Pebblebrook Hotel Trust: Cheap Because Of Pain

Summary

• Pebblebrook Hotel Trust has had an interesting operating history in recent years.
• The company found itself a victim of the COVID-19 pandemic and that pain continues into this year.
• Shares have some nice upside potential in the event of a probable recovery, but there could be more attractive prospects out there.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

Photo by Klaus Vedfelt/DigitalVision via Getty Images

There is no denying that the hotel industry was decimated by the COVID-19 pandemic. Very few companies in the space, if any, escaped material amounts of pain. One example of a company that found itself profoundly impacted is Pebblebrook Hotel Trust (NYSE:PEB). With a market capitalization of around $3.2 billion, Pebblebrook is a fairly small player in the hotel industry. As a result of the crisis, revenue at the business plummeted and earnings and cash flow turned negative. More likely than not, the worst is now behind the business. Shares, at the moment, appear attractively priced, but this does not mean that it's the most attractive prospect on the market today.

A look at Pebblebrook

Pebblebrook is a fairly small operator in the hotel REIT space. At present, the company owns 52 hotels and resorts, representing 12,820 rooms, or keys. Of these operations, 44 have now reopened, with the latest of those opening earlier this month. This works out to 10,499 of its rooms and it accounts for 86% of the company's 2019 EBITDA. Of the hotels and resorts on its books, those representing an urban lifestyle theme accounted for 62% of the company’s EBITDA. This is based on 2019 figures, not 2020, given the amount of volatility the company saw last year. Similarly, a further 19% of EBITDA came from unique lifestyle resorts. And the remaining 19% came from what management calls its urban major brands. The reason for the concentration on the urban lifestyle theme relates to just how many hotels are dedicated to that style. In all, this figure is 38, representing 8,015 rooms. Meanwhile, a further eight fall under the unique lifestyle resorts the company has. And the last six fall under the urban major brands.

*Taken from Pebblebrook Hotel Trust

Geographically, the company is largely focused on the West Coast. This is where 59% of its EBITDA comes from. Leading the way - San Francisco at 22% and San Diego at 15%. An impressive 49% of its EBITDA is attributable to California. This is not to say that other parts of the country have been ignored - 36% of its EBITDA comes from the East Coast and the remaining 5% comes from the central US.

Management views the lifestyle concept to be attractive because the experiential aspect of it, according to them, allows the company to generate higher margins. This is why the business has been focused on ensuring that the bulk of its portfolio focuses on this niche. This even applies to the major brand hotels on its books. These include names like Embassy Suites, Hilton (HLT), and Hyatt (H). Another key strategy that the company has is its emphasis on hiring a diverse pool of hotel operators to manage its properties. Not a single operator represents more than 16% of the EBITDA the company generated in 2019. The largest of these is Marriott International (MAR).

*Taken from Pebblebrook Hotel Trust

Despite this coherent strategy, the operating history of the business has been a bit mixed. Consider revenue. Between 2016 in 2018, revenue moved around in a narrow range between $769.3 million and $828.7 million. In 2019 though, revenue surged, rising to $1.61 billion. While some of this increase came from the comparable properties in its portfolio, the majority was attributable to its $4.1 billion merger with LaSalle Hotel Properties. This is not to say that the company does not sell properties as well. On April 1 of this year, the company completed the sale of its Sir Francis Drake Hotel in San Francisco, netting proceeds of $157.6 million. In fact, from 2018 through early this year, the business sold 17 properties totaling $1.88 billion. These represented 4,612 rooms and were completed at a weighted average EBITDA multiple of 14.7.

Naturally, asset sales would serve to push revenue down, but nobody could have guessed how far that metric would drop in 2020 in response to the COVID-19 pandemic. For the year, revenue came in at just $442.9 million. This was driven in large part by same store occupancy rate of just 25% compared to the 82.3% seen in 2019. Another contributor was the same store RevPAR of just $89.14. This compares to $310.62 seen in 2019.

Because of the significant change brought about by its merger with LaSalle, Pebblebrook should be looked at as two different companies, one that ended in 2018, and a new one that began in 2019. When paying attention to the 2019 figures, you find that the business is quite healthy. However, the decline in revenue that we saw in 2020 hurt the company's bottom line figures. Operating cash flow of $395.20 million in 2019 turned negative to the tune of $201.78 million last year. Adjusted for preferred distributions, operating cash flow moved from a positive $362.65 million to a negative $234.33 million. FFO, or funds from operations, dropped from a positive $314.94 million to a negative $243.87 million. And finally, EBITDA dropped from a positive $461.43 million to a negative $110.48 million.

For the first quarter of its 2021 fiscal year, performance remained weak. Revenue came in at just $83.64 million. This compares to $269.11 million seen the same period last year and came about as a result of occupancy at same-store properties declining from 56.7% to just 18.8%. Operating cash flow was -$7.14 million compared to the $1.49 million seen a year earlier. FFO, meanwhile, came in at -$59.39 million vs. the -$7.23 million the company generated in the first quarter of 2020. And EBITDA declined from $13.87 million to -$25.81 million over this same period of time.

Clearly, valuing Pebblebrook on the basis of 2020 figures is not possible. And without a doubt, if the picture does not eventually improve, the company could be in for a world of hurt. That said though, the worst of the COVID-19 pandemic appears behind us, and it is likely that the firm will continue to recover from here. This case for a recovery is being made by management itself as illustrated by how many of the company’s hotels are now operational.

Using 2019 figures, shares of the business look fairly attractive. At present, Pebblebrook is trading at a price to operating cash flow multiple of 8.8. Its price to FFO multiple is 10.2. And its EV to EBITDA multiple is 12.7. To put this in perspective, I compared the company’s multiples to those that were rated in the five highest in this category as determined by Seeking Alpha’s Quant platform. I found two that were extreme outliers on the upside, but the other three traded at a price to operating cash flow multiple of between 6.5 and 15.3. On this, only one of the three was more expensive than Pebblebrook. Meanwhile, their EV to EBITDA multiple ranged from 19.2 to 27.7. This left the company the cheapest of its major peers on this basis.

Takeaway

Based on the data provided, Pebblebrook looks to be an interesting company that has been hit by hard times. If these hard times were to continue, the firm could suffer irreparably. But for investors who, like myself, believe the worst is well behind us, a return to normalcy could offer some upside potential. That said, there are some peers that are trading cheaper than Pebblebrook at this time that may warrant some consideration.

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.

Comments

[bondman67]

what is an "urban lifestyle theme" hotels ?? are they business travel related or leisure/vacation?

[User 19396501]

An historically well-managed REIT, but too much exposure in unfriendly markets on the East and West Coast, too much exposure to future regulations, taxes, organized labor, insurance scams, etc. Plus, they have too many properties that are managed by the major brands. Bad outcomes in those situations. Not a buyer right now. Too much risk. This is also a very weak article with little meat to it.

[neuroshrink]

Yes at $15, no at $24, not a value at this level. There is no PE as there is no E.

[neuroshrink]

I see their holdings are almost exclusively in blue states that embrace lockdowns and are going to be slow to recover. Hotels in Texas are likely already doing better. I am going to pass on this.

[toh192]

I see they are diversified into the gubernatorial slave states, so why have any Florida exposure.
Just go bankrupt already.

[mkarpoff]

Still not comfortable with the common, but the preferreds are trading for pennies over par for those income lovers reading SA.