Private equity wins the REIT.
Blackstone has agreed to buy real estate investment trust LaSalle Hotel Properties in an all-cash deal valued at $4.8 billion, or $33.50 per share, a 5-percent premium on LaSalle's Friday closing price.
The deal essentially ends Pebblebrook Hotel Trust's bid to acquire the REIT and illustrates the power private-equity giants like Blackstone wield. Pebblebrook had made three separate bids for LaSalle, the latest coming in late April. But LaSalle, which owns 41 upper-upscale and luxury hotels, totaling approximately 10,450 rooms, spurned Pebblebrook's advances, ultimately preferring an all-cash deal rather than stock consideration.
LaSalle Chairman Stuart Scott said that it was in touch with 20 potential buyers and signed confidentiality agreements with 10 of them before deciding on Blackstone's offer, which represents a premium of almost 35 percent above LaSalle’s share price on March 27.
"The board determined that this transaction represents the most compelling opportunity for LaSalle’s shareholders, delivering a significant premium with immediate and certain cash value,” Scott said.
A note from RW Baird opined that a higher private-equity bid is "unlikely." "The agreement with Blackstone represents full pricing for LaSalle, in our opinion, and essentially matches our low-to-mid-$30s leveraged buyout math; given this pricing and Blackstone's lower cost of capital, we believe a topping bid from private equity is highly unlikely," the note continued.
Should the deal be terminated, LaSalle would be required to pay a $112-million break-up fee. Completion of the transaction is expected to occur in the third quarter of 2018.
Blackstone's Bonanza
The deal is Blackstone's second recent REIT takeover. Earlier this month it acquired commercial real estate fund Gramercy Property Trust for around $4 billion in cash..
Blackstone's proposal for LaSalle comes days after it checked out of Hilton Worldwide, selling the last of its shares. Many reports tag Blackstone's gain at more than $14 billion in profit.
Blackstone maintains a "but it, fix it, sell it" philosophy, one that is strongly embraced by company President and COO Jonathan Gray. Blackstone acquired Hilton in 2007 in a $26-billion leveraged buyout, before taking it private. "Hilton really fell into that as a company we felt we could transform," Gray told Bloomberg.
In 2013, Blackstone took Hilton public again, raising an estimated $2.35 billion. At the time, Blackstone held a 45.8-percent stake in the company. Since then, it has steadily unwound from the investment.
In October 2016, China's HNA Group agreed to acquire a 25-percent interest in Hilton from Blackstone, making it the largest Hilton stockholder. Now, HNA is seeking to exit from Hilton, too, having already sold its stakes in Hilton Vacations and in March publicly put its stake in Park Hotels & Resorts, the REIT spinoff from Hilton, on the market.
REIT Setback
Pebblebrook losing out on LaSalle is a blow to the company. A deal would have vaulted it higher in the REIT echelon, which, on the full-service, upper-upscale and luxury sectors, is dominated by the aforementioned Park and Host Hotels & Resorts.
There is a history between the two companies. Pebblebrook CEO Jon Bortz and LaSalle CEO Michael Barnello have a reportedly fractious relationship. Bortz served as president and CEO of LaSalle Hotel Properties from its inception in April 1998 until he left the company in September 2009. Upon Bortz's departure, Barnello, who had been COO and EVP of acquisitions, was named CEO. A year later, Bortz formed Pebblebrook and became chairman of the board, president and CEO.
One hotel REIT executive framed the tense situation this way: "This is, 'I don't want to sell to the guy who started this company, who he thinks can fix what I have done.'"
Now, he won't.
The REIT space has been shrinking, though not as quickly as some predicted. Last September, RLJ Lodging Trust completed its merger with FelCor Lodging Trust. But a Fitch Ratings piece from 2014 augured further lodging REIT consolidation that has not yet fully been recognized. When Thomas Baltimore, the former CEO of RLJ Lodging Trust took on the same role at Park Hotels, he made the case that the fragmented lodging REIT sector could be ripe for consolidation with Park picking off some of its smaller competitors. Park has yet to make an acquisition of a REIT, thought it is still early.
Park was established as an independent company on January 3, 2017, following its spin-off from Hilton. Its portfolio consists of 54 hotels and resorts with more than 32,000 rooms mostly in the U.S. More than 85 percent of its portfolio is in the luxury and upper-upscale segment.