Now that Pebblebrook Hotel Trust will be acquiring LaSalle Hotel Properties, the company’s next move will be to reduce debt by selling as much as $1 billion in assets within six months to a year of the closing.
Earlier this month, Pebblebrook agreed to acquire LaSalle for about $5.2 billion, including debt, after a lengthy bidding war for the REIT with a Blackstone Group subsidiary. With LaSalle’s assets, Pebblebrook will now have 66 hotels, most of which fall in the luxury and upper-upscale categories. When the deal closes—tentatively scheduled for late November/early December—Pebblebrook will be one of the largest owners of independent lodging properties in the United States.
On an investor call, REIT executives said the company is already under contract to sell three LaSalle properties—the Park Central San Francisco, the Park Central New York and the WestHouse hotel—for $715 million when the merger closes. “The proceeds from these sales will be used to partially fund the cash component of our merger price as well as to reduce debt if more stock is elected by the LaSalle shareholders,” said Raymond Martz, EVP and CFO for Pebblebrook Hotel Trust.
Martz told investors the company also will sell an additional $500 million to $1 billion in assets. “In fact, we’re already actively working on this disposition plan and we’re very optimistic that we’ll be able to begin executing on our plans relatively quickly in order to reduce our leverage level as quickly and softly as possible,” he said. He did not, however, specify which hotels are (or will be) on the block. “We don’t plan to disclose the specific hotels that we intend to sell as this is disruptive for those hotels, especially when the hotel is encumbered, which is the case for most of the LaSalle hotels,” he said.
Go West, Young REIT
Whatever other assets end up on the market, they will not likely be properties on the West Coast.
“We do have an incredibly positive view of San Francisco, not just for 2019 obviously, but for the long-term,” Pebblebrook CEO John Bortz said. “We think the dynamics there are pretty stupendous from a demand-and-supply perspective.” Selling the Park Central San Francisco, then, comes down to size. “It would be, by far, our largest hotel. And while its EBITDA is perhaps just slightly above the highest EBITDA we have within our portfolio, that’s really pre-capital, and I would say, pre-capital and brand change probably related to the property, that would presumably drive up the bottom line of the property based upon the capital that might go into the hotel.”
From that perspective, he continued, the overall EBITDA would reach a level that the company would rather spread out over several assets. “One of the benefits, from our viewpoint, of putting these two portfolios together is that we can reduce any individual concentration risk through the combining of the assets,” he said. “We certainly have plenty of exposure in San Francisco [and] our EBITDA as a share is going to grow significantly next year over the overall portfolio.” As such, the company was confident the three hotels on the block were not where they wanted to go in terms of the concentration or diversification of the portfolio.
As Pebblebrook closes these sales—and the merger, Bortz said—he expects the company’s West Coast exposure to grow back from where it is.
Hurricane Effect
Both Pebblebrook’s and LaSalle’s portfolios were negatively affected by last year’s hurricane seasons, Bortz said, and required significant repairs and improvements. “The LaSalle properties in Key West [faced] a much slower ramp-up, even though the properties in the market got reopened earlier in the year,” he said. “The customers take time to come back.”
The negative impacts from the hurricanes, he said, account for the cap rates investors are seeing. “When we think about the capital requirements, there are more opportunities within the LaSalle portfolio, I think, on the rotations of those properties to make capital investments in order to improve the market share and the performance,” he said.
The damage may also affect Pebblebrook’s decisions in terms of what properties to sell.
As mentioned earlier, Pebblebrook’s management team will remain the same after the deal closes. Bortz will continue to serve as Pebblebrook’s chairman, president and CEO; Martz will continue to serve as EVP, CFO, treasurer and secretary; and Thomas Fisher will continue to serve as EVP and CIO. The Pebblebrook board will remain unchanged. During the call, Bortz said the company expects to bring the majority of the LaSalle team over as well.