High Expense Growth Overshadows Pebblebrook’s Revenue Growth in Q4 Results and First-Quarter Outlook

Fourth-quarter results for Pebblebrook PEB were below our expectations, though we didn’t see anything in the quarter that would materially change our $27.50 fair value estimate. The company reported occupancy of 60.1% for the quarter, which is better than the 53.0% level reported in the fourth quarter of 2021 but still significantly below the 77.2% level reported in the fourth quarter of 2019. The average daily rate grew 10.8% year over year and 18.4% over the fourth quarter of 2019. As a result, revenue per available room grew 25.6% year over year, which was slightly below our estimate of 29.7% growth. However, operating expenses grew 29.2% in the quarter, leading to EBITDA margins falling 80 basis points to 21.0%, which was well below our estimate of EBITDA margins of 25.6%. Therefore, Pebblebrook reported adjusted funds from operations of $0.20 per share in the fourth quarter that was an improvement over the $0.08 figure reported in the fourth quarter of 2021 but missed our $0.31 estimate for the current quarter.

Management is still not ready to provide full-year guidance for 2023, but it did provide an outlook for the first quarter. RevPAR growth is expected to range between 15.0% and 18.0%, which is in line with our estimate of 16.1%. However, hotel EBITDA is only expected to grow between 3.0% and 13.1%, which implies another quarter where expense growth exceeds revenue growth. As a result, AFFO is only expected to range between $0.06 and $0.10 in the first quarter, which is slightly below the $0.11 figure the company reported in the first quarter of 2022 and well below our estimate of $0.28. We still believe that over the next few years Pebblebrook’s high-quality portfolio should see occupancy and EBITDA margins return to a level near the 2019 peak. While we will likely lower our estimates for 2023 to reflect slower hotel industry growth than we anticipated, we don’t plan to change our long-term outlook or materially change our fair value estimate.