On his company’s latest earnings call, Pebblebrook Hotel Trust CEO Jon Bortz laid out exactly how the company will shape its portfolio as it further integrates the operations and hotels of LaSalle Hotel Trust.
BETHESDA, Maryland—The deal between Pebblebrook Hotel Trust and LaSalle Hotel Properties closed almost three months ago.
While Pebblebrook has checked off quite a few items from its integration to-do list since acquiring LaSalle, executives on the company’s fourth-quarter and 2018 full-year earnings call made it clear there’s still so much more they want to accomplish.
“To say that we’re excited about the new, larger Pebblebrook and the opportunities we see would be a major understatement,” Chairman and CEO Jon Bortz said.
By the time the deal closed, Pebblebrook’s executive team decided who would be part of the combined company and made its offers and received acceptance letters, he said. The deal closed on a Friday, and by the following Monday, everyone was working in their new offices. The company recently executed on a lease for a new office to serve as the company headquarters and will move there during the third quarter, he said.
The newly combined teams have worked tirelessly to capitalize on the combined portfolio, Bortz said. Executive and management teams conducted portfolio-wide tours and reviews to determine which portfolios didn’t fit into the long-term vision for the company and would be candidates for disposition. After spending a significant amount of time evaluating the hotels that fit into the company’s long-term vision, executives believe there are tremendous opportunities available for those properties, he said.
“We concluded that the portfolio that remains is very unique and is of a higher quality and has more potential than we initially anticipated,” he said.
As of press time, Pebblebrook’s stock was trading at $32.75, up 16.2% year to date. The Baird/STR Hotel Stock Index was up 14.4% for the same time period.
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Strategic disposition program
Pebblebrook has been selling legacy LaSalle hotels to decrease its leverage, Bortz said. It recently sold the Liaison Capitol Hill for $111 million and the Hotel Palomar Washington, D.C., for $141.5 million. When combined with the five other hotels sold at the closing of the deal, Pebblebrook has realized a total of more than $1.1 billion from the sales of legacy LaSalle hotels in the last 90 days.
Looking ahead to the rest of 2019, Pebblebrook expects to sell another $350 million in legacy LaSalle assets, Bortz said. The company assumes it will sell $250 million in assets in the middle of the second quarter and another $100 million at the end of the third quarter. The remaining dispositions in 2019 are expected to sell at an average net operating capitalization rate of 5.5%, and the company projects the sale of additional assets will total between $400 million to $900 million over the next 18 months or so, he said.
The additional sales this year should bring the company’s leverage down to its target range of 4x to 4.25x by the end of 2019, Bortz said. Pebblebrook’s total net debt to trailing 12-month corporate earnings before interest, taxes, depreciation and amortization will be about 4.7x by the end of the first quarter.
Any proceeds from additional sales this year and next year would be used to decrease its debt further, redeem its callable preferred securities or repurchase shares, he said.
“We’re at a period of time where the buyer pool is very broad and deep, particularly for urban hotels and resorts,” Bortz said before clarifying that Pebblebrook is not looking to sell any of its resorts.
When looking at the mix of buyers so far, there have been private equity buyers, a local commercial real estate owner, a real estate investment trust and a combination of a brand company and a high-net-worth real estate investor, he said. There also has been some foreign investor interest in the independent offerings, he added.
“I would suspect as we sell additional properties, ultimately the buyers would be different than what we’ve had so far,” he said.
Vision for the portfolio
Through the combination of Pebblebrook’s and LaSalle’s portfolios, Pebblebrook has become the largest owner of lifestyle-oriented and experiential hotels in the U.S., Bortz said. Through 2018, the portfolio of 61 hotels—including only December for LaSalle properties—achieved an average EBITDA per key of $36,300, he said. Among those, 15 hotels in the portfolio had an EBITDA per key of more than $40,000.
The portfolio achieved an average daily rate of $252 and an occupancy level of 82.3%, resulting in revenue per available room of $207, he said.
Today, Pebblebrook comprises three definable portfolios of hotels, Bortz said. Two of those include urban hotels—which make up 83% of the company’s EBITDA—and the remaining one includes resorts. The company will continue to focus on the East and West coasts while holding a West Coast bias, he said. Any additional sales would come predominantly from the East Coast and central markets.
The resorts portfolio includes eight experiential and lifestyle-oriented properties. The resorts are located in some of the top resort locations in the U.S., and many of them are within a short drive to a major U.S. city. These eight properties had an average ADR of $272, average RevPAR of $205 and an average EBITDA per key of $48,000. Pebblebrook’s forecast shows four of these resorts should earn more than $60,000 EBITDA per key in 2019.
The urban hotel portfolios include a group of seven branded hotels, which generated $104.2 million of EBITDA in 2018, he said.
The remaining group of 46 urban lifestyle hotels are the core of the new Pebblebrook, Bortz said. They generated an average ADR of $255, occupancy level of 84.2% and RevPAR of $215. The average EBIDTA per key reached $35,700. This group itself could be further broken down into subgroups: 14 urban iconic hotels, 27 urban contemporary hotels and five in the unofficial “Z collection,” he said.
The urban iconic subgroup includes distinct and soft-branded hotels with sophisticated architecture and design with a unique story and soul, he said. The urban contemporary subgroup includes primarily independent and soft-branded hotels in unparalleled locations and have a unique lifestyle experience through stylized design and services.
The unofficial Z hotels include all of Pebblebrook’s Z-named hotels in San Francisco, which each bring an individually curated experience to hotel guests and locals, Bortz said. These hotels generated an average ADR of $254, occupancy level of 86% and RevPAR of $217, he said. The average EBITDA per key was $38,200.
Given the success of these hotels, Pebblebrook will evaluate the opportunity to grow the Z hotels collection through the redevelopment of hotels currently in the portfolio or further acquisitions, he said. The first of these transformations will be the Hotel Modera in Portland, which will become Hotel Zags in the second quarter, he said.
Pebblebrook invested $87 million in renovations in 2018. In continuation of that, the company started a number of renovations in the fourth quarter and has plans to begin more early this year, Bortz said. The projects are primarily focused on guestrooms and guestroom bathrooms and should be complete between the first and second quarters of 2019, he said.
As part of the comprehensive review of the portfolio, executives see opportunities for changing brands, property transformations and operator changes, Bortz said. There are already a number of projects in the works and more details will be available in the coming quarters.
“There are an extensive number of opportunities to create significant value,” he said. “We expect these projects in particular will be scheduled out in a balanced and thoughtful manner over the next several years.”