Following shareholders’ approval of Pebblebrook Hotel Trust’s acquisition of LaSalle Hotel Properties, hotel industry analysts say the deal isn’t likely to spur any further M&A activity in the REIT space.
REPORT FROM THE U.S.—Now that shareholders have approved Pebblebrook Hotel Trust’s acquisition of LaSalle Hotel Properties, the question remains what is next for the new, bigger Pebblebrook and what might be the ripple effects for the hotel industry.
Shareholders of Pebblebrook and LaSalle voted Tuesday in favor of the acquisition. The deal is expected to close Friday. Talks of an acquisition began when Pebblebrook began buying shares of LaSalle in January and became public when Pebblebrook released its letters proposing the acquisition in March. LaSalle rejected Pebblebrook’s offer and later entered into an agreement with an affiliate of Blackstone Group. After months of increasing offers, Pebblebrook sweetened the pot enough for LaSalle to break off its deal with Blackstone and enter into an agreement with Pebblebrook.
LaSalle shareholders voted 99% in favor of the deal, according to a news release from Pebblebrook. Similarly, more than 99% of the votes cast by Pebblebrook shareholders were in favor of the deal.
Preliminary results from the voting show that holders of 85.8 million LaSalle common shares elected to receive cash. This amounts to 77% of outstanding shares. The remaining 25.4 million eligible LaSalle shareholders (23%) chose to receive common shares, did not submit valid elections or expressed no preference.
As part of the agreement, Pebblebrook offered a cash component fixed at approximately $1.3 billion, or 30% of the total consideration in the deal, based on shareholder preference.
In a separate news release from LaSalle, President and CEO Michael Barnello said, “We thank the LaSalle shareholders for their support of this combination. We look forward to continuing to work closely with Pebblebrook to quickly bring this transaction to a close.”
Path for Pebblebrook
Should the deal close as expected Friday, the newly combined companies will have their first full day of trading Monday under Pebblebrook, said Mike Bellisario, VP and equity research senior analyst at Baird.
Bellisario noted some investors, who had questioned the company’s post-acquisition strategy, are now more comfortable with the deal after company officials detailed what hotels will be sold and how quickly they’ll be sold. There were a lot of people shorting the stock to almost 20% even just recently, he said, but that soon should unwind somewhat.
Pebblebrook has become larger in its equity cap, he said, and it’s a bigger part of the hotel index and real estate indices.*
“It’s just a bigger name that’s harder to ignore,” he said.
In the near term, Bellisario said he expects the now-larger Pebblebrook to sit on the acquisition sidelines. It has effectively just purchased 40 hotels in this deal, and that’s a lot to digest. It will sell off some hotels, mostly legacy LaSalle properties with a couple legacy Pebblebrook assets, he said, adding that LaSalle was actually larger than Pebblebrook. The company will be in sell mode, cutting free properties with outsized CapEx needs.
After some portfolio fine-tuning and recalibrating, the company will look similar to a pre-acquisition Pebblebrook in a couple of years, he said.
When Pebblebrook will return to the acquisition market will depend on where the cycle progresses, Bellisario said. The company is expected to continue its focus on independent, boutique properties that need some work, and possibly a brand or new management, to potentially outgrow their markets, he said.
Pebblebrook management put out a pro forma a couple different ways, most recently in early September, and it has likely changed since then, Rich Hightower, managing director at Evercore ISI, said.
There has been incremental news on asset sales or those on the market that Pebblebrook itself hasn’t announced. The sales are likely accretive and help the company deleverage, he said, which has been an important investor concern over the last few months. For that reason, he gives the company more credit than executives have given themselves publicly.
On the other hand, he said, the company is penalized somewhat for the added CapEx it needs to get to some NOI levels. Investors will know more when the company puts out its detailed guidance on this, which he expects to occur sooner than it typically would be (during fourth-quarter reporting in February).
Despite Pebblebrook’s successful acquisition of another public REIT, the uniqueness of this deal means it isn’t likely to inspire other public REITs to follow, Bellisario said.
The two companies had enough market, strategy and historical overlap that the deal made sense, he said. Management teams will say public-to-public M&A is not an easy process, and even while the combination of Pebblebrook and LaSalle strategically made sense, the deal itself wasn’t an easy process.
“It certainly was not smooth sailing,” he said. “It’s unique to these two names. It’s not a sign of more public-to-public deals to come.”
In fact, another deal like this could be harder today.
Private-equity groups like Blackstone Group want to be friendly acquirers, Bellisario said. Pebblebrook set the wheels in motion in the public forum, he said, which allowed other players to come in. No other REIT has a “for sale” sign up currently, he said.
There is a lot of money out there, but there needs to be a willing buyer and willing seller, he said. That doesn’t match up too often throughout the cycle, he said.
Hightower agreed. “For other lodging REITs, it doesn’t mean anything,” he said.
Without a willing buyer and seller and a combination that makes sense, there’s no law of investing out there that would make companies consolidate, even if everything agrees there needs to be more M&A in general.
“There’s just not, generally speaking, a direct catalyst to force M&A to happen,” he said.
*Correction, 28 November 2018: This story has been updated to remove incorrect information about Pebblebrook's equity cap.