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Section 1: 8-K/A (8-K/A)

Document


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
 
FORM 8-K/A
 
CURRENT REPORT
 
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
 
Date of Report (Date of Earliest Event Reported):
 
November 30, 2018
 
PEBBLEBROOK HOTEL TRUST
 
(Exact name of registrant as specified in its charter)
 
 
Maryland
001-34571
27-1055421
_____________________
(State or other jurisdiction
_____________
(Commission
______________
(I.R.S. Employer
of incorporation)
File Number)
Identification No.)
 
 
 
7315 Wisconsin Avenue, 1100 West, Bethesda, Maryland
 
20814
______________________________
(Address of principal executive offices)
 
___________
(Zip Code)
 
Registrant’s telephone number, including area code:
 
(240) 507-1300
 
Not Applicable
 
Former name or former address, if changed since last report
 
 
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.





Explanatory Note
 
As previously reported in its Current Report on Form 8-K filed on December 3, 2018 (the “Initial Form 8-K”), on November 30, 2018, Pebblebrook Hotel Trust (“Pebblebrook”) completed its previously announced merger with LaSalle Hotel Properties (“LaSalle”) pursuant to the Agreement and Plan of Merger dated September 6, 2018, as amended on September 18, 2018, by and among Pebblebrook, Pebblebrook Hotel, L.P. (“Pebblebrook OP”), Ping Merger Sub, LLC (“Merger Sub”), Ping Merger OP, LP (“Merger OP”), LaSalle and LaSalle Hotel Operating Partnership, L.P. (“LaSalle OP”) (the "Merger Agreement").

Pursuant to the Merger Agreement, on November 30, 2018, Merger OP merged with and into LaSalle OP with LaSalle OP surviving as a subsidiary of Pebblebrook OP (the “Partnership Merger”). Immediately following the Partnership Merger, LaSalle merged with and into Merger Sub with Merger Sub surviving as a wholly owned subsidiary of Pebblebrook (the “Company Merger” and, together with the Partnership Merger, the “Mergers”). On December 3, 2018, Merger Sub was liquidated and dissolved.

This Form 8-K/A amends the Initial Form 8-K to include the financial statements and pro forma financial information required by Items 9.01(a) and (b) of Form 8-K and should be read in conjunction with the Initial Form 8-K.
 
Item 9.01.          Financial Statements and Exhibits.
 
(a)           Financial Statements of Business Acquired.
 
The audited consolidated financial statements of LaSalle for each of the years ended December 31, 2017, December 31, 2016 and December 31, 2015 and the unaudited consolidated financial statements of LaSalle for the nine months ended September 30, 2018 and June 30, 2017, are filed herewith as Exhibits 99.1 and 99.2, respectively, and are incorporated herein by reference.
 
(b)           Pro Forma Financial Information
 
The unaudited pro forma condensed combined financial statements of Pebblebrook for the year ended December 31, 2017 and for the nine months ended September 30, 2018, giving effect to the Mergers, are filed herewith as Exhibit 99.3 and are incorporated herein by reference.
 
(d)            Exhibits.
 
Exhibit No.
 
Description
 
Consent of KPMG LLP, independent registered public accounting firm (in respect of LaSalle Hotel Properties)
 
Audited consolidated financial statements of LaSalle Hotel Properties for each of the years ended December 31, 2017, 2016 and 2015 (incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC by LaSalle Hotel Properties on February 20, 2018)
 
Unaudited consolidated financial statements of LaSalle Hotel Properties for the nine months ended September 30, 2018 and 2017 (incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 filed with the SEC by LaSalle Hotel Properties on November 1, 2018)
 
Unaudited pro forma condensed combined financial statements (and related notes) of Pebblebrook Hotel Trust for the year ended December 31, 2017 and the nine months ended September 30, 2018






SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
 
 
 
PEBBLEBROOK HOTEL TRUST
 
 
 
 
 
February 13, 2019
 
By:
 
/s/ Raymond D. Martz
 
 
 
 
 
 
 
 
 
Name: Raymond D. Martz
 
 
 
 
Title: Executive Vice President, Chief Financial Officer, Treasurer and Secretary



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Section 2: EX-23.1 (EXHIBIT 23.1)

Exhibit

Exhibit 23.1



Consent of Independent Registered Public Accounting Firm

 
We consent to the incorporation by reference in the registration statement (No. 333-216353) on Form S-3 and Form S-8 (Nos. 333-163638, 333-186324 and 333-214345) of Pebblebrook Hotel Trust of our report dated February 20, 2018, with respect to the consolidated balance sheets of LaSalle Hotel Properties as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedule III (collectively, the “consolidated financial statements”), which report is incorporated by reference in the Form 8-K/A of Pebblebrook Hotel Trust dated February 13, 2019.

/s/ KPMG LLP
 

Chicago, Illinois
February 13, 2019




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Section 3: EX-99.3 (EXHIBIT 99.3)

Exhibit


Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On November 30, 2018, Ping Merger OP, LP, which we refer to as Merger OP, a subsidiary of Pebblebrook Hotel, L.P., which we refer to as Pebblebrook OP, merged with and into LaSalle Hotel Operating Partnership, L.P., LaSalle's operating partnership, which we refer to as LaSalle OP, with LaSalle OP as the surviving partnership and a wholly owned subsidiary of Pebblebrook OP. We refer to this merger as the partnership merger. Immediately following the partnership merger, LaSalle Hotel Properties, which we refer to as LaSalle, merged with and into Ping Merger Sub, LLC, which we refer to as Merger Sub, a wholly owned subsidiary of Pebblebrook Hotel Trust, which we refer to as Pebblebrook, with Merger Sub surviving the merger as a wholly owned subsidiary of Pebblebrook. We refer to this merger as the Company merger and, together with the partnership merger, as the mergers. The mergers are part of the transactions contemplated by the Agreement and Plan of Merger dated September 6, 2018, as amended on September 18, 2018, by and among Pebblebrook, Pebblebrook OP, Merger Sub, Merger OP, LaSalle and LaSalle OP, which we refer to as merger agreement. On December 3, 2018, Merger Sub was liquidated and dissolved.
 
Pursuant to the terms and subject to the conditions set forth in the merger agreement, at the effective time of the Company merger, each outstanding common share of LaSalle, $.01 par value per share, which we refer to as LaSalle common shares, was exchanged for the merger consideration in accordance with elections made by holders of LaSalle common shares.

The consideration for the mergers included 61.4 million of Pebblebrook common shares issued to LaSalle common shareholders, 10.4 million of Pebblebrook preferred shares to LaSalle preferred shareholders, 0.1 million common units of Pebblebrook OP, which we refer to as OP Units, issued to LaSalle OP limited partners, and $1.7 billion in cash (which includes the cash paid for the termination fee pursuant to a prior merger agreement into which LaSalle and LaSalle had entered). The total value of the consideration consisted of the following, valuing each Pebblebrook common share and OP unit at $34.92, which was the closing price per Pebblebrook common share on November 30, 2018, the day of completion of the mergers, and valuing each Pebblebrook preferred share at fair value (in thousands):

 
 
Consideration

Common Shares
 
$
2,144,057

Preferred Shares
 
234,222

OP Units
 
4,665

Cash, net of cash acquired
 
1,719,150

Total consideration
 
$
4,102,094


Pebblebrook preliminarily allocated the purchase price consideration as follows (in thousands):

 
 
Allocation

Investment in hotel properties, net
 
$
4,179,201

Restricted cash
 
14,996

Hotel receivables (net of allowance for doubtful accounts of $245)
 
31,424

Prepaid expenses and other assets
 
57,392

Accounts payable and accrued expenses
 
(124,917
)
Deferred revenue
 
(26,290
)
Accrued interest
 
(2,354
)
Distribution payable
 
(4,116
)
Accumulated other comprehensive income (loss)
 
(23,242
)
Total consideration
 
$
4,102,094



 The following unaudited pro forma condensed combined financial statements are based on Pebblebrook's historical combined financial statements and LaSalle's historical combined financial statements, both of which have been adjusted in the statements below to give effect to the mergers. The unaudited pro forma condensed combined statements of operations for the

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nine months ended September 30, 2018 and the year ended December 31, 2017 give effect to the mergers as if they had occurred on January 1, 2017, the beginning of the earliest period presented. The unaudited pro forma condensed combined balance sheet as of September 30, 2018 gives effect to the mergers as if they had occurred on September 30, 2018. The historical combined financial statements of LaSalle have been adjusted to reflect certain reclassifications in order to conform to Pebblebrook's financial statement presentation.

The estimated fair values for the assets acquired and the liabilities assumed are preliminary and are subject to change during the measurement period as additional information related to the inputs and assumptions used in determining the fair value of the assets and liabilities becomes available and may result in variances to the amounts presented in the unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed statements of operations.

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting with Pebblebrook considered the accounting acquirer of LaSalle. Under the acquisition method of accounting, the purchase price is allocated to the underlying LaSalle tangible and intangible assets acquired and liabilities assumed based on their respective fair values, with the excess purchase price, if any, allocated to goodwill.

LaSalle sold four of LaSalle's hotel properties immediately prior to completion of the mergers. Due to the significance of the sales, LaSalle's consolidated balance sheet as of September 30, 2018 and historical consolidated statements of operations for the year ended December 31, 2017 and the nine months ended September 30, 2018 have been adjusted to reflect the sales of these hotels. For pro forma purposes, the sales are assumed to have occurred on September 30, 2018 for the unaudited pro forma condensed combined balance sheet and on January 1, 2017 for the unaudited pro forma condensed combined statements of operations.

Assumptions and estimates underlying the unaudited adjustments to the unaudited pro forma condensed combined financial statements are described in the accompanying notes. The historical combined financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are: (1) directly attributable to the mergers, (2) factually supportable and (3) expected to have a continuing impact on the operating results of Pebblebrook following the mergers. This information is presented for illustrative purposes only and is not indicative of the combined operating results or financial position that would have occurred if such transactions had occurred on the dates described above and in accordance with the assumptions described below, nor is it indicative of future operating results or financial position.

The unaudited pro forma combined financial statements, although helpful in illustrating the financial characteristics of Pebblebrook following the mergers under one set of assumptions, do not reflect the benefits of expected cost savings (or associated costs to achieve such savings), opportunities to earn additional revenue or other factors that may result as a consequence of the mergers and do not attempt to predict or suggest future results. Specifically, the unaudited pro forma condensed combined statements of operations exclude projected operating efficiencies and synergies expected to be achieved as a result of the mergers. The projected operating synergies are expected to substantially offset the expected increase in property tax reassessments of the acquired properties located in California, as required by California's Proposition 13. The unaudited pro forma combined financial statements also exclude the effects of costs associated with any restructuring or integration activities or asset dispositions resulting from the mergers as they are not all known currently, and to the extent they occur, are expected to be non-recurring and were not incurred as of the completion date of the mergers. However, such costs could affect Pebblebrook following the mergers in the period the costs are incurred or recorded.
 
The unaudited pro forma condensed combined statements of operations have been developed from and should be read in conjunction with:

the accompanying notes to the unaudited pro forma condensed combined financial statements;

the historical audited consolidated financial statements of Pebblebrook as of and for the year ended December 31, 2017 and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in its Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 22, 2018;

the historical unaudited consolidated financial statements of Pebblebrook as of and for the nine months ended September 30, 2018 and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, as filed with the SEC on November 1, 2018; 


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the historical audited consolidated financial statements of LaSalle as of and for the year ended December 31, 2017 and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in its Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 20, 2018; and 

the historical unaudited consolidated financial statements of LaSalle as of and for the nine months ended September 30, 2018 and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, as filed with the SEC on November 1, 2018.

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET 
SEPTEMBER 30, 2018 
(Dollars in thousands) 
 
 
Pebblebrook Historical(1)
 
LaSalle Historical(1)
 
LaSalle Adjustments (A)
 
LaSalle Adjusted
 
Pro Forma Adjustments
 
Pebblebrook Pro Forma
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment in hotel properties, net
 
$
2,437,679

 
$
3,272,555

 
$
(811,667
)
 
$
2,460,888

 
$
1,718,313

B
$
6,616,880

 
Investment in marketable securities
 
373,891

 

 

 

 
(373,891
)
C

 
Ground lease assets, net
 
28,593

 

 

 

 

 
28,593

 
Cash and cash equivalents
 
18,026

 
248,164

 
792,509

 
1,040,673

 
(681,280
)
D
377,419

 
Restricted cash reserves
 
8,485

 
14,996

 

 
14,996

 

 
23,481

 
Hotel and other receivables, net
 
36,317

 
41,732

 
(10,308
)
 
31,424

 

 
67,741

 
Prepaid expense and other assets
 
173,472

 
82,004

 
(15,156
)
 
66,848

 
(9,456
)
E
230,864

 
   Total assets
 
$
3,076,463

 
$
3,659,451

 
$
(44,622
)
 
$
3,614,829

 
$
653,686

 
$
7,344,978

 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 

 
 
 

 
Unsecured revolving credit facilities
 
$
394,000

 
$

 
$

 
$

 
$
(30,000
)
F
$
364,000

 
Term Loans, net
 
771,087

 
853,634

 

 
853,634

 
784,015

G
2,408,736

 
Senior unsecured notes, net
 
99,445

 

 

 

 

 
99,445

 
Mortgage debt, net
 
68,731

 
224,806

 

 
224,806

 
(224,806
)
H
68,731

 
Accounts payable and accrued expenses
 
147,564

 
152,183

 
(16,418
)
 
135,765

 
125,313

I
408,642

 
Advance deposits
 
25,547

 
33,371

 
(7,081
)
 
26,290

 

 
51,837

 
Accrued interest
 
3,459

 
2,354

 

 
2,354

 

 
5,813

 
Distribution payable
 
31,647

 
4,116

 

 
4,116

 

 
35,763

 
Deferred deposit on merger transaction
 

 
112,000

 

 
112,000

 
(112,000
)
J

 
   Total liabilities
 
1,541,480

 
1,382,464

 
(23,499
)
 
1,358,965

 
542,522

 
3,442,967

 
Commitments and contingencies
 
 
 
 
 
 
 

 
 
 

 
Shareholders' equity:
 
 
 
 
 
 
 

 
 
 

 
Preferred shares
 
100

 
104

 

 
104

 

 
204

 
Common shares
 
689

 
1,132

 

 
1,132

 
(518
)
K
1,303

 
Additional paid-in capital
 
1,686,530

 
2,696,646

 
(47,838
)
 
2,648,808

 
(271,143
)
K
4,064,195

 
Accumulated other comprehensive income (loss)
 
12,356

 
23,242

 

 
23,242

 

 
35,598

 
Distributions in excess of retained earnings
 
(170,284
)
 
(447,478
)
 
26,715

 
(420,763
)
 
381,501

L
(209,546
)
 
   Total shareholders' equity
 
1,529,391

 
2,273,646

 
(21,123
)
 
2,252,523

 
109,840

 
3,891,754

 
Non-controlling interests
 
5,592

 
3,341

 

 
3,341

 
1,324

 
10,257

 
   Total equity
 
1,534,983

 
2,276,987

 
(21,123
)
 
2,255,864

 
111,164

 
3,902,011

 
   Total liabilities and equity
 
$
3,076,463

 
$
3,659,451

 
$
(44,622
)
 
$
3,614,829

 
$
653,686

 
$
7,344,978

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)The historical financial information for Pebblebrook and LaSalle is derived from their respective Quarterly Reports on Form 10-Q for the nine months ended September 30, 2018 filed with the SEC. Certain historical LaSalle amounts have been reclassified to conform to Pebblebrook's financial statement presentation.

See accompanying notes to the unaudited pro forma condensed combined financial statements

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS 
FOR THE YEAR ENDED DECEMBER 31, 2017 
(Dollars in thousands, except per share data) 

 
 
Pebblebrook Historical(1)
 
LaSalle Historical(1)
 
LaSalle Adjustments (A)
 
LaSalle Adjusted
 
Pro Forma Adjustments
 
Pebblebrook Pro Forma
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Room
 
$
532,288

 
$
791,287

 
$
(155,589
)
 
$
635,698

 
$

 
$
1,167,986

 
  Food and beverage
 
182,737

 
214,280

 
(14,063
)
 
$
200,217

 

 
382,954

 
  Other operating
 
54,292

 
99,248

 
(17,205
)
 
$
82,043

 

 
136,335

 
       Total revenues
 
769,317

 
1,104,815

 
(186,857
)
 
917,958

 

 
1,687,275

 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Room
 
134,068

 
214,843

 
(57,916
)
 
156,927

 

 
290,995

 
  Food and beverage
 
123,213

 
154,371

 
(15,231
)
 
139,140

 

 
262,353

 
  Other direct and indirect
 
210,692

 
289,996

 
(49,577
)
 
240,419

 

 
451,111

 
       Total hotel operating expenses
 
467,973

 
659,210

 
(122,724
)
 
536,486

 

 
1,004,459

 
Depreciation and amortization
 
102,290

 
178,374

 
(36,765
)
 
141,609

 
12,508

M
256,407

 
Real estate taxes, personal property taxes, property insurance, and ground rent
 
48,500

 
77,956

 
(13,741
)
 
64,215

 
10,000

N
122,715

 
General and administrative
 
24,048

 
39,301

 
(365
)
 
38,936

 

 
62,984

 
Impairment and other losses
 
6,003

 

 

 

 

 
6,003

 
  Total operating expenses
 
648,814

 
954,841

 
(173,595
)
 
781,246

 
22,508

 
1,452,568

 
Operating income (loss)
 
120,503

 
149,974

 
(13,262
)
 
136,712

 
(22,508
)
 
234,707

 
  Interest income
 
97

 
2,568

 

 
2,568

 

 
2,665

 
  Interest expense
 
(37,299
)
 
(39,366
)
 

 
(39,366
)
 
(34,076
)
P
(110,741
)
 
  Other
 
2,265

 
(1,706
)
 

 
(1,706
)
 

 
559

 
  Gain on sale of hotel properties
 
14,877

 
85,545

 

 
85,545

 

 
100,422

 
  Equity in earnings (loss) of joint venture
 

 

 

 

 

 

 
Income (loss) before income taxes
 
100,443

 
197,015

 
(13,262
)
 
183,753

 
(56,584
)
 
227,612

 
Income tax (expense) benefit
 
(181
)
 
(1,699
)
 
44

 
(1,655
)
 

 
(1,836
)
 
Net income (loss)
 
100,262

 
195,316

 
(13,218
)
 
182,098

 
(56,584
)
 
225,776

 
Net income (loss) attributable to non-controlling interests
 
374

 
282

 

 
282

 

 
656

 
Net income (loss) attributable to the Company
 
99,888

 
195,034

 
(13,218
)
 
181,816

 
(56,584
)
 
225,120

 
Distribution to preferred shareholders
 
(16,094
)
 
(18,024
)
 

 
(18,024
)
 

 
(34,118
)
 
Issuance costs of redeemed preferred shares
 

 
(2,401
)
 

 
(2,401
)
 

 
(2,401
)
 
Net income (loss) attributable to common shareholders
 
$
83,794

 
$
174,609

 
$
(13,218
)
 
$
161,391

 
$
(56,584
)
 
$
188,601

 
Net income (loss) per share available to common shareholders, basic
 
$
1.20

 
$
1.54

 
$
(0.12
)
 
$
1.42

 
$
1.10

 
$
1.43

R
Net income (loss) per share available to common shareholders, diluted
 
$
1.19

 
$
1.54

 
$
(0.12
)
 
$
1.42

 
$
1.10

 
$
1.42

R
Weighted-average number of common shareholders, basic
 
69,591,973

 
112,975,329

 
112,975,329

 
112,975,329

 
(51,576,225
)
 
130,991,077

R
Weighted-average number of common shares, diluted
 
69,984,837

 
113,364,092

 
113,364,092

 
113,364,092

 
(51,576,225
)
 
131,772,704

R
(1)The historical financial information for Pebblebrook and LaSalle is derived from their respective Annual Reports on Form 10-K for the year ended December 31, 2017 filed with the SEC. Certain historical LaSalle amounts have been reclassified to conform to Pebblebrook's financial statement presentation.

See accompanying notes to the unaudited pro forma condensed combined financial statements

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 
(Dollars in thousands, except per share data) 
 
 
Pebblebrook Historical(1)
 
LaSalle Historical(1)
 
LaSalle Adjustments (A)
 
LaSalle Adjusted
 
Pro Forma Adjustments
 
Pebblebrook Pro Forma
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Room
 
$
411,396

 
$
589,371

 
$
(117,352
)
 
$
472,019

 
$

 
$
883,415

 
  Food and beverage
 
136,919

 
151,821

 
(11,093
)
 
$
140,728

 

 
277,647

 
  Other operating
 
44,721

 
84,438

 
(13,740
)
 
$
70,698

 

 
115,419

 
       Total revenues
 
593,036

 
825,630

 
(142,185
)
 
683,445

 

 
1,276,481

 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Room
 
99,540

 
162,418

 
(45,269
)
 
117,149

 

 
216,689

 
  Food and beverage
 
93,611

 
111,655

 
(11,683
)
 
99,972

 

 
193,583

 
  Other direct and indirect
 
160,663

 
214,878

 
(37,304
)
 
177,574

 

 
338,237

 
       Total hotel operating expenses
 
353,814

 
488,951

 
(94,256
)
 
394,695

 

 
748,509

 
Depreciation and amortization
 
74,229

 
138,490

 
(25,337
)
 
113,153

 
2,296

M
189,678

 
Real estate taxes, personal property taxes, property insurance, and ground rent
 
35,809

 
62,800

 
(11,471
)
 
51,329

 
7,500

N
94,638

 
General and administrative
 
21,465

 
44,904

 
(187
)
 
44,717

 
(26,695
)
O
39,487

 
Impairment loss
 
1,452

 

 

 

 

 
1,452

 
Gain on insurance settlement
 
(13,954
)
 

 

 

 

 
(13,954
)
 
  Total operating expenses
 
472,815

 
735,145

 
(131,251
)
 
603,894

 
(16,899
)
 
1,059,810

 
Operating income (loss)
 
120,221

 
90,485

 
(10,934
)
 
79,551

 
16,899

 
216,671

 
  Interest income
 
162

 
2,073

 

 
2,073

 

 
2,235

 
  Interest expense
 
(33,274
)
 
(31,205
)
 

 
(31,205
)
 
(6,134
)
P
(70,613
)
 
  Other
 
29,247

 

 

 

 
(29,247
)
Q

 
  Merger termination fee
 

 
(112,000
)
 

 
(112,000
)
 
112,000

Q

 
  Gain on sale of hotel properties
 

 

 

 

 

 

 
  Equity in earnings (loss) of joint venture
 

 

 

 

 

 

 
Income (loss) before income taxes
 
116,356

 
(50,647
)
 
(10,934
)
 
(61,581
)
 
93,518

 
148,293

 
Income tax (expense) benefit
 
(3,628
)
 
(3,816
)
 
52

 
(3,764
)
 

 
(7,392
)
 
Net income (loss)
 
112,728

 
(54,463
)
 
(10,882
)
 
(65,345
)
 
93,518

 
140,901

 
Net income (loss) attributable to non-controlling interests
 
424

 
122

 

 
122

 

 
546

 
Net income (loss) attributable to the Company
 
112,304

 
(54,585
)
 
(10,882
)
 
(65,467
)
 
93,518

 
140,355

 
Distribution to preferred shareholders
 
(12,070
)
 
(12,347
)
 

 
(12,347
)
 

 
(24,417
)
 
Issuance costs of redeemed preferred shares
 

 

 

 

 

 

 
Net income (loss) attributable to common shareholders
 
$
100,234

 
$
(66,932
)
 
$
(10,882
)
 
$
(77,814
)
 
$
93,518

 
$
115,938

 
Net income (loss) per share available to common shareholders, basic
 
$
1.45

 
$
(0.61
)
 
$
(0.10
)
 
$
(0.70
)
 
$
(1.89
)
 
$
0.89

R
Net income (loss) per share available to common shareholders, diluted
 
$
1.44

 
$
(0.61
)
 
$
(0.10
)
 
$
(0.70
)
 
$
(1.89
)
 
$
0.88

R
Weighted-average number of common shareholders, basic
 
68,900,402

 
110,793,969

 
110,793,969

 
110,793,969

 
(49,394,865
)
 
130,299,506

R
Weighted-average number of common shares, diluted
 
69,267,098

 
110,793,969

 
110,793,969

 
110,793,969

 
(49,394,865
)
 
130,666,202

R
(1)The historical financial information for Pebblebrook and LaSalle is derived from their respective Quarterly Reports on Form 10-Q for the quarter ended September 30, 2018 filed with the SEC. Certain historical LaSalle amounts have been reclassified to conform to Pebblebrook's financial statement presentation.

See accompanying notes to the unaudited pro forma condensed combined financial statements

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(in thousands unless otherwise noted)

1. Overview

For purposes of the unaudited pro forma combined financial statements, which we refer to as the pro forma financial statements, we have used a total purchase price for the mergers of $4.1 billion, which consists primarily of Pebblebrook common and preferred shares issued and cash paid as consideration. Under the terms of the merger agreement, LaSalle shareholders were permitted to elect to receive for each share they owned either (i) 0.92 Pebblebrook common share or (ii) $37.80 in cash. A maximum of 30% of the outstanding LaSalle common shares could receive cash and cash elections were subject to pro rata cutbacks if holders of more than 30% of LaSalle common shares elected cash. The maximum number of shares eligible to receive cash elected to receive cash. New Pebblebrook preferred shares were issued to replace LaSalle preferred shares on a one-for-one basis.

            The pro forma financial statements have been prepared by applying the acquisition method of accounting under U.S. GAAP, which we refer to as acquisition accounting, with Pebblebrook as the acquiring entity. Accordingly, the total purchase price was allocated to the LaSalle assets acquired and the LaSalle liabilities assumed based on their respective fair values, as further described below.

            To the extent identified, certain reclassifications have been reflected in the pro forma financial statements to conform LaSalle's financial statement presentation to that of Pebblebrook. However, the pro forma financial statements may not reflect all the adjustments necessary to conform LaSalle's accounting policies to those of Pebblebrook due to limitations on the availability of information as of the date of this filing. On the unaudited pro forma condensed combined balance sheet as of September 30, 2018, property under development was reclassified to investment in hotel properties, revolving credit facility debt issuance costs and deferred taxes were reclassified to prepaid expenses and other assets and treasury shares were reclassified to additional paid-in capital. On the unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2018 and year ended December 31, 2017, the other operating department revenue was reclassified to other revenue, other direct expenses and other indirect expenses was reclassified to other direct and indirect expenses, ground rent was reclassified to real estate, property taxes and ground rent and merger costs and other were reclassified to general and administrative expenses.

            The pro forma adjustments represent Pebblebrook management's estimates based on information available as of the date of this filing and are subject to change as additional information becomes available and additional analyses are performed. The pro forma financial statements do not reflect the impact of possible revenue or earnings enhancements, cost savings from operating efficiencies or synergies, or asset dispositions. Also, the pro forma financial statements do not reflect possible adjustments related to restructuring or integration activities that have yet to be determined, including transaction or other costs following the mergers that are not expected to have a continuing impact.

            The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and for the nine months ended September 30, 2018 combine the historical combined statements of operations of Pebblebrook and LaSalle, giving effect to the mergers as if they occurred on January 1, 2017, the beginning of the earliest period presented. The unaudited pro forma condensed combined balance sheet combines the historical consolidated balance sheets of Pebblebrook and LaSalle as of September 30, 2018, giving effect to the mergers as if they had occurred on September 30, 2018.

A.    LaSalle Significant Disposition

           LaSalle sold four of its hotel properties immediately prior to closing of the mergers for an aggregate sale price of $820.8 million. Due to the significance of the sales, LaSalle's historical consolidated balance sheet as of September 30, 2018 has been adjusted to reflect the sales as if they had occurred on September 30, 2018 and LaSalle's historical statement of operations for the nine months ended September 30, 2018 and year ended December 31, 2017 have been adjusted to reflect the sales as if they had occurred on January 1, 2017.

2. Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet

     The unaudited pro forma condensed combined balance sheet as of September 30, 2018 reflects the following adjustments:

B.    Investment in Hotel Properties, Net


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            The hotel property assets acquired by Pebblebrook through the mergers are reflected in the unaudited pro forma condensed combined balance sheet of LaSalle based on a preliminary fair value. The preliminary fair value was derived by applying a capitalization rate to estimated net operating income and other market data. The hotel property assets acquired generally consist of land and improvements, buildings and improvements, and furniture, fixtures and equipment. The adjustments reflected in the unaudited pro forma condensed combined balance sheet represent the differences between the preliminary fair value of the hotel property assets acquired by Pebblebrook through the mergers, and LaSalle's historical balances, which are presented as follows (in thousands):

 
 
Preliminary Fair Value
 
Less: LaSalle Historical (Adjusted)
 
Pro Forma Adjustments
Land and improvements
 
$
835,840

 
$
388,539

 
$
447,301

Buildings and improvements
 
3,050,817

 
2,646,476

 
404,341

Furniture, fixtures and equipment
 
292,544

 
739,126

 
(446,582
)
Property under development
 

 
18,074

 
(18,074
)
 
 
4,179,201

 
3,792,215

 
386,986

Accumulated depreciation
 

 
(1,331,327
)
 
1,331,327

Investment in hotel properties, net
 
$
4,179,201

 
$
2,460,888

 
$
1,718,313



       The fair value of the assets acquired was estimated by using market data and other information available and making numerous estimates and assumptions. LaSalle's historical accumulated depreciation was eliminated since the assets are recognized and presented at fair value.

C.    Investment in Marketable Securities
        
Pebblebrook's investment in marketable securities represents an investment in LaSalle common shares. Upon completion of the mergers, such shares were cancelled and the $373.9 million in investment in marketable securities was eliminated.

D.    Cash and Cash Equivalents
        
Cash and cash equivalents is adjusted to reflect the use of cash to repay the principal balance on the LaSalle term loans and mortgage loan.

E.    Prepaid Expenses and Other Assets

            Pebblebrook did not assume any debt in the mergers and therefore the unamortized debt issuance costs of $2.5 million related to LaSalle's credit facility have been eliminated.
       
 Included in prepaid expenses and other assets on the LaSalle historical balance sheet was $7.0 million in unamortized deferred lease assets and straight line rent receivables related to tenant leases. A fair value adjustment has been made to eliminate these historical balances. The adjustments are summarized below (in thousands):

Unamortized debt issuance costs
 
$
2,456

Unamortized deferred lease assets and straight line rent
 
7,000

   Adjustment to prepaid expense and other assets
 
$
9,456



F.    Unsecured Revolving Credit Facilities
        
The Adjustment reflects a portion of the new term loan used to repay the credit facility.



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G.    Term Loans, Net

            The LaSalle historical balance sheet included the principal balance on term loans of $855.0 million net of $1.4 million of unamortized debt issuance costs. Pebblebrook did not assume the LaSalle term loans and therefore an adjustment has been made to eliminate the term loan. As of September 30, 2018, Pebblebrook had outstanding a $100.0 million delayed draw term loan, which funded a portion of the payment of the termination fee to an affiliate of The Blackstone Group L.P. on behalf of LaSalle upon the termination of LaSalle's previous merger agreement. This delayed draw term loan was repaid in connection with completion of the merger closings. An adjustment has been made to reflect the repayment of the delayed draw term loan. Pebblebrook entered into a new $1.75 billion term loan, which we refer to as the new term loan, to fund the cash requirements related to the mergers. An adjustment has been made to reflect the new term loan and associated issuance costs. The adjustments are summarized below (in thousands):

Pebblebrook new term loan
 
$
1,750,000

Issuance costs on the new term loan
 
(12,351
)
Less: Repayment of delayed draw term loan
 
(100,000
)
Less: LaSalle term loans—historical basis
 
(855,000
)
Less: LaSalle unamortized debt issuance costs on term loans—historical basis
 
1,366

   Adjustment to term loans
 
$
784,015



H.    Mortgage Debt, Net

            Pebblebrook paid off LaSalle's mortgage debt in connection with completion of the mergers. An adjustment has been made to reflect the repayment of the mortgage debt of $225.0 million and write-off of the $0.2 million in unamortized issuance costs.


I.    Accounts Payable and Accrued Expenses
     
Non-recurring transaction costs include those costs directly attributable to the mergers paid by Pebblebrook or LaSalle. These transaction costs, consisting primarily of severance, transfer taxes, fees for financial advisors, commitment fees paid for the bridge loan, and legal, accounting, tax and other professional services, were approximately $150.6 million. An adjustment is made to accounts payable and accrued expenses for the $123.9 million of transactions costs that had not been paid or accrued as of September 30, 2018. These costs are non-recurring in nature and directly related to the mergers and, therefore, are reflected as a reduction to retained earnings and not included in the unaudited pro forma condensed combined statements of operations.

        The debt issuance costs of approximately $12.4 million are the costs paid by Pebblebrook that are directly attributable to the new term loan.

        The straight-lining of rent pursuant to the underlying ground leases associated with the hotel properties acquired pursuant to the mergers commenced upon completion of the mergers. Therefore, the carrying value of straight-line rent included on LaSalle's historical balance sheet has been eliminated. The adjustments are summarized below (in thousands):

Non-recurring transaction costs
 
$
123,914

Debt issuance costs
 
12,351

Ground lease straight-line rent
 
(10,952
)
   Adjustment to accounts payable and other liabilities
 
$
125,313


J.    Deferred Deposit on Merger Transaction

The LaSalle historical balance sheet as of September 30, 2018 included an accrual for the merger termination fee due to an affiliate of The Blackstone Group, L.P. This merger termination fee was paid by Pebblebrook.

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K.    Common Shares and Additional Paid-in Capital
        
The pro forma adjustment represents the issuance of Pebblebrook common shares with a par value of $0.01 per share and a market price per share $34.92, which was the closing price per Pebblebrook common share as of the close of business on November 30, 2018, the day of completion of the mergers. Upon completion of the mergers, 66.8% of LaSalle common shares each received 0.92 Pebblebrook common share and 33.2% of LaSalle common shares each received $37.80 in cash. The adjustments are summarized below (in thousands except share data):

Total LaSalle common shares converted to Pebblebrook common shares
 
67,005

Exchange ratio
 
0.92

Calculated Pebblebrook common shares to be issued
 
61,645

Less: Fractional shares
 
(246
)
Pebblebrook common shares issued
 
61,399

Par value per Pebblebrook common share
 
$
0.01

Par value of Pebblebrook common shares issued
 
$
614

Less: Par value of LaSalle common shares—historical basis
 
(1,132
)
Adjustment to Pebblebrook common shares
 
$
(518
)
Pebblebrook common shares issued
 
61,399

Additional paid-in capital per share ($34.92 less $0.01 par value)
 
$
34.91

Additional paid-in capital of Pebblebrook common shares issued
 
$
2,143,443

Additional paid-in capital of LaSalle preferred shares converted to Pebblebrook preferred shares
 
234,222

Total common and preferred share additional paid-in capital on shared issued
 
$
2,377,665

Less: LaSalle additional paid-in capital—historical basis
 
(2,648,808
)
Adjustment to additional paid-in capital
 
$
(271,143
)


L.    Retained Earnings (Deficit)

            Represents the elimination of LaSalle's distributions in excess of retained earnings of $447.5 million as of September 30, 2018, an adjustment to increase Pebblebrook retained earnings to reflect the LaSalle shares owned by Pebblebrook to market value based on the share price on the merger date, and an adjustment of $123.9 million to decrease retained earnings for non-recurring transaction costs directly attributable to the mergers that had not yet been expensed in the historical consolidated statements of operations or accrued in the historical consolidated balance sheets, which have been used as the starting point for the pro forma financial statements.

3. Adjustments to the Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 2017 and the nine months ended September 30, 2018

            The historical amounts include Pebblebrook's and LaSalle's actual operating results for the periods presented, as filed with the SEC on their respective Forms 10-K and Forms 10-Q (reclassified as set forth under Note 1 above). The pro forma adjustments to the historical amounts are presented in the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and the nine months ended September 30, 2018, assuming the mergers occurred on January 1, 2017. Noted below are the explanations for the adjustments included in the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and the nine months ended September 30, 2018.

M.    Depreciation and Amortization
       
 For purposes of the unaudited pro forma condensed combined statements of operations, depreciation and amortization expense is calculated using the straight-line method over the estimated useful lives of 40 years for buildings, 15 years for building improvements and five years for furniture fixture and equipment. As Pebblebrook would have commenced depreciation and amortization on January 1, 2017, the depreciation and amortization expense included in Pebblebrook's historical financial statements has been eliminated and an adjustment has been made to reflect the depreciation and

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amortization expense that Pebblebrook would have recognized if the mergers had been completed as of January 1, 2017. The adjustments are summarized below (in thousands):

 
 
Nine months ended September 30, 2018
 
Year ended December 31, 2017
Depreciation and amortization
 
$
115,451

 
$
154,118

Less: Elimination of LaSalle's depreciation and amortization—adjusted historical
 
(113,155
)
 
(141,610
)
 
 
$
2,296

 
$
12,508



N.    Property Taxes
        
The estimated increase in property taxes is primarily due to estimated reassessments of LaSalle's California hotel properties with estimated fair value exceeding historical property tax basis pursuant to Proposition 13. The adjustment was calculated based on multiplying property tax rates by the difference between the estimated fair value of each hotel property and its historical property tax basis.

O.    Transaction and Pursuit Costs
 
Represents the elimination of $26.7 million in transaction costs incurred by LaSalle and Pebblebrook during the nine months ended September 30, 2018. These costs are directly related to the mergers and will not have a continuing impact on the operating results of Pebblebrook.

P.    Interest Expense
        
The pro forma adjustment to interest expense is related to amortization of debt issuance costs related to the mergers which are amortized over the remaining term of the debt and the elimination of LaSalle's historic amortization of debt issuance costs.

 
 
Nine months ended September 30, 2018
 
Year ended December 31, 2017
Interest Expense - new term loan
 
$
35,486

 
$
70,972

Amortization of debt issuance costs - new term loan
 
1,853

 
2,470

Less: LaSalle's interest expense-historical
 
(31,205
)
 
(39,366
)
   Adjustment to interest expense
 
$
6,134

 
$
34,076


     
Q.    Other and Merger Termination Fee

            The pro forma adjustment to other is related to the elimination of the $29.2 million gain on investment in marketable securities and dividend income from marketable securities recorded on Pebblebrook's historical statement of operations for the period ended September 30, 2018. The gain and dividend from marketable securities is directly related to the mergers and will not have a continuing impact on the operating results of Pebblebrook.

The LaSalle historical statement of operations for the period ended September 30, 2018 included an expense for the merger termination fee due to an affiliate of The Blackstone Group, L.P. This merger termination fee was paid by Pebblebrook and is directly related to the mergers and will not have a continuing impact on the operating results of Pebblebrook. An adjustment has been made to eliminate the merger termination fee.

R.    Earnings (Loss) Per Share


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            The unaudited pro forma adjustment to shares outstanding used in the calculation of basic and diluted earnings per share are based on the combined basic and diluted weighted-average number of shares outstanding, after giving effect to the exchange ratio, as follows (in thousands, except per share data):

 
 
Nine months ended September 30, 2018
 
Year ended December 31, 2017
Numerator:
 
 
 
 
Net income (loss) attributable to common shareholders
 
$
115,938

 
$
188,601

Dividends paid on unvested restricted shares
 
(428
)
 
(850
)
Undistributed earnings attributable to unvested restricted shares
 
(67
)
 

Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
 
$
115,443

 
$
187,751

Denominator:
 
 
 
 
Pebblebrook weighted-average number of common shares, basic
 
68,900,402

 
69,591,973

Pebblebrook common shares to be issued to LaSalle shareholders
 
61,399,104

 
61,399,104

Pro forma weighted-average common shares outstanding, basic
 
130,299,506

 
130,991,077

Compensation-related shares
 
366,696

 
781,627

Pro forma weighted-average number of common shares, diluted
 
130,666,202

 
131,772,704

Net income (loss) per share available to common shareholders, basic
 
$
0.89

 
$
1.43

Net income (loss) per share available to common shareholder, diluted
 
$
0.88

 
$
1.42






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