Pebblebrook Hotel Trust PEB recently completed the disposition of the company’s 82-room Hotel Madera in Washington DC to a third party, for $23.3 million. The asset sale comes as part of the company’s disposition program aimed at optimizing its portfolio and reducing the leverage level.
The sale price indicates an EBITDA multiple of 14.3x and net operating income (NOI) capitalization rate of 5.7%, based on the property’s operating performance in 2018. Further, the sale price reflects a 14.1x EBITDA multiple and NOI capitalization rate of 5.9%, based on the trailing 12-month period ended Jun 30 2019. Notably, the NOI capitalization rate is after considering an assumed annual capital reserve of 4% of total hotel revenues.
Pebblebrook plans to use sale proceeds for general business needs, which will likely include reducing the company’s outstanding borrowings. As a result of this disposal, the company estimates total net debt to trailing 12-month corporate EBITDA to be nearly 4.6 times at the end of third-quarter 2019.
Notably, the company’s strategic disposition plan, which commenced on Nov 30, 2018, targets improving overall portfolio quality and 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. Therefore, 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. As part of its strategic disposition program, the company has completed $1.3 billion of asset sales, including the sale of Hotel Madera. Furthermore, amid favorable pricing levels and active transaction market with decent interest from buyers, the company remains on track to dispose $600 million in 2019, with $449 million of asset sales completed so far in the year.
Such timely execution of asset disposition will likely boost the 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 negatively impact its near-term profitability margins.
Currently, Pebblebrook carries a Zacks Rank #3 (Hold). Over the past three months, shares of the company have declined1.6% compared with the industry’s growth of 6.1%.
Stocks to Consider
Some better-ranked stocks from the real-estate space include Alexandria Real Estate Equities, Inc. ARE, Equity Residential EQR and Mid-America Apartment Communities, Inc. MAA, each carrying a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Alexandria Real Estate’s Zacks Consensus Estimate for 2019 funds from operations (FFO) per share has moved marginally north to $6.98 in the past three months.
Equity Residential’s FFO per share estimate for the current year moved 1.5% upward to $3.45 over the past two months.
Mid-America’s Zacks Consensus Estimate for the ongoing year’s FFO per share climbed marginally to $6.30 in a month’s time.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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