Pebblebrook Hotel Trust officials gave their rationale for combining with LaSalle Hotel Properties during a call with investors and analysts, noting the combined company would be the third-largest hotel real estate investment trust in the U.S.
BETHESDA, Maryland—If all goes according to plan, Pebblebrook Hotel Trust could be the third-largest hotel real estate investment trust in the U.S. by early December.
With Blackstone Group out of the picture and a deal officially in place with LaSalle Hotel Properties, Pebblebrook officials laid out their vision during a call with investors and analysts Thursday for why merging with LaSalle is in the best interest of both companies’ shareholders.
“In the history of REIT mergers, this combination probably makes the most sense of them all,” said Pebblebrook Chairman, President and CEO Jon Bortz. “The combined LaSalle-Pebblebrook company will have the premiere, best-in-class portfolio with 66 unique, upper-upscale and luxury independent and branded hotels located in key urban and resort markets in the United States.”
After LaSalle officials walked away from an all-cash deal with Blackstone, Pebblebrook and LaSalle executives quickly agreed on a proposal for Pebblebrook to acquire all of LaSalle’s common shares for roughly $5.2 billion in a combination of cash and stock. If the deal goes through as currently structured, LaSalle shareholders will receive up to 30% of the payout in cash at $37.80 per share and the rest in stock at an exchange of 0.92 Pebblebrook shares per LaSalle share.
Shareholders of both companies still must approve the deal.
According to a presentation during the investor call, the combined company would have an enterprise value of $8.5 billion and an equity market capitalization of $5 billion, assuming shareholders elect for the 30% cash option baked into the deal.
Those figures would leave the company behind only Host Hotels & Resorts and Park Hotels & Resorts among hotel REITs and would set up the company as clearly the largest player in world of independent hotel ownership.
Bortz noted beyond the size and scale benefits, the deal would provide the company with a greater degree of diversity in its portfolio.
A combined company would have a hotel presence in 16 different markets with the highest concentrations in San Francisco, which accounts for 18% of earnings before interest, taxes, depreciation and amortization. California-based properties would account for roughly 45% of the company’s total EBITDA, with a heavy presence in both San Diego and Los Angeles.
Pebblebrook officials noted there will be “no changes to Pebblebrook’s executive management team—CEO, CFO and CIO—or board” as part of the transaction, but they expect to bring on most of LaSalle’s employees.
Bortz noted there are several reasons to believe there would be a quick improvement in operating metrics in the combined company’s portfolio, including the completion of wide-scale renovations at both. He said he also expects there would be a reversal of the negative impacts from Marriott International’s integration of the salesforce at legacy Starwood Hotels & Resorts Worldwide properties and a similar integration process for InterContinental Hotels Group at Kimpton Hotels & Restaurants properties.
“In the short-term, we have significant tailwinds for 2019,” he said.
Bortz did note that there’s no “low-hanging fruit” in terms of growing EBITDA at the LaSalle properties because of the strength of LaSalle’s existing asset-management team. He said both companies follow similar best practices in many areas, but he hopes to learn from looking at how LaSalle does things compared to Pebblebrook.
“There’s always more we can do and better ideas out there than the ones we have,” he said.
The debt issue
Perhaps the largest concern with the deal would be the elevated level of debt on the books for the combined company, which is projected to be 5.5-times the company’s EBITDA and 34% of the company’s enterprise value. The debt was driven up in part by the cash election in the current deal, and Pebblebrook officials noted the debt would have been just 3.1-times EBITDA in an all-stock transaction with net debt to enterprise value at a comparatively low 20%.
But Pebblebrook officials said the company would immediately look to lower its leverage level—which they prefer to be closer to four-times EBITDA—through asset sales.
Bortz said the company will not identify which properties it is looking to sell as that will negatively impact performance and operations.
Pebblebrook officials promised roughly $18 million to $20 million in “general and administrative cost synergies,” the bulk of which would be realized almost immediately after the deal closes.
Those synergies are expected to come via eliminating redundant positions, a reduction in the costs related to running publicly traded companies, and scale benefits from having more properties with shared operators or concentrated in specific markets.
They also expect to realize some greater negotiating power with more scale, which could pay dividends in working with brands, third-party managers or distribution channels like online travel agencies.
Bortz said the company could also realize a lower cost of capital with “stronger banking relationships” through its enhanced size and scope.