The hotel industry has had a tough run this past year and a half as COVID-19 brought business and leisure travel to a screeching halt. Many hotels have reopened after the release of vaccines in early 2021 and bookings are starting to finally bounce back, but most are still a long way from recovery.
Now, concern is growing over the highly contagious delta variant possibly leading to a second round of hotel closures. That's why some investors are wondering if Pebblebrook Hotel Trust (NYSE: PEB), a lifestyle and resort hotel real estate investment trust (REIT), is in trouble. Here's what investors need to know.
Luxury hotels are hurting
Pebblebrook's locations and portfolio quality are both an asset and a liability to the company right now. Economy and midscale hotels have had the least percentage decline in occupancy and have recovered the quickest, while upper-upscale, luxury, and lifestyle hotels have had the slowest recovery and the biggest initial hit, with 54% of luxury hotels being closed in April 2020.
Right now, this is concerning for REITs like Pebblebrook Hotel Trust, which owns or has interest in 52 lifestyle resorts and high-end boutique hotels in popular luxury destinations and urban gateway cities across the nation. Its high-quality portfolio, as of August 2021, includes 37 urban lifestyle hotels in cities like Washington D.C., San Francisco, and Los Angeles; nine urban lifestyle resorts in areas like Hollywood (Florida), Key West, Naples, Jekyll Island, and San Diego; as well as six major urban brand hotels, which include brand names like Westin and Hyatt in gateway cities.
This normally allows Pebblebrook to earn a higher average daily rate (ADR) than most of its competitors. But right now, it means it's exposed to some of the hardest-hit areas in one of the slowest-growing sectors.
Its top 10 markets by percentage of EBITDA in 2019 (a good indicator of a healthy performance) were:
According to the hotel figures for the first quarter of 2021 released by CBRE Group, the worst-performing markets for bookings in Q1 2019 to Q1 2021 included San Francisco, with 82.6% decrease in revenue per available room (RevPar) and other gateway cities in which the company has a presence -- like Boston, Washington D.C., and Seattle.
As of June 2021, 49 of the company's 52 hotels were open, which, combined, produced a total revenue of $66 million for the month and EBITDA $16.4 million, a 48% variance from the same month in 2019. As of July 11, 2021, the company's hotel and resorts were operating at an occupancy of 51% with a 66% improvement to the ADR when compared to May 2021.
The good news is that the company entered the pandemic on a strong footing. In Q2 2021, the company completed a capital raise of $230 million through a Series G preferred sale in addition to selling Sir Francis Drake and The Roger New York, bringing its total liquidity to $970 million.
In July 2021, Pebblebrook completed a second raise through redeemable preferred shares, bringing $250 million to the company's balance sheet. The company also acquired a new 200-room upper-upscale resort on Jekyll Island and has a contract for sale on Villa Florence in San Francisco, as well as a contract for acquisition for a 369-room Margaritaville Hotel in Hollywood Beach underway.
Is Pebblebrook Hotel Trust in trouble?
On paper, it appears things are improving for the company. Q2 results showed higher-than-anticipated recovery rates, and while still a far cry from normal operations, it's a step in the right direction.
Q2 2021 is still operating at a loss, with adjusted funds from operations (AFFO) of ($0.12). The company cut dividends in 2020, paying out $0.04 for the full year, and has paid no dividends to date in 2021. Like most hotel REITs, the company is relying on steady recovery, which raises the question of whetherPebblebrook could be in trouble depending on the spread of the delta variant.
The company should be able to maintain its debt obligations considering its next major debt maturity isn't due until Q4 2022 and it has more than enough liquidity to cover it. But 2023 brings a much larger maturity, which could mean the company will have to liquidate more assets to pay its obligations if things don't continue to improve in the near future.
I think Pebblebrook has a really high-quality portfolio, a solid business model, and a fairly strong financial balance sheet, but even the best portfolios have their weaknesses. Right now, it's simply a matter of whether or not conditions improve, and if not, how long the next lull will linger. Investors should consider this a volatile stock but one that could be backed by strong growth over the next three to five years.