Palogic Urges Pebblebrook To Sell As It Backs Off Board Additions

A Dallas-based investment advisory firm is backing off from a fight for a seat on the board of one of the nation's largest hotel REITs while still encouraging the company to consider a sale.

Palogic Value Fund LP and Palogic Value Management LP withdrew two director nominees in a letter sent Tuesday to the Pebblebrook Hotel Trust board. The move came after Pebblebrook added Directors Bill Bayless and Nina P. Jones in a board refresh earlier this month. 

Palogic praised the additions and called the creation of a tenure-based framework for board changes a positive step. However, the investment firm said it had “significant concerns” about the REIT’s ability to increase its net asset value and encouraged the board to sell the company as its stock is trading at a 50% discount to NAV.

Since highlighting the discount to NAV in 2021, Pebblebrook has reduced the share count by around 14%, Palogic wrote in its letter. The REIT’s cash payouts of one cent per quarter are more like a standard payout than an accelerated capital return, the letter stated.

“Given the persistent concerns raised above, we wonder if Pebblebrook’s strategy – focused on full-service, high-barrier to entry coastal markets – would ultimately be better suited for a buyer with a lower cost of capital,” Palogic wrote in its letter. “The public hotel REIT space has been unforgiving.”

Palogic also expressed concern with Pebblebrook's executive compensation structure. It noted that Pebblebrook CEO Jon E. Bortz has received nearly $84M in compensation since the company went public in 2009, while the REIT’s co-presidents, Raymond D. Martz and Thomas C. Fisher, each received nearly $40M during that period. 

"In our opinion, it is difficult for unaffiliated shareholders to maintain confidence when management is afforded a compensation structure that has not translated into value for the owners of the Company," Palogic wrote in its letter.

The firm also encouraged Pebblebrook’s new board to address several questions as part of its strategic discussion:

• Why does the NAV gap exist?
• If NAV accretion is a key priority, why is management not more aggressively pursuing a strategy of acquiring shares?
• What assets could be readily sold to accelerate NAV accretion?
• Would shareholders benefit more from a sale of the entire company to provide certainty and realize NAV?

Pebblebrook did not immediately respond to Bisnow’s request for comment on the letter. The REIT largely focuses on high-end urban and resort hotels. It has around 11,000 rooms at 44 hotels in 13 markets, according to Pebblebrook's website.

Pebblebrook refinanced its near-term debt maturities last week through a $450M senior unsecured term loan and restored its senior unsecured revolving credit facility to its full capacity of $650M through October 2029.

Veris Residential is another multifamily REIT that was publicly encouraged to sell the company. Erez Asset Management, which owns around 5% of Veris, recently called for a review of strategic alternatives. 

Pebblebrook was among the hotel REITs that reduced their guidance for earnings after the first quarter last year due to a downturn in demand for the hospitality sector.