Pebblebrook Hotel Trust PEB recently completed the disposition of the company’s 137-room Rouge Hotel in Washington DC to a third party, for a contracted price of $42 million.
The sale price indicates an EBITDA multiple of 17.4x and net operating income (NOI) capitalization rate of 5%, based on the property’s operating performance in 2018. Further, the sale price reflects a 19.3x EBITDA multiple and NOI capitalization rate of 4.5%, based on the trailing 12-month period ended March 2019. Notably, the NOI capitalization rate is after considering an assumed annual capital reserve of 4% of total hotel revenues.
The company intends to use sale proceeds for general business purposes which will likely include reducing the company’s outstanding borrowings. As a result of this disposal, Pebblebrook estimates total net debt to trailing 12-month corporate EBITDA to be nearly 4.6 times at the end of third-quarter 2019.
The asset sale is part of the company’s strategic disposition plan commenced on Nov 30, 2018, through which it aims to optimize portfolio and reduce leverage ratio to a target of 4-4.25 times. In addition, Pebblebrook is reinvesting the sale proceeds for additional renovation and repositioning projects throughout its portfolio. Such dispositions will boost its portfolio’s growth profile.
In fact, in second-quarter 2019, it sold or executed contracts for sale of hotel properties for $173.2 million. Additionally, in July 2019, it completed the sale of the 132-room Hotel Amarano Burbank in Los Angeles, CA for $72.9 million.
Furthermore, amid healthy and active transaction market, the company remains on track to dispose $1.45 billion of realties. Such timely execution of strategic changes will likely boost long-term operating profitability and aid in value creation for the company.
However, asset sales will likely result in near-term earnings dilution. This might also impact near-term profitability margins.
Currently, Pebblebrook carries a Zacks Rank #3 (Hold). Over the past three months, shares of the company have inched up 0.5% compared with the industry’s growth of 2.1%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Notably, amid global slowdown and uncertainty surrounding the ongoing trade deals, businesses have taken a cautious outlook. This has resulted in a decline in business-transient demand. With the absence of any near-term catalyst to reverse the softer operating environment, a number of hoteliers and hotel real estate investment trusts (REITs), including Marriott International, Inc. MAR, Host Hotels & Resorts Inc. HST and Park Hotels & Resorts PK, have trimmed the 2019 guidance to temper these expectations.
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