BETHESDA, MD—LaSalle Hotel Properties posted a RevPAR of 0.8% in the third quarter—or at least it would have if it hadn't been for one-off difficulties at two of its Manhattan properties, Park Central New York and WestHouse.

For the third quarter, the REIT provided two sets of figures for shareholders. One set showed how it really performed. The second, how it should have performed, or rather, its "normalized" financial metrics. For shareholders the two sets numbers are supposed to be of some comfort: the real numbers are what they are getting but as LaSalle is trying to make clear, this was a one-off event due to what could well be described as "dirty tricks."

The one-off event in question was in fact a series of alleged health and safety violations at two of its properties in Manhattan: Park Central New York and WestHouse—properties typically frequented by upscale clientele. To digress with one example, the WestHouse, which opened in 2013, was designed by Jeffrey Beers International a la 1920s Art Deco style. The REIT describes it as a blend of "the refined elements of an upscale Upper Westside townhouse with the amenities and services of a luxury boutique hotel."

How did these accusations—which LaSalle says were false and subsequent testing showed that they were false—come about?

LaSalle gives a short hand explanation in its earnings announcement, but CEO Mike Barnello went into greater detail during the earnings call. The trouble appeared to have begun when LaSalle transitioned the management company, Kimpton Hotels & Restaurants, at three of its hotels in San Francisco in July.

During the earnings call, Barnello said that because of InterContinental Hotels Group's acquisition of Kimpton Hotels & Restaurants acquisition at the start of 2015, "the local union in San Francisco believe[d] it has a right to organize the Kimpton managed hotels in San Francisco by use of car check neutrality," according to a transcript of the call provided by Seeking Alpha.

Since Kimpton was no longer managing the three hotels in San Francisco, the union retaliated against LaSalle at two hotels in New York City, Barnello said, according to the transcript.

In late August, the hotel workers' union claimed there were health and safety violations in the New York City hotels.

This is what LaSalle wrote about the allegations in its earnings press release:

These allegations were a targeted attack against the company. Despite the fact that neither hotel has received any New York City or New York State health or safety violations during or since the time the allegations began, both hotels had no choice but to test against all claims. In order to adequately test for these alleged issues, the Park Central New York and WestHouse were forced to close many of their available rooms during the final six weeks of the third quarter and for the first three weeks of the fourth quarter. As a result, during September, both hotels combined ran 14.5% occupancy and room revenue per available room at the two hotels decreased by 85.1%, compared to the prior year.

LaSalle said the conflict is resolved and the hotels are back to normal operations. However, the interruption decreased RevPAR by 320 basis points, reduced hotel EBITDA margin by 125 basis points, displaced $7.2 million of hotel EBITDA, and lowered adjusted FFO by $4.2 million, which was partially offset by income tax savings.

LaSalle also incurred $4.6 million in one-time costs in testing, including guest relocation, clean up, legal, and payroll. LaSalle's third quarter results would have been within its previously disclosed third quarter outlook range for adjusted EBITDA without this event, it said.

Since the disruption continued into October, LaSalle's fourth quarter results will also be impacted, it warned.

In case you are wondering why you didn't hear more about this event as it unfolded, Barnello admitted the REIT didn't disclose it until a solution was apparent. That solution, reading between the lines, was a settlement with the union, which means the REIT will not be counter suing and is not expecting similar situations to unfold.

LaSalle did not provide the name of the union.

A press release published in July 2015 by UNITE HERE Local 2 noted that LaSalle Hotel Properties, Pebblebrook Hotel Trust and InterContinental Hotels Group all had moved recently to transfer management of seven San Francisco properties away from the Kimpton Hotels portfolio. It called the transfers in the release "extraordinary steps to evade contractual commitments pertaining to hotel employee organizing rights in San Francisco and said that it "has created a climate of uncertainty and disruption at seven prominent San Francisco hotel properties."

According to UNITE HERE Local 2, it had requested in June that IHG uphold its contractual commitment to remain neutral in the union organizing drives at the seven hotels it acquired through its Kimpton purchase.

According to UNITE HERE's press release:

Three weeks after sending the request, Local 2 learned that operation of these hotels -- three of which are owned by LaSalle and four by Pebblebrook -- was to be transferred to new management companies…..

The owners previously had expressed glowing satisfaction with Kimpton's management. LaSalle COO, Alfred Young complimented the management of the San Francisco Monaco in 2014, stating "Kimpton has done a great job working with us." Even as recently as June 11, Pebblebrook CEO Jon Bortz reaffirmed his company's relationship with Kimpton, stating "we're thrilled to continue to grow our successful relationship with Kimpton Hotels."

"The fact that LaSalle, Pebblebrook, and InterContinental provided such belated notice of the changes, and that these changes have been taken without an accurate evaluation of the financial consequences, should lead analysts to ask whether the companies have been sufficiently transparent in their dealings and whether they have acted in shareholders' best interests," Local 2 president Anand Singh said in a prepared statement.

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GlobeSt.com contacted LaSalle Hotel Properties and UNITED HERE for comment. We will update the story when/if a responses are received.

Instant Insights /

Alleged Dirty Union Tricks Derailed LaSalle's Q3 RevPAR

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