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Analysis of Pebblebrook Hotel Trust's acquisition of LaSalle Hotel Properties: Understanding the REIT market and whether or not PEB was late to the game

Zerby, John
Abstract
On March 28th, 2018, Pebblebrook Hotel Trust officially announced that it had made an unsolicited offer to acquire LaSalle Hotel Properties. The deal valued LaSalle to be worth nearly $3.4 billion dollars, well above the $2.8 billion market cap calculated from the firm’s share price at the close of the prior trading day. Five and a half months later, on September 6th, 2018, Pebblebrook reached a final agreement with LaSalle to purchase the real estate investment trust for a staggering $5.2 billion. This acquisition came at a time when M&A activity in the real estate industry had reached its greatest peak in history at $524.7 billion. This figure represents a nearly 25% increase from the previous record set in 2007 (Bockmann, 2018).
In 2007, and just before the financial crisis of 2008, real estate was hot and the overall market had maintained sensational momentum behind packs of new investors who were eager to get in the game and achieve higher returns. No one, including and especially the real estate firms involved in the scramble for new assets, could have predicted the financial cataclysm that was about to result in the greatest economic crisis that the world had seen since the Great Depression. With this in mind, as investors look at the LaSalle acquisition made by Pebblebrook, heretofore referred to as the Transaction, the premium paid as well as the characteristics of the market in which the deal was made certainly raises questions about the future prospects of the combination. This paper will attempt to answer these questions by analyzing the Transaction using the top-down analysis approach.
This paper will provide details on key macro-economic and industry specific market indicators in order to create an understanding of the market environment in which the Transaction occurred, and develop a hypothesis on the future market environment in which the newly combined company will operate. A ratio analysis will be conducted to evaluate the financial health of the acquired entity, and several valuation methodologies will be used to calculate an intrinsic per share value of LaSalle Hotel Properties. This intrinsic value will be applied to calculate the implied premium paid by Pebblebrook Hotel Trust. A summary and analysis on whether or not the premium paid is justified will be discussed in the conclusion of this report.
Date
2019-12-03