Pebblebrook Hotel Trust Reports Second Quarter 2018 Results

Pebblebrook Hotel Trust (NYSE: PEB) (the “Company”) today reported results for the second quarter ended June 30, 2018. The Company’s results include the following:

“During the second quarter, our portfolio generated healthy year over year growth in operational results which exceeded our expectations,” said Jon E. Bortz, Chairman, President and Chief Executive Officer of Pebblebrook Hotel Trust. “Overall, demand accelerated in the second quarter from the first quarter, driven by improvements in business travel demand, both group and transient, and inbound international travel that has reversed and is now growing. Elevated group spend that we experienced in the first quarter continued throughout the second quarter. Leisure remains strong, and non-room revenues continued to increase above our expectations. This enabled us to beat our second quarter outlook for Same-Property EBITDA, Adjusted EBITDAre and Adjusted FFO per diluted share. We expect that the encouraging travel demand trends we’ve been experiencing will continue into the second half of the year as short-term group and transient booking trends are very positive.”

Second Quarter Highlights

• Net income: The Company’s net income was $58.3 million in the second quarter of 2018, increasing $14.6 million as compared to the same period of 2017.
• Same-Property RevPAR and Same-Property Total RevPAR: Same-Property RevPAR for the quarter increased 2.6 percent versus 2017 to $223.81. Same-Property ADR climbed 1.5 percent over the prior year to $254.81. Same-Property Occupancy grew 1.1 percent to 87.8 percent. Same-Property Total RevPAR increased 3.1 percent over the same period of 2017 to $325.39.
• Same-Property EBITDA: The Company’s hotels generated $74.8 million of Same-Property EBITDA for the quarter ended June 30, 2018, increasing 4.5 percent over the same period of 2017. Same-Property Revenues grew 3.2 percent, while Same-Property Expenses were held to an increase of only 2.4 percent. Same-Property EBITDA Margin increased 47 basis points to 36.2 percent for the second quarter of 2018, as compared to the same period last year.
• Adjusted EBITDAre: The Company’s Adjusted EBITDAre grew to $72.8 million from $67.2 million in the prior year period, an increase of 8.4 percent. Adjusted EBITDAre includes $1.9 million of business interruption income related to lost EBITDA incurred and forecasted in 2018 at LaPlaya Beach Resort & Club (“LaPlaya”) and $2.4 million of dividend income received from the Company’s investment in liquid marketable securities, $3.1 million of which was not included in the Company’s second quarter outlook. Beginning this quarter, the Company is reporting and forecasting Adjusted EBITDAre. Adjusted EBITDAre is the same as the previously reported and forecasted Adjusted EBITDA.
• Adjusted FFO: The Company’s Adjusted FFO increased 7.4 percent to $56.0 million from $52.1 million in the prior year period.
• Dividends: On June 15, 2018, the Company declared a regular quarterly cash dividend of $0.38 per share on its common shares, a regular quarterly cash dividend of $0.40625 per share on its 6.50% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest and a regular quarterly cash dividend of $0.39844 per share on its 6.375% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest.

“Our hotels performed very well throughout the second quarter and took advantage of improving business demand fundamentals, driving solid results across our portfolio,” noted Mr. Bortz. “San Francisco was our strongest market in the second quarter, with RevPAR climbing 15.5 percent, largely attributed to a more active convention calendar at the Moscone Convention Center, the favorable ramp-up of Hotel Zoe Fisherman’s Wharf, which was redeveloped and transformed last year, and our newfound ability to drive ADR growth with increased compression in the San Francisco market. In the second quarter, Same-Property RevPAR for our portfolio grew 2.6 percent, at the upper end of our guidance of plus 1.0 percent to 3.0 percent. Same-Property Total Revenue rose 3.2 percent, a direct result of our efforts to enhance the hotel experience for our guests through enriched amenities and additional value created in our reconcepted food and beverage outlets and public areas. These non-room revenues increased by 4.4 percent in the quarter. Our asset managers and operational teams were able to limit Same-Property Expense growth to 2.4 percent by relentlessly implementing our best practices and successfully achieving further efficiencies. As a result, Same-Property EBITDA increased 4.5 percent, which was $1.4 million above the upper end of our guidance.”

Update on Impact from Hurricane Irma on LaPlaya Beach Resort & Club

During the second quarter of 2018, the Company executed a finalized settlement agreement with its insurance carriers providing for $20.5 million of insurance proceeds for the remediation and repair work for damages caused by Hurricane Irma in September of 2017. This settlement includes $1.9 million of 2018 business interruption income which was also recorded as business interruption proceeds in the second quarter of 2018 and was not previously included in the Company’s 2018 outlook. The Company is confident that the resort will be fully restored by the conclusion of the construction and go-back work later this year.

Capital Reinvestments

In the second quarter, the Company completed $17.1 million of capital investments throughout its portfolio. In June, the Company substantially completed its $8.5 million investment in the redevelopment of Hotel Zephyr Fisherman’s Wharf’s Zephyr Walk. The approximately 46,000 square feet of street-level retail space has been significantly upgraded and enhanced, and the Company will continue its re-leasing efforts throughout the year. During the remainder of 2018, the Company will execute additional renovations at a number of properties that will improve performance in future years, including:

• Mondrian Los Angeles (estimated at $18.0 million), which will undergo a renovation of the guestrooms and guest bathrooms, as well as our legendary Skybar, beginning in the fourth quarter of this year, with an expected completion date in the first quarter of 2019;
• W Hotel Boston (estimated at $10.0 million), which will undergo a guestroom renovation beginning in the fourth quarter of 2018, with an expected completion date in the first quarter of 2019;
• Sir Francis Drake (estimated at $9.0 million), which includes a lobby and an expanded guestroom refresh, featuring guest bathroom tub to shower conversions, beginning in the third quarter of this year, to be completed at the end of 2018; and
• Hotel Zelos San Francisco (estimated at $6.0 million), which involves a guestroom refresh and an expanded guest bathroom renovation to be completed by the end of 2018, which will build on the success of the previously transformed lobby, guestroom corridors and the award-winning Dirty Habit, all of which were completed in 2014.

Year-to-Date Highlights

• Net Income: The Company’s net income was $82.8 million for the six months ended June 30, 2018, an increase of $25.1 million over the same period of 2017.
• Same-Property RevPAR and Same-Property Total Revenue per Available Room: Same-Property RevPAR for the six months ended June 30, 2018 increased 1.3 percent over the same period of 2017 to $209.57. Year-to-date Same-Property ADR rose 1.1 percent from the comparable period of 2017 to $249.90, and year-to-date Same-Property Occupancy increased 0.2 percent to 83.9 percent. Same-Property Total Revenue per Available Room grew 2.5 percent over the same period of 2017.
• Same-Property EBITDA: The Company’s hotels generated $130.4 million of Same-Property EBITDA for the six months ended June 30, 2018, up 3.5 percent compared to the same period of 2017. Same-Property Revenues climbed 2.6 percent, while Same-Property Expenses rose just 2.2 percent. As a result, Same-Property EBITDA Margin for the six months ended June 30, 2018 increased 28 basis points to 33.7 percent as compared to the same period last year.
• Adjusted EBITDAre: The Company’s Adjusted EBITDAre increased 13.7 percent, or $15.9 million, to $132.1 million from $116.2 million in the prior-year period.
• Adjusted FFO: The Company’s Adjusted FFO grew 12.5 percent to $102.2 million from $90.9 million in the prior year period. The Company’s Adjusted FFO per diluted share increased 14.8 percent to $1.47 compared with the same period of 2017.

Capital Markets and Balance Sheet

As of June 30, 2018, the Company had $1.2 billion in consolidated debt at an effective weighted-average interest rate of 3.5 percent. The Company had $675.0 million outstanding in the form of unsecured term loans and $383.0 million outstanding on its $450.0 million senior unsecured revolving credit facility. As of June 30, 2018, the Company had $25.5 million of consolidated cash, cash equivalents and restricted cash.

During the quarter, the Company increased its strategic purchases in LaSalle Hotel Properties (NYSE: LHO) (“LaSalle”) and now holds an ownership position of approximately 9.8 percent of the outstanding common shares of LaSalle, comprising approximately $349.8 million of invested capital. As of June 30, 2018, excluding the dividend income and associated debt related to the ownership of the LaSalle shares, the Company’s fixed charge coverage ratio was 4.2 times and total net debt to trailing 12-month corporate EBITDA was 3.4 times.

Proposed Combination with LaSalle Hotel Properties

On June 11, 2018, the Company issued an offer letter to LaSalle’s board, in which the Company submitted a merger proposal for a strategic combination with LaSalle, based on a fixed exchange ratio of 0.92 common share of the Company (“Pebblebrook common shares”) for each LaSalle common share. The Company’s offer provides LaSalle’s common shareholders with the option for each share to elect to receive a fixed price of $37.80 per LaSalle share in cash instead of Pebblebrook common shares, subject to a cap of 20% of LaSalle shares receiving cash in total and customary pro ration if the number of LaSalle holders electing to receive cash instead of stock is oversubscribed. This offer remains outstanding and was resubmitted to LaSalle’s board in a separate letter on July 20, 2018, and the Company is prepared to move forward with it immediately. On July 10, 2018, the Company filed a preliminary proxy statement to urge LaSalle’s shareholders to vote with the Company against the proposed Blackstone take-under offer of $33.50 per share.

The Company remains convinced that a merger with LaSalle presents the most compelling strategic opportunity for the shareholders of both the Company and LaSalle, and the Company’s Board of Trustees unanimously supports a combination with LaSalle.

2018 Outlook

The Company has updated its 2018 outlook to reflect the second quarter Same-Property EBITDA outperformance of $1.4 million and the overall strengthening in economic activity and accelerating improvements in group and transient travel demand expected for the remainder of 2018 for an additional $1.4 million. Partly offsetting the increased outlook for portfolio Same-Property EBITDA is the increased short-term disruption from the recently expanded renovation scopes at Sir Francis Drake and Hotel Zelos San Francisco during the third and fourth quarters of 2018 which are expected to reduce Same-Property EBITDA by $2.8 million, resulting in no change to the upper end of the Company’s 2018 Same-Property EBITDA outlook and a $1.5 million increase to the lower end of the 2018 Same-Property EBITDA outlook.

The Company’s updated 2018 outlook also reflects an additional $4.2 million of interest expense related to the net 5.4 million additional LaSalle common shares purchased during the second quarter and $1.2 million of reduced dividend income compared to the prior outlook due to the elimination of the third and fourth quarter common dividends on the LaSalle shares as agreed by LaSalle’s board pursuant to the merger agreement entered into with Blackstone. On a combined basis, the increased interest expense and reduced dividend income relating to the strategic acquisition of the LaSalle common shares will reduce Adjusted FFO by $5.4 million, or $0.08 per diluted share, versus the Company’s prior outlook. The Company’s unrealized gain on investment in LaSalle common shares as of June 30, 2018 was $20.2 million, which is not reflected in the Company’s 2018 Adjusted EBITDAre or Adjusted FFO.

The Company’s strategic investment in LaSalle has significantly impacted its 2018 outlook. Had the Company not made the strategic investment in LaSalle, on a full-year basis, the Company’s 2018 Adjusted EBITDAre would be $5.2 million lower, but the Company’s Adjusted FFO and Adjusted FFO per diluted share would be $7.0 million, and $0.10 higher, respectively.

The Company’s 2018 outlook, which assumes no additional acquisitions or dispositions, reflects the Company’s various planned capital investment projects and includes other significant assumptions, is as follows:

The Company’s outlook for the third quarter of 2018 is as follows:

The Company’s estimates and assumptions, including the Company’s outlook for 2018 and the third quarter 2018 for Same-Property RevPAR, Same-Property RevPAR growth rate, Same-Property EBITDA, Same-Property EBITDA growth rate, Same-Property EBITDA Margin and Same-Property EBITDA Margin growth rate include the hotels owned as of June 30, 2018, as if they had been owned by the Company for all of 2017 and 2018, except for LaPlaya, which is not included in the third or fourth quarters. The Company’s 2018 outlook assumes no additional acquisitions or dispositions beyond the hotels the Company owned as of June 30, 2018.

If any of the foregoing estimates and assumptions prove to be inaccurate, actual results, including the outlook, may vary, and could vary significantly, from the amounts shown above.

Second Quarter 2018 Earnings Call

The Company will conduct its quarterly analyst and investor conference call on Thursday, July 26, 2018 at 10:00 AM ET. To participate in the conference call, please dial (877) 705-6003 approximately ten minutes before the call begins. Additionally, a live webcast of the conference call will be available through the Company’s website. To access the webcast, log on to www.pebblebrookhotels.com ten minutes prior to the conference call. A replay of the conference call webcast will be archived and available online through the Investor Relations section of www.pebblebrookhotels.com.

About Pebblebrook Hotel Trust

Pebblebrook Hotel Trust is a publicly traded real estate investment trust (“REIT”) organized to opportunistically acquire and invest primarily in upper upscale, full-service hotels located in urban markets in major gateway cities. The Company owns 28 hotels, with a total of 6,973 guest rooms. The Company owns hotels located in 9 states and the District of Columbia, including: Los Angeles, California (Beverly Hills, Santa Monica and West Hollywood); San Diego, California; San Francisco, California; Washington, DC; Coral Gables, Florida; Naples, Florida; Buckhead, Georgia; Boston, Massachusetts; Minneapolis, Minnesota; Portland, Oregon; Philadelphia, Pennsylvania; Nashville, Tennessee; Columbia River Gorge, Washington; and Seattle, Washington. For more information, please visit us at www.pebblebrookhotels.com and follow us on Twitter at @PebblebrookPEB.

For further information about the Company’s business and financial results, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of the Company’s SEC filings, including, but not limited to, its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, copies of which may be obtained at the Investor Relations section of the Company’s website at www.pebblebrookhotels.com.

All information in this press release is as of July 25, 2018. The Company undertakes no duty to update the statements in this press release to conform the statements to actual results or changes in the Company’s expectations.

Additional Information

This communication does not constitute an offer to buy or solicitation of an offer to sell any securities. This communication relates to a proposal which Pebblebrook has made for a business combination transaction with LaSalle. In furtherance of this proposal and subject to future developments, Pebblebrook (and, if a negotiated transaction is agreed, LaSalle) may file one or more registration statements, proxy statements, tender or exchange offer statements, prospectuses or other documents with the United States Securities and Exchange Commission (the “SEC”). This communication is not a substitute for any proxy statement, registration statement, tender or exchange offer statement, prospectus or other document Pebblebrook or LaSalle may file with the SEC in connection with the proposed transaction. INVESTORS AND SECURITY HOLDERS OF PEBBLEBROOK AND LASALLE ARE URGED TO READ ANY SUCH PROXY STATEMENT, REGISTRATION STATEMENT, TENDER OR EXCHANGE OFFER STATEMENT, PROSPECTUS AND OTHER DOCUMENTS FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY IF AND WHEN THEY BECOME AVAILABLE AS THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. Any definitive proxy statement or prospectus (if and when available) will be delivered to shareholders of LaSalle or Pebblebrook, as applicable. Investors and security holders will be able to obtain free copies of these documents (if and when available) and other documents filed with the SEC by Pebblebrook through the website maintained by the SEC at http://www.sec.gov.

Pebblebrook or LaSalle and their respective trustees and executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction. You can find information about Pebblebrook’s executive officers and trustees in Pebblebrook’s definitive proxy statement filed with the SEC on April 27, 2018. You can find information about LaSalle’s executive officers and trustees in LaSalle’s definitive proxy statement filed with the SEC on March 22, 2018. Additional information regarding the interests of such potential participants will be included in one or more registration statements, proxy statements, tender or exchange offer statements or other documents filed with the SEC if and when they become available. You may obtain free copies of these documents using the sources indicated above.

This document shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

Forward-Looking Statements

This communication may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements regarding Pebblebrook’s offer to acquire LaSalle, its financing of the proposed transaction, its expected future performance (including expected results of operations and financial guidance), and the combined company’s future financial condition, operating results, strategy and plans. Forward-looking statements may be identified by the use of the words “anticipates,” “expects,” “intends,” “plans,” “should,” “could,” “would,” “may,” “will,” “believes,” “estimates,” “potential,” “target,” “opportunity,” “tentative,” “positioning,” “designed,” “create,” “predict,” “project,” “seek,” “ongoing,” “upside,” “increases” or “continue” and variations or similar expressions. Other examples of forward-looking statements include the following: projections and forecasts of U.S. GDP growth, U.S. hotel industry RevPAR growth, the Company’s net income, FFO, EBITDA, EBITDAre, Adjusted FFO, Adjusted EBITDAre, RevPAR, EBITDA Margin and EBITDA Margin growth, and the Company’s expenses, share count or other financial items; descriptions of the Company’s plans or objectives for future operations, acquisitions or services; forecasts of the Company’s future economic performance and its share of future markets; forecasts of hotel industry performance; and descriptions of assumptions underlying or relating to any of the foregoing expectations including assumptions regarding the timing of their occurrence. These forward-looking statements are subject to various risks and uncertainties, many of which are beyond the Company’s control, which could cause actual results to differ materially from such statements. These assumptions, risks and uncertainties include, but are not limited to, assumptions, risks and uncertainties discussed in Pebblebrook’s most recent annual or quarterly report filed with the SEC and assumptions, risks and uncertainties relating to the proposed transaction, as detailed from time to time in Pebblebrook’s and LaSalle’s filings with the SEC, which factors are incorporated herein by reference. Important factors that could cause actual results to differ materially from the forward-looking statements made in this communication are set forth in other reports or documents that Pebblebrook may file from time to time with the SEC, and include, but are not limited to: (i) the ultimate outcome of any possible transaction between Pebblebrook and LaSalle, including the possibilities that LaSalle will reject a transaction with Pebblebrook, (ii) the ultimate outcome and results of integrating the operations of Pebblebrook and LaSalle if a transaction is consummated, (iii) the ability to obtain regulatory approvals and meet other closing conditions to any possible transaction, including the necessary shareholder approvals, and (iv) the risks and uncertainties detailed by LaSalle with respect to its business as described in its reports and documents filed with the SEC. All forward-looking statements attributable to Pebblebrook or any person acting on Pebblebrook’s behalf are expressly qualified in their entirety by this cautionary statement. Readers are cautioned not to place undue reliance on any of these forward-looking statements. These forward-looking statements speak only as of the date hereof. Pebblebrook undertakes no obligation to update any of these forward-looking statements to reflect events or circumstances after the date of this communication or to reflect actual outcomes.

For additional information or to receive press releases via email, please visit our website at
www.pebblebrookhotels.com

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Pebblebrook Hotel Trust
Raymond D. Martz, Chief Financial Officer
240-507-1330