Pebblebrook Hotel: Disappointing Guidance And High Uncertainty In 2020
Summary
- Pebblebrook Hotel delivers an okay Q4 2019 with same-property RevPAR growth.
- However, its 2020 outlook is uncertain due to the outbreak of coronavirus.
- The company has a list of redevelopment projects to grow its EBITDA in 2020 and 2021.
- Pebblebrook Hotel pays a 7.5%-yielding dividend.
Investment Thesis
Pebblebrook Hotel Trust (NYSE:PEB) delivered an okay Q4 2019 with positive same-property revenue per available room ("RevPAR") growth. The REIT has a list of renovation projects that should help grow its EBITDA in 2020 and 2021. However, due to the outbreak of coronavirus, we think there is a substantial risk for investors if the virus cannot be contained quickly. This will negatively impact its revenue in Q2 and Q3. The company currently pays a 7.5%-yielding dividend and has the potential to deliver a return of 24% for investors. However, uncertainty remains very high at this moment and we think this is a stock that is only suitable for investors with a high risk tolerance.
Data by YCharts
Recent Developments: Q4 2019 Highlights
Pebblebrook Hotel reported an okay Q4 2019 as it saw its same-property RevPAR increased by 2.8% to $196.34. The increase was driven by a healthy growth of 2.7% of its average daily rate and an improvement of occupancy rate of 2.5 percentage points. However, due to higher same-property expenses growth rate of 3.4%, its same-property EBITDA margin declined to 28.9% in Q4 2019 from 29.4% in Q4 2018.
Source: Q4 2019 Earnings Release
Earnings And Growth Analysis
A rich pipeline of redevelopment projects
Pebblebrook plans to perform some renovations in several of its hotels in 2020. The company’s 2020 renovation projects are listed in the summary table below. Total investment for these projects is expected to be $93 million. These projects have the potential to grow its EBITDA by about $11.8 million.
Source: Q4 2019 Presentation
The company also plans to renovate 9 hotels in 2021. These renovation projects will cost about $169 million and have the potential to grow its EBITDA by $17.4 million. This implies an EBITDA yield of 10.3%.
Source: Q4 2019 Presentation
The outbreak of coronavirus will be a net negative for Pebblebrook
The outbreak of Coronavirus has the potential to develop into a global pandemic. As a result, the hotel industry is now facing very strong headwinds as businesses and individuals reduce travel activities. We expect Pebblebrook’s occupancy ratio to take a hit in this environment especially because its hotels are located in major international gateways such as San Francisco, San Diego, Los Angeles, Washington DC, Seattle, etc. If this virus can be quickly contained before the end of April, we think the impact will be limited to only the first half of 2020. However, if this virus cannot be contained quickly and continues to spread throughout the world beyond April, it is likely that many travellers will cancel their travel plans for the summer. This will cause a huge negative impact on Pebblebrook’s NOI in 2020 as summer is the busiest season for the hotel industry.
RevPAR could decline further
Pebblebrook released its 2020 guidance in its Q4 2019 earnings report. The company now only expects same-property total RevPAR growth rate of negative 0.6% to positive 1%. The company has built in some cancellations due to the outbreak of coronavirus in Q1 only. This means that if this virus continues well into the summer, its RevPAR guidance may need to be revised downward.
Solid balance sheet
Fortunately, Pebblebrook Hotel has a solid balance sheet. The company has a reasonable net debt to EBITDA ratio of 4.7x at the end of December 2019. The company also has no debt maturities in 2020. Its weighted average interest rate of 3.5% is also reasonable. Therefore, we think the company should be able to manage the headwinds in 2020.
Source: Q4 2019 Presentation
Valuation Analysis
Pebblebrook Hotel expects to generate adjusted funds from operations of $2.23 to $2.33 per share in 2020. This is a decline of about 11.4%-15% year over year. We noted that its peers usually have a P/AFFO in the range of 10x-12x. Using a P/AFFO ratio of 11x and the midpoint of its guidance, we derive our target price of $25.08 per share. This represents a return of 24%.
A 7.5%-yielding dividend
Pebblebrook currently pays a quarterly dividend of $0.38 per share. This is equivalent to a dividend yield of 7.5%. Its dividend appears to be safe with a payout ratio of 57.8% based on its 2019 AFFO.
Data by YCharts
Risks And Challenges
An economic recession
The hotel industry is cyclical and the prosperity depends on the strength of the economy. In an economic recession, travel activities may be limited. In addition, a global pandemic such as the outbreak of coronavirus can also cause a significant decline for travel activities.
New supply to the market
Pebblebrook Hotel is exposed to supply risk. This is because hotel operators tend to invest and build more hotels during the peak of the economic cycle. By the time these developments reach completion, the economy may reach a downturn. In fact, the REIT continues to face oversupply in several of its markets. In its latest conference call, management indicated that they are currently facing supply issues in San Diego, Seattle and Portland.
Investor Takeaway
While we see significant return for investors, uncertainty is very high due to the cyclical nature of the hotel industry and the outbreak of coronavirus. In other words, things may get worse before they get better. Therefore, we think this stock is only suitable for investors with a high risk tolerance.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.
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