust (NYSE: FCH), Ashford Hospitality Trust (NYSE: AHT), and Strategic Hotels & Resorts (NYSE: BEE), which sport net debt-to-EBITDA ratios of 10.4, 12.4, and 15.6, respectively, Pebblebrook has strict rules in place to keep its ratio below a conservative 4.5.
Dishing out dividends
One of our catalysts in Pebblebrook is its eventual qualification for REIT status, which would grant the company exemptions from federal taxes. With Bortz's expeditious dealmaking, the company is ahead of schedule on the REIT front, and it's already in range to satisfy a major qualification requirement for percent of assets invested.
Another major requirement is to pay out a minimum of 90% of taxable income in dividends to shareholders. Pebblebrook has made progress on that front, too. On Dec. 15, the company's board announced it would begin paying a $0.12 quarterly dividend. Because we don't have full-year financials yet, it's difficult to tell what portion of income that represents, but I expect Bortz will gradually raise the dividend over the coming 12 to 18 months to reach qualifying levels. In the meantime, the nice 2.3% yield pays us to wait.
Keeping on top of Pebblebrook
Pebblebrook is an evolving company, led by a fast-moving and very able CEO. I'm excited to see some pieces of our thesis play out ahead of schedule, and it should be interesting to continue tracking Bortz's moves in the coming months. To keep abreast of this energetic young company, tune in to the Young Gun discussion boards. You can also follow the Young Gun Portfolio on Twitter.
