BETHESDA, Maryland—The new Pebblebrook Hotel Trust starts today.
Pebblebrook closed on its acquisition of LaSalle Hotel Properties at the end of business 30 November. With that, the real estate investment trust known as LaSalle, which started in May 1998 under the leadership of Jon Bortz, is once again under Bortz’s direction.
However, Bortz, who is chairman, president and CEO of Pebblebrook, said via email there isn’t any special sense of fulfillment over the acquisition of a company he previously founded, successfully led and retired from.
“The fulfillment comes from completing a merger in order to create a better, stronger company with a ton of upside opportunity, and an even more efficient platform,” he said.
There is a lot of work to do to fine-tune the portfolio to maximize its growth and create a unique portfolio, he said, such as the disposition of another $650 million to $1.15 billion in assets. The company will make some operator and brand changes at some of the legacy LaSalle hotels, he said, and it will start a number of transformative renovations similar to what the company has done with its legacy Pebblebrook properties.
“In addition, we will cross-pollinate our best practices among our two companies, and (integrate) the former LaSalle team into the culture and approach of the Pebblebrook family,” he said. “There is a lot of financial upside from putting these two companies together.”
Bortz said he hopes the investment community continues to view Pebblebrook as well-run company that is focused on creating shareholder returns that lead the industry and as one that always puts shareholders first.
The path forward
The journey from initial planning to closing the deal has been a long one, EVP and CFO Ray Martz said. Pebblebrook began gearing up for the deal in the fourth quarter of last year, acquiring shares in January 2018, and then made its intentions publicly known in March. After months of bids, revised bids and negotiations—including a period where LaSalle’s leadership had an all-cash deal in hand with an affiliate of the Blackstone Group that ultimately failed to get shareholder approval—shareholders for both companies voted in favor of the deal last week.
At the end of the day, LaSalle’s shareholders got what they wanted, he said, and Pebblebrook’s shareholders got what they wanted as well. Pebblebrook is now the largest owner of independent and lifestyle hotels in the country, which Martz said provides the company with a lot of options going forward.
He believes that added scale, especially where’s it’s concentrated in certain markets, is not a matter of the company competing against itself but will give the company better footing in an era of M&A.
“In the industry, we’re seeing now, with the consolidation of brands and managers becoming larger, as a bigger owner, we’ll have more influence with brands and management companies,” he said. “It provides more opportunities in general for us.”
Refining the portfolio
A team of Pebblebrook executives conducted a tour of each LaSalle property, Martz said, which allowed them to meet all of the teams and learn of all the opportunities and challenges. The company created a strategic disposition program to sell off assets that don’t fit into their vision for Pebblebrook’s future portfolio, he said.
While he could not provide any specifics on the properties they’re looking to sell so as not to disrupt operations, he said there is a short list of what the company is looking for in the properties it holds, including being roughly similar sizes, not requiring much additional investment, being in the right markets, being unique and having the potential to generate the best possible returns. The company will look to execute its strategic disposition program over the next six to 12 months, he said.
There is still a great environment for selling hotels, he said, and the properties have been generating a significant amount of interest on the market so far.
“It’s a great time to be selling,” he said. “There’s a lot of capital out there. This should improve our balance sheet and improve the quality of our portfolio.”
Along with helping refine the portfolio, he said, the program will help the company reduce its leverage. The near-term focus is to bring the company’s leverage more in line with its long-term targets, he said. At the moment, the company’s leverage is a little more than 5 times, he said, and it prefers to be in the low 4s.
Pebblebrook will continue to be bullish on the West Coast, he said, particularly in markets such as San Francisco, Los Angeles, San Diego and Seattle.
Pebblebrook isn’t looking to be the largest hotel REIT, Martz said, noting future acquisitions will be driven by opportunity, not necessity, and the company could be a net seller going forward if that’s ultimately the best decision for shareholders.
“We’re opportunistic,” he said. “Could we be larger in five years or smaller? The answer depends on the opportunity. We have no goals to be larger just to be larger.”
Changes in operations
Bortz likes to, and has been able to, attend every budget meeting in the portfolio, Martz said. While that’s possible to do with 30 hotels, he said, that’s tougher to do with 60. One of the things the company will do is refine how everyone spends their time to support a larger portfolio, he said.
The near-term focus will be integrating LaSalle’s employees with Pebblebrook’s team, he said. While there are a lot of similarities between the two companies’ cultures, they are still different, he said, and it’s important to have that integration done right.
“In real estate, we put so much focus on the real estate,” he said. “The risk is not to focus on the team.”
Pebblebrook will move to a new, larger office space to accommodate its more than 50 employees, he said, but for the time being, the integrated team will use the existing Pebblebrook and LaSalle offices. Pebblebrook’s accounting team will move to LaSalle’s office to work with the accounting team there, he said, and the LaSalle asset management team will move to Pebblebrook’s office. Once the teams are up and running, the company will focus on having employees in the same disciplines work more closely together, such as having an asset manager from one company work with an analyst from the other company.