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Summary

  • PEB offers today's discerning traveler a luxury experience without luxury pricing.
  • Thanks to leadership, PEB has experienced an average of almost 15% annual share price growth since inception.
  • PEB has been able to acquire properties at 20-60% below replacement cost in supply-constrained markets.
  • By optimizing operations, PEB has driven down its expense margin and grown EBITDA in excess of its peer set, with room still to improve.
  • Over the long run, PEB will continue to produce significant NAV growth.

Pebblebrook Hotel Trust (NYSE: PEB) is a publicly traded real estate investment trust ("REIT") focused on acquiring high-quality, full-service lodging properties in and around urban markets, specifically gateway cities, in the US. Unlike most of its peers, PEB is focused on owning independently branded and operated hotels.

PEB Portfolio Map (click to enlarge)

Source: Pebblebrook Hotel Trust corporate website, Aug 2014

We believe PEB's niche approach is exactly the place to be invested in this hotel cycle. Though their properties lean toward the upper upscale (Omni, Hilton, Kimpton), they appeal to today's discerning traveler who is seeking familiar amenities and services, but with a feel that is unique and special. In other words, a luxury experience without the luxury price tag, and PEB is offering just that.

We believe the most important component in an investment is the people running it. Thanks to leadership from Jon Bortz, who has made his career in the hotel industry, PEB has experienced an average of nearly 15% annual share price growth since its inception in late 2009. Bortz previously co-founded LaSalle Hotel Properties (NYSE:LHO), the 25-year old REIT lodging industry stalwart, and before that started Jones Lang LaSalle's Hotel Investment Group. It is from his connections at LHO and Jones Lang LaSalle that he culled PEB's CFO and CIO, Raymond Martz and Thomas Fisher. While starting a business in 2009 focused on opportunistic lodging acquisitions may not have been the hardest thing to do, we appreciate management's restraint in investing in only properties that suited their strategy. They have been able to identify and acquire properties at 20-60% below replacement cost in supply-constrained markets. We see their steady flow of acquisitions, pictured below, as the result of thoughtful execution. The company ramped up acquisitions in the first two years to establish itself and has now become more restrained in its investment activity.

PEB Pace of Acquisitions

Source: July 2014 Pebblebrook Investor Presentation; July 17, 2014 Pebblebrook Press Release

By following this strategy, management has developed a business with excellent operating performance, as indicated by its EBITDA (earnings before interest, taxes, depreciation, and amortization) growth, which has continually outpaced its peer group.

PEB vs. Lodging Industry EBITDA Growth since 2010

Source: Green Street Advisors Pebblebrook Company Snapshot

PEB's strategy from the start was to buy underperforming properties and optimize operations. As its portfolio stabilizes, management is focused on continuing to recognize upside by diligently reducing their expense margin. Management believes there is as much as 300 bps of 'fat' it can still trim from its expense lines, which should directly flow through to their bottom line. We believe they have the ability to recognize these savings as most of their portfolio is comprised of independent hotels and thus they have more control over operations.

Our approach is to find companies with a high quality growth profile that is sustainable and hold them for the long run, and PEB aligns very well with our strategy. While on the surface the company seems expensive, with a 19.5x EBITDA multiple versus the lodging industry average of 16.4x and, by our valuation trading at a 6% premium to NAV, we are holders for the long run. PEB has the components of a business that can produce significant NAV growth and drive shareholder value creation. We think PEB will continue to grow into its valuation.

Source: Niche Approach Is Exactly The Place To Be In This Hotel Cycle - Why I Am Long Pebblebrook

Additional disclosure: Scott Crowe holds PEB within the funds he manages at Resource Real Estate Global Real Estate Securities.

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