PEB - Pebblebrook Hotel Trust: The 40% Discount To Book Value Is An Opportunity

2023-08-12 06:03:17 ET

Summary

• Pebblebrook Hotel Trust is currently swapping hands at a 40% discount to its book value.
• The hotel REIT has been buying back its common shares in response to this discount in lieu of paying a dividend. The Series E preferreds trade at a smaller discount.
• A recovery of its urban hotels and continued share buybacks could drive the common shares higher.

Pebblebrook Hotel Trust (PEB) has yet to reinstate quarterly cash dividends long suspended since the outbreak of the pandemic in early 2020. This dearth of income has been at odds with other hotel REIT peers like Braemar Hotels & Resorts (BHR) as Pebblebrook's exposure to urban hotels has formed a headwind. These properties have seen their recovery hampered by the remote working post-pandemic zeitgeist. Internally managed Pebblebrook has lost a quarter of its value over the last 1-year with its recent earnings for its fiscal 2023 second quarter pointing to an improvement of its operating environment with the hotel REIT recording dual beats.

Book value is down from 2019 but Pebblebrook is still swapping hands for a 40% discount to book. Important to note that this discount has not remained sticky as a result of the dividend suspension but by interest rates being hiked to 22-year highs. Bears, who form the marked 21% short interest, would flag that book value has declined on a nominal and a per-share basis since 2019. However, this has been more stable in recent years with book value per share for the recently reported second quarter coming in at $24.27 , a 69 cents increase sequentially from the first quarter.

Private Net Asset Value Range Implies An Even Larger Discount

The income is not the prize here because it's still suspended. Hence, near-term returns will be driven by the common shares moving up back to trade in line with their book value. Pebblebrook has provided a valuation range for its net asset value on a per-property basis and on the back of respective cap rates. Firstly, the trailing 12-month portfolio net operating income as of the end of the second quarter has dropped by around $54.2 million or 13.88% from 2019. Resorts have seen strong growth with domestic and international tourism rebounding beyond the pre-pandemic level. Trailing 12-month resort NOI came in at $151.3 million, up from $107.2 million even as revenue for all of its urban markets fell from their 2019 comps. San Francisco realized the steepest fall with NOI dipping 75% from 2019.

The REIT has placed its private valuation in the range of $27 to $32 per share. This is with a net debt of $1.46 billion and $750 million in convertible notes as of the end of its second quarter. The midpoint of this valuation range of if $29.50 per share which is 100% higher than Pebblebook's current stock price. To be clear, Pebblebrook is currently swapping hands for 50 cents on the dollar. Further, some of the headwinds facing San Francisco like the collapse of VC activity from a broad tech downturn should begin their journey of normalization once the current era of monetary tightening comes to an end. This should form part of broader local lodging demand recovery to allow the REIT to capture a greater share of 2019 NOI. The closure of this discount will hinge on an expansion of NOI in the future quarters with book value also required to maintain its stability.

Dual Beats, Share Buybacks, And The Preferreds

Pebblebrook recorded second-quarter revenue of $384.3 million , a 3.3% decline over its year-ago comp but a beat by $1.65 million on consensus estimates. This came on the back of same-property total RevPAR that stood at $241 as of the end of June and against portfolio occupancy of 77%, up from occupancy of 47% as of the end of January. Pebblebrook's average daily rate has also moved up around $25 from January to $312 as of the end of June. Same-property EBITDA of $110.7 million did decline by 12.9% over the year-ago comp with the fall being led by an increase in property operating expenses.

Are the earnings enough to kickstart a larger resumption of the dividends? Yes. Adjusted EBITDAre of $116.2 million drove adjusted funds from operations of $75.7 million. This was a 20.3% decline from the year-ago period but FFO per share of $0.62 beat consensus estimates by 6 cents. Further, FFO per share declined by a comparatively lower rate of 13.9% on the back of Pebblebrook's stock buybacks. The REIT repurchased 3.6 million common shares for $50 million during the second quarter. Pebblebrook enacted this buyback strategy to return cash to shareholders in October 2022 and has since repurchased over 11 million common shares, around 8% of its outstanding common shares. This was at around $14.51 per share, a roughly 50% discount to its NAV per share.

Hence, the repurchase of common shares at such a marked discount to NAV looks like the right decision. This discount is materially larger than the 24% discount on the Series E preferreds ( PEB.PE ) which I covered earlier this year. The REIT has been dependent on property sales to fund some of these buybacks and most recently disposed of a hotel in Seattle for $33.7 million . Pebblebrook has sold $232.3 million worth of hotel properties since the beginning of 2023. The REIT is a cautious buy on the back of its discount to NAV.

For further details see: