Transactions in the hotel REIT industry have increased dramatically over the last year, thanks to factors such as a strong economy, steady inflation, low unemployment, lower corporate taxes and rising interest rates (which have lowered share prices, making hotel REITs attractive investments relative to net asset values). In fact, in the first four months of 2018, U.S. hotel transaction volumes increased by 93% from the same period last year. Meanwhile the 52-week moving average for hotel occupancy reached 66.4% - its highest level in the past decade. Given this recent growth, REIT M&A in the area has started heating up, leading to some high-profile bidding wars and disputes over shareholder value.
The Bid for LaSalle
At the forefront of the current trend is LaSalle Hotel Properties (“LaSalle”), which has been the target of several strategic offers. Its initial suitor, Pebblebrook Hotel Trust (“Pebblebrook”), is a natural fit. Both LaSalle and Pebblebrook focus on acquiring and investing in upscale, independent, full-service hotels and resorts located in or around major urban markets throughout the United States. Both are based in Bethesda, Maryland and share a common founder, Jon Bortz. In the words of Bortz, “Our shareholders and LaSalle’s shareholders have long encouraged us to explore a combination to create a stronger industry leader. This combination is obvious and has been so for several years. Our companies have complementary assets and similar strategies, and we strongly believe bringing our two companies together is in the best interests of our respective shareholders. We believe the shareholders of both of our companies should know about this proposal, and it is our hope that LaSalle will decide to engage with us to reach a mutually beneficial agreement.”
In March, Pebblebrook proposed a share-for-share merger with LaSalle. The proposal included an implied merger price of $29.95 per LaSalle common share, representing a 17.4% premium to LaSalle’s trailing 10-day volume weighted average price and valuing the company at more than $3 billion. In spite of the premium, LaSalle rejected the bid, stating it undervalued the company and did not reflect the company’s potential for future value creation. Following the rejection, Pebblebrook upped its offer to buy LaSalle by almost 6%, suggesting an offer price of $31.75, with an option for shareholders to be paid cash up to a maximum of 15% of the value of their holdings. A bidding war ensued, and the prospect of a merger drove LaSalle’s stock price to above $35.00 per share.
Blackstone, which recently divested of its Hilton stake, has recently emerged as the winner of the battle. In spite of the higher per share price of $37.80 that was ultimately offered by Pebblebrook and an exit fee in the Blackstone agreement, LaSalle’s board favored the Blackstone all-cash offer, set at $33.50 per common share, citing the failure of Pebblebrook’s proposal to address the significant price risks and uncertainties inherent in a stock transaction. Specifically, Pebblebrook had repeatedly refused to agree to a pricing collar or similar pricing protection mechanism. In contrast, Blackstone’s all-cash offer provides price certainty. Currently, the deal is pending a shareholder vote requiring a 2/3 majority to proceed. Among LaSalle’s shareholders is Pebblebrook, which, following LaSalle’s rejection, increased its ownership in the company to 9%.
Maximizing Shareholder Value
The Pebblebrook/Blackstone bidding war represents a growing struggle in the industry as directors and shareholders quarrel over how to maximize shareholder value. Last year, the hotel REIT industry was caught up in similar M&A drama when RLJ Lodging Trust (“RLJ”) and FelCor Lodging Trust (“FelCor”) entered into a definitive merger agreement in a stock swap transaction. Similar to the LaSalle battle, Blackstone made an all-cash offer to acquire FelCor for a premium above where FelCor’s stock was then trading. Unlike LaSalle, Blackstone’s offer was rejected by FelCor’s board, to the dismay of some of the company’s shareholders. Around the same time, certain shareholders felt that the RLJ merger agreement would not adequately compensate shareholders given FelCor’s potential for growth. Those shareholders sued both companies, alleging, among other things, that FelCor’s board of directors had violated the Securities Exchange Act by omitting material details about financial projections and that the board had effectively precluded consideration of competing bids by approving a merger agreement that contained restrictive provisions.
Given the present strength of the hotel REIT market, more transactions similar to those described above are likely to occur. This is not the first time, and will certainly not be the last, that boards of directors and shareholders debate over what is best for the company and its shareholders. Only time will tell if cash is king in hotel REIT M&A.
