Pebblebrook Hotel Trust IPO: Building Something Solid

By Will Ashworth | June 27, 2010 AAA

I read June 22 that Pebblebrook Hotel Trust (NYSE:PEB) bought the 416-room Sir Francis Drake hotel in San Francisco for $90 million. It turns out Pebblebrook is the creation of Jon Bortz, the founder and former CEO of LaSalle Hotel Properties (NYSE:LHO). He's raised new funds and is actively buying hotels in the "upper upscale" segment of the lodging industry. Unlike the Hyatt IPO, which was little more than a partial payout, this is all fresh money to be used to build the hotel REIT from the ground up. For once, I've found an IPO I could like.

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What's Different?
In the past, I've not been a fan of "blind pool" investments. You're placing a lot of trust in the hands of the management team to make good use of the money you've just given them. Especially dubious is the special purpose acquisition corporation (SPAC), where management receives large ownership positions at little cost because of their gold-plated resumes. So what's different about Pebblebrook?

REIT Ownership Restrictions
First, in order to qualify as a REIT, no one person can own more than 9.8% of its stock. Yes, the management team have financial incentives, but they aren't simply given founders shares for having the right connections. CEO Jon Bortz bought 125,000 shares of stock from the company in a private placement concurrent to its IPO at $20 a share. That's a $2.5 million commitment for less than 1% of its outstanding shares. Compare this to Richard Heckmann, who received a 19.4% interest in Heckmann Corp. (NYSE:HEK) back in 2008 for the princely sum of $66,000.

Opportunity Meets Experience
According to Pebblebrook, at the end of last September there were 1,100 hotels in the U.S. in financial distress worth approximately $29 billion. This presents a unique buying opportunity for those with money and expertise. Two things CEO Jon Bortz has in abundance. Pebblebrook raised $380 million from its December IPO and has already committed much of the funds to hotel acquisitions. In his years at Jones Lang LaSalle and LaSalle Hotel Properties, Bortz oversaw the acquisition of 42 hotels worth several billion dollars. The definition of luck is preparation meeting opportunity. Jon Bortz appears ready for a second act.

Four Hotels and Counting
June's been a busy month for the REIT. It's announced or will soon do so the acquisition of three hotels in addition to the Sir Francis Drake deal mentioned in the opening paragraph. Besides San Francisco, it's thought to be buying the InterContinental (NYSE:IHG) Buckhead in Atlanta for $105 million, the Bethesda DoubleTree in the Washington-area for $67.1 million and the Grand Hotel Minneapolis for $36 million. By my calculations this will leave it with roughly $82 million to make one or two acquisitions before it will need to find additional funding, which has been hard to come by in the hotel sector. Perhaps five hotels are enough to digest for now. On the other hand, why not make hay while the sun shines.

Bottom Line
Private equity has soured my opinion on IPOs. Public offerings used to be about raising capital for business expansion. Now it seems deals are simply a convenient way for these massive partnerships to get out of their investments with profits in hand, no matter the mess left for new investors. It used to be about building something. For this reason, I'll go against my rule of never investing in an IPO until it's traded for at least one year. Despite the difficulties the hotel markets still face, I think Bortz and company are as good a group to invest with as you'll find anywhere, especially now that we know most of the targets. (To learn more, see Private Equity Opens Up For The Little Investor.)

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