Pebblebrook Hotel Trust (NYSE: PEB) will likely continue to report negative funds from operations through the end of the first nine months of 2021, before leisure and business travel return to normal. However, the cash burn will likely continue to decline until September 2021, after which I expect PEB’s hotel properties to generate net positive cash flow. Increasing occupancy of currently open hotels and the re-opening of closed hotels will likely reduce the cash burn over the coming months. Overall, I believe PEB can ride out the pandemic due to its present liquidity position. I’m expecting PEB to return to the pre-pandemic dividend level by the mid of 2022. Based on my outlook of negligible dividends and dividend yield until 2022 and the subsequent normalization, I’m adopting a neutral rating on PEB.
Current Liquidity Position Gives Hope
PEB reported funds from operations (“FFO”) of negative $82 million in the third quarter, which is a small improvement from the second quarter of 2020. Around nineteen out of a total fifty-three of PEB’s hotels resumed operations during the third quarter to take the total number of open hotels to thirty-nine, according to details given in the November NAREIT Summary. The re-opening of hotels and some recovery in leisure and business travel led to a slight improvement in FFO. The following table shows PEB’s FFO and revenues over the last few quarters.
The management believes that it can break even if its occupancy level reaches the “early 50s” (meaning 50% to 53%), as mentioned in the third quarter’s conference call. This break-even occupancy level is almost double of October’s occupancy of 27%, as mentioned in the NAREIT Summary. In my opinion, PEB’s hotels will be unable to reach 50% occupancy until the last quarter of next year. I’m expecting positive cash flow in the fourth quarter of 2021 because several experts agree that life will be normal by then. The management of a COVID-19 vaccine frontrunner recently mentioned that life could return to normal by next winter, while the United States’ vaccine program advisor recently predicted that life could return to normal by May 2021.
The question is: can PEB ride out the pandemic till it reaches the break-even point?
PEB currently has a monthly cash burn rate of $16 million to $21 million, while it has cash on hand of $217 million and total liquidity of $570.2 million, as mentioned in the third quarter’s investor presentation. The cash burn will reduce over the coming months as occupancy improves in PEB’s 39 hotels that are currently open. Further, the re-opening of the remaining 14 hotels in the coming months will reduce the cash burn. However, I’m assuming that in the worst-case scenario, PEB will not be able to improve its cash burn at all through the next twelve months. Further, I’m not expecting debt repayments to boost the cash burn because PEB just has $57 million of debt maturing in November 2021, and the REIT does not have any major debt repayments until