Pebblebrook Hotel Trust's High-End Hotels Deliver at the Low End of Expectations

Expectations can be tough to overcome, because when the bar is set high, anything less than hitting the high end is almost always considered a disappointment.

That's how one might describe Pebblebrook Hotel Trust's (PEB 0.07%) third-quarter results. While those results, which were announced Thursday after the market closed, were within its guidance range, several metrics skewed toward the lower end of that range. This was to be expected after it warned last month that hotel demand in August and September was lower than anticipated, but for a company that owns nothing but high-end hotels, hitting the low end of its guidance range just comes across as a bit of a letdown. 

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?
Several of Pebblebrook's key metrics skimmed the bottom of its guidance range.

• Same-Property RevPAR grew 4% year over year to $230.36 in the third-quarter, which was near the bottom of its outlook of $230 to $234. The company also delivered lower-end results for Same-Property EBITDA and adjusted EBITDA.
• Adjusted FFO and AFFO per share, however, did hit the high end of its guidance range. This was due to keeping expenses in check with Same-Property Hotel Expenses only increasing by 1.4%, which was a slower growth rate than Same-Property Revenue, which increased by 3.9%.

What management had to say
In discussing its third-quarter results, CEO Jon Bortz said in a press release that the company "continued to deliver strong bottom-line results" and that it "made good progress remixing our customer segments throughout our portfolio, particularly at our recently renovated hotels." However, he did note that growth was more modest than expected because "demand was negatively affected by the Labor Day and other holiday shifts, as well as weaker leisure and international inbound travel in the quarter."

While more modest demand growth was expected and did have an impact on Pebblebrook's results, it had a far more direct impact on the results on other hotel REITs. LaSalle Hotel Properties (LHO) is a prime example. LaSalle had been guiding for its third-quarter RevPAR to increase by 1%-3% year over year to go along with adjusted EBITDA of $120 million to $124 million and adjusted FFO of $0.87 to $0.90 per share. However, it missed the mark pretty much across the board after RevPAR surprisingly declined 2.4% while adjusted EBITDA came in at $114.6 million and adjusted FFO hit the low end of its guidance range.

Clearly, the slowdown in hotel demand is hitting LaSalle's properties much harder than it is hitting the higher-end hotels owned by Pebblebrook. So, while Pebblebrook's results were a bit of a disappointment, it was much better insulated against the slowdown than some of its competitors.  

Looking forward
Given the slowdown in the hotel industry over the past few months, Pebblebrook is becoming more cautious and is now slightly reducing its outlook for the rest of the year. The company now expects full-year Same-Property RevPAR growth to be a full percent lower than its previous expectation, but to still grow by 3.5% to 4% year over year. It is also reducing the high end of its AFFO by a penny per share. Having said that, Pebblebrook "remain[s] encouraged by the overall positive industry fundamentals as demand growth continues to outpace supply growth," according to Bortz, so while it is growing more cautious in the near term, it's still bullish over the longer term.