Jon E. Bortz, chairman of the board, president and CEO of Pebblebrook Hotel Trust, is an entrepreneur at heart: In addition to founding Pebblebrook and LaSalle Hotel Properties, he also founded the hotel investment group of Jones Lang LaSalle Incorporated in 1994.
It’s no surprise then, that creation is one of the aspects of the job that Bortz loves most. “I like to create things that people love. I loved creating Pebblebrook, bringing on the right people to create the best culture, but what I really love is overseeing the creation of these unique properties,” he said.
In the coming year, Bortz will be taking on a new kind of challenge. Last month, the merger between Pebblebrook and LaSalle—Bortz’s former haunt—closed, and the company is in the process of integrating portfolios, systems and operations.
“This particular transaction with LaSalle stands out as unique,” he said. “We’ve never done a large transaction like this or one-tenth the size of this. We’ve mostly bought properties on a one-off business. What’s unique here is we have another public company that is so similar, in the same markets, with a lot of the same operators—similar size assets for the most part—and, obviously, we know a lot of these assets. More than half of them were purchased while I was leading LaSalle. There’s an incredible familiarity, both historically and contemporaneously. There’s a uniqueness here. It’s not about being bigger; it’s about creating more value for our shareholders and being able to recognize opportunity—we know these assets so well and [know]how we would improve them. Based on that, we think we can create a lot of value for our shareholders at a relatively low risk.”
That being said, Bortz noted, there isn’t a sentimental aspect to this acquisition. “It really is all about trying to create more value. It could have been any company if they fit the profile of what we look for,” he said.
Going forward, Bortz said, there’s roughly $18 million to $20 million of relatively immediate savings with regard to redundancy in leadership, in systems and in public company costs.
The second piece revolves around the value Pebblebrook’s team can create. “If you look at the two companies, while rates, occupancy, the products, markets and operators are similar, our properties deliver $3,000 to $5,000 more per key in EBITDA than properties at LaSalle do,” Bortz said. “Over the next three to five years, as we operate them differently, as we renovate and transform them our way, which is very experientially focused…we believe that’s a core expertise we have that we can bring to bear on the LaSalle portfolio and transform them into businesses more like ours, and narrow or eliminate that differential in EBITDA per key. That amount of money is upwards of $30 million to $50 million of EBITDA, which is $400 million to $700 million of value by the public markets. In addition to that, there’s a lot of best-practice sharing. We’ll cross-pollinate those, and there will be benefits to the whole portfolio—not just theirs, but ours as well, in terms of performance.”
The first goal in the plan is to seamlessly integrate operations. “[We want] to do that without disruption, integrate people, technology and systems immediately, which is what we’re on plan to do, so these businesses can continue to operate without a hiccup,” he said.
The company also launched a strategic disposition plan. In connection with the closing of the merger, five hotels were sold for $820.8 million of gross proceeds, $105.8 million of which are part of “$700 million to $1.2 billion of assets we intend to sell,” Bortz said. “That’s a primary focus—to get these dispositions done, and bring our leverage level down to a level we feel is appropriate for the long term and is below the levels that are a result of the transaction. Then we’ll move on to [making decisions on if]we need to make changes in operators or brands, when will we renovate and enhance—those are secondary decisions.”
With regard to the disposition plan, there are a number of factors in play. “Is it too small or too big? Are they in a market we don’t have a positive near- to intermediate-term view? Do we have too many assets in markets we don’t have the most positive view of? Is it unique enough?” he asked. “Here’s an opportunity to really fine tune the portfolio to continue to make it even more experiential. Are there assets more commodity-like, even if it’s independent? All of those are factors. The good news is we have a very robust buyer market for these kinds of assets, most of which can be sold unencumbered by brand and operator.”
While integrating two companies can be a challenge, Bortz relishes challenges—after all, it’s what he likes best about hospitality. “I gravitate to things that are progressively more difficult and more challenging,” he said. “I got into the business by happenstance, but it was clearly a very difficult kind of real estate. It’s real estate and an operating business at the same time.”
In addition to the intellectual challenge, he said, “When things are harder, frankly, it’s easier to differentiate yourself and outperform. If it’s easy, everybody can do it.” HB