Hotels can be one of the more unpredictable real estate investment trust (REIT) investments, with revenues and expenses changing daily and without the comfort of triple net leases many other types of REITs enjoy. This makes hotel REITs a lot more sensitive to economic changes, which can be a positive or a negative, depending on the timing.
With a depressed economy and a recovery on the horizon, it’s a good time to start looking at hotel REITs. As hotels across the world continue opening, one such company worth taking a look at is Pebblebrook Hotel Trust (NYSE: PEB).
Pebblebrook Hotel Trust company profile
Pebblebrook Hotel Trust is a hotel REIT that invests in upper-scale hotel and resort properties in major gateway cities throughout the United States. As of March 15, 2021, the REIT had a portfolio of 53 hotels with a total of 13,236 rooms.
Pebblebrook’s portfolio is made up of luxurious and iconic hotels in major urban markets and resort destinations, such as San Francisco, Los Angeles, Key West, Chicago, and New York. To paint a better picture of the class of hotels it owns, the average daily rate (ADR) in 2019 was $258, compared to the industry average of $131.
Most of the REIT’s hotels are unbranded, meaning they’re not tied to a globally or nationally recognized brand name. This gives the company a lot more flexibility in terms of how it designs their hotels and how they’re operated. However, there is the "Unofficial Z Collection," which the company says is becoming its own brand as they grow.
The few brand affiliations Pebblebrook does have within its portfolio include Westin, Viceroy, Hyatt, and Hilton.
Since REITs aren’t allowed to manage or operate their own hotels, Pebblebrook leases its properties to its own taxable REIT subsidiaries (TSR), which contract with independent third- party management companies. As of December 2020, they had management agreements with 18 different hotel management companies, none of which accounted for more than 15% of the company’s EBITDA in 2019.
Pebblebrook’s portfolio more than doubled in size in 2018 when it acquired LaSalle Hotel properties. This took the REIT from 28 hotels to 64, after five were sold in connection with the merger. Since this acquisition, the company’s focus has been on improving the quality of its portfolio and reducing debt through its disposition program. This disposition program resulted in the sale of 11 more properties between 2018 and 2020, with another expected to close in 2021.
The company hasn’t acquired any additional hotel properties since the LaSalle acquisition. Instead, it has been making significant investments into the properties it already owns. Between 2019 and 2020, the company made nearly $300 million in capital investments to reposition and improve the hotels in its portfolio.
Pebblebrook Hotel Trust news
The most significant news for Pebblebrook over the past year is the same as every other hotel REIT’s: the COVID-19 pandemic. The company immediately closed 28 of its hotels at the beginning of the pandemic, and all but eight of them were closed by April 2020.
Pebblebrook slowly began reopening hotels in certain areas in June 2020 until having to take a small step backwards in November. As of March 15, 2021, the REIT has 39 of its 53 hotels open, with 9,374 of its 13,236 guest rooms available. The majority of the hotels still closed at this point are in San Francisco, CA.
Since the company’s disposition program was in full swing through 2019, it went into 2020 with $517.7 million less debt. This was perfect timing to give it some extra breathing room. It also completed an additional $387 million in dispositions in 2020, after the start of the pandemic, which further helped to pay down debt and cover operating expenses.
The company also announced the upcoming sale of one of its largest assets, the 416 room Sir Francis Drake in San Francisco. Pebblebrook announced the upcoming sale in February, 2021. It expects the sale to generate $156.7 million in proceeds. The Sir Francis Drake hotel accounted for $13.4 million in EBITDA in 2019.
Pebblebrook Hotel Trust stock price
As of March 19, 2021, Pebblebrook’s stock was trading at about $25, which is in line with its price just before the pandemic caused hotel REIT prices to hit record lows. At its lowest point, Pebblebrook fell to $6.20 in March, 2020.
Leading up to the pandemic, Pebblebrook’s stock price followed a similar pattern as many other hotel REITs over the past few years, with fears of a slowing economy causing a slow price decline that started in 2018. Pebblebrook’s stock price hit a high of $41.47 in June 2018 before gradually making its way down to around $25 in February 2020, just before the COVID-19 crash.
Pebblebrook’s price decline wasn’t due to struggling performance, though. In fact, 2019 was its strongest year in terms of revenue and funds from operations (FFO) after more than doubling the size of its portfolio with the LaSalle acquisition. It’s important to remember that REITs have to pay out at least 90% of their taxable income as dividends, so they’re constantly having to raise capital in order to grow. In order to pull off an acquisition of that size, the company had to issue an additional 61.39 million common shares, plus over 10 million redeemable preferred shares. This means its revenue in 2019 was spread out among almost twice as many shares as before.