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I highly encourage shareholders of PEB - and anyone considering buying the stock - to read CEO Jon Bortz' letter on the first few pages of the 2011 annual report:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9N...

Cheers,
Alex
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Good stuff!

Way back on 11/18/2010, in the thread announcing your first Rising Star pick pf PEB, you said of PEB's prospective REIT status:

PEB and ROIC also both intend to qualify as REITs. ROIC plans to elect for REIT status for this year; I expect PEB to qualify in 12-18 months.

Am I reading it correctly that they beat that? On page 5 of the 2010 Annual Report, it says:

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 2009.

Since the IPO was less than a month before that date it seems to be saying PEB was a REIT from the start. I suppose I am wondering if there is a difference between electing to be taxed as REIT and being officially designated as a REIT.

Thanks!

RH
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RH,

You are right that they beat my estimate. That they "elected" to be taxed as a REIT in 2009 is pretty meaningless - they had no operations and nothing to be taxed that year anyway, so it didn't matter what they elected. The turning point to me is when they started paying out the dividend in December 2010. Once that started, REIT status meant something. And yes, that came much more quickly than expected. The pace of investment has been torrid. Amazing.

Cheers,
Alex
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...The pace of investment has been torrid. Amazing.

Would you say that's why their EBIT margin, profit margin, and a few other figures are in the negative?
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...The pace of investment has been torrid. Amazing.

Would you say that's why their EBIT margin, profit margin, and a few other figures are in the negative?


Frankly, none of those measures are meaningful yet. They are still in acquisition mode - and making acquisitions incurs one-time costs (think legal fees, etc). All those costs are one-time-only per hotel, and they are taken out up front.

Also, PEB is acquiring top-notch hotels that haven't been loved by their previous owners as late. Hotel owners defaulting on their debt aren't spending money on repairs or upgrades, and many of the hotels PEB is picking up on the cheap have several years of past-due maintenance to make up for. The company also upgrades, repositions, or rebrands some of its newly-acquired hotels. All that translates into higher capex spend, but of course that higher capex will only last 3-18 months or so per property before settling back towards a much-lower maintenance level.

PEB hasn't owned a single hotel for a full year yet, so every single item on their financials should be taken with a grain of salt at best or completely disregarded as unrepresentative of the future at worst. When valuing PEB (or companies similar to PEB), it is important to value its potential futures - the various places it could be several years out - and then discount those possible realities back to the present and weight their likelihoods.

I hope this helps. If I can help clear anything else up for you, please don't hesitate.

Cheers,
Alex
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If I can help clear anything else up for you, please don't hesitate.
Can you tell me how long will it take before my friends enviously say "You got PEB below 19? Boy, I sure wish I had!"


8-)
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