Good day and welcome to the Pebblebrook Hotel Trust second quarter 2012 earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Raymond Martz, Chief Financial Officer. Please go ahead sir.

Thank you, Cynthia. Good morning everyone. Welcome to our second quarter 2012 earnings call webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. But before we start, let me remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. These statements are subject to numerous risk and uncertainties as described in our 10-K for 2011 and our other SEC filings that could cause results to differ materially from those expressed in or implied by, our comments. Forward looking statements that we make today are effective only as of today August 3, 2012 and we undertake no duty to update them later. You can find our SEC reports and our earnings release which contain reconciliations of non-GAAP financial measures we use on our website at www.pebblebrookhotels.com. Okay. The good news is we have another great quarter to talk about. Second-quarter performance was better than we expected on almost all of our operating metrics, pro forma RevPAR for the total portfolio on 12.9% to $186.32. This The exceeded our outlook for RevPAR growth of 10% to 12% primarily due to better-than-expected performance in many of our recently renovated hotels, the July 4 holiday shift that benefitted the last week of June and continued strong transient demand in most of our urban markets. For our portfolio on a monthly basis, April RevPAR increased 12.1%, May was up 13.4% and June climbed 13.1%. As a reminder, our RevPAR and hotel EBITDA results include all the hotels we owned as of June 30 except for the Milano but do include 49% of the results from Manhattan Collection. The vintage hotels in Seattle and Portland are not included in the second-quarter results, because we didn’t acquire these hotels until July 9. RevPAR growth in the quarter…

Thanks Ray. So as Ray said, the lodging industry continued to recover at a strong pace in 2012. When we look at the second quarter as overall industry trends performance continued to be driven by strength in both business transient and leisure travel. Demand in the U.S. rose a very healthy 3.5% in the quarter and with almost no supply growth occupancy grew 3.1%. With solid industry occupancies and ongoing positive momentum ADR growth continued its slow march higher, increasing 4.7% in the quarter, up from last quarter's 4% rate. Combined, industry RevPAR climbed 7.9% in the quarter and now 8% for the first half at the top end of our prior 6% to 8% outlook for the year. While transient demand growth demonstrated ongoing strength, group travel also continued to recover at a similar pace this quarter. So ADR growth for group continued to lag transient which is typical for this early in the recovery cycle. One note of caution about July and the third quarter that Ray touched on earlier. We believe that the unusual timing of the July 4 holiday, that is falling on a Wednesday this year, not that it fell on July 4, caused some fairly dramatic changes in both group and transient usage patterns that significantly benefited June by up to 200 basis points of RevPAR growth to the detriment of July performance, which we expect to be reduced by 200 basis points or more from the current industry trend line. So we now expect RevPAR growth for July for the industry to range between 4% and 6%. This of course will depress third-quarter industry RevPAR growth as well. Supply in the second quarter increased just 0.4%, and we expect it to remain a sub 1% levels through at least 2014, a key part…

(Operator Instructions) We will take our first question from Andrew Didora with Bank of America.

Get my first question Jon is, what a music you chose to start off the call is a good precursor to what your next deal is going to be?

I wouldn’t necessarily conclude that Ray’s selection of songs is always a questionable issue here. So maybe it’s better for Ray to answer why he chose that song.

Andrew, if you play the music backwards, we will have our 2013 guidance.

I will listen to the replay again. But I guess after factoring in the closing of the vintage assets and the future draw on the term loan, I am coming up with about $225 million of cash currently available, which seems like a pretty good amount of dry powder right now. I guess can you give us some sense of kind of what assets are you looking at it on the market now and I guess would you be open to any type of portfolio deals in other markets outside of New York?

Yeah, I think what we can say is that the activity level in the second half for the industry and hopefully for us will be significantly higher than it was in the first half. We've seen a very positive momentum in the number and quality of assets in the major gateway markets that we have an interest in, and we believe that will continue to get at least our share in both on market and off market transactions.

I guess another question is just in terms of your margin guidance, I know 4Q had – you have some tough comps but it seems like for Q4 it produce in a deceleration to about 150 bps. I know you had called out I guess the vintage assets might not have a strong EBITDA growth in the fourth quarter. But is there anything else going on in the portfolio later in the year that might affect the growth there?

You talking about in terms of margin?

Margins, yeah.

Yeah, it really has to do with the fact in the fourth quarter that I think we were up well over 500 basis points in EBITDA margin in the fourth quarter last year. So the comparisons is a little more challenging.

We will take our next question from Jeffrey Donnelly - Wells Fargo Securities

I guess you always have that response concerning acquisition, I am curious at what point you do not want your fair share of acquisition because historically you guys have put the recession year acquisition underwriting, and is that on the horizon at this point and I am just curious, what signal do you look for (inaudible)

Typically what we are looking for is an overheated environmental both in capital availability and from an economic standpoint and I’d say we all agree that, we are a long way from there. At this point, in fact, we’re, if anything slightly decelerating from an economic perspective and in this pretty bumpy recovery that we’re all living through. So we haven't built anything in and if anything Jeff, I'd say that the way this recovery is playing out and the bumpiness of it and really modest nature of the economic recovery, the likelihood is probably greater that this recovery will take longer and will be more stretched out than prior cycles. But for some event again where somebody drives the bus over the foot. So I would say right now we continue to be excited about making acquisitions. We think it's still very early in the recovery. We think in almost all markets except for select service in a couple of major cities, we are a long way from replacement cost and capital availability for new construction particularly in urban markets, again outside of New York is very, very limited.

I am curious have you seen a change in the pace of group booking or specifically expenditures that they are making a lot of that, just curious if it gives you some foresight in working through (indiscernible)

Yeah in fact, we have really seen the office that – we have seen spend actually be up on a group cover basis. So outside of government, government is clearly down on a spend basis but private industry is up on a spend basis. And what we're seeing is groups do a little better quality lunches, maybe at a dinner, maybe at a cocktail reception, a higher-quality coffee breaks as opposed to maybe being a little tighter last year from a corporate spend perspective. So the underlying trends though right now continue to be good and we really don't see a sign of a change in corporate behavior as it relates to travel and spend.

And then just a last question or two, in New York, we often get questions from folks about the threat of a slowdown in New York city that would stem from Europe. Can you maybe talk a little bit more macro about the nature of that demand in Manhattan? Do you feel it’s more corporate or leisure and I guess how significant than European demand to Manhattan, in your opinion, do you think it favors a particular price point?

Yeah, New York is a very interesting market. Obviously it’s very heavily transient graded versus group. It has extremely undersized convention center for the size of the market and the number of rooms in the market. And actually there are very few large hotels that have a lot of meeting space. So you tend to see a lot of transient business in New York. I think with the demand growth we've seen, which is more than absorbing the supply in fact, yeah. interestingly, you – we’ve now passed prior peak occupancy in lower Manhattan and that demand is definitely being enhanced by overseas travel to the United States. It was -- we think it's moderated to some extent in the second quarter, albeit it's still growing. We have definitely seen some reduction from Europe, particularly Western Europe, but it's been -- much of it’s been replaced by growth from South America, particularly Brazil and Colombia as examples and from Asia, with 50 to 60% increases right now from China and fairly significant increases from Japan and Australia. So New York continues to benefit as being sort of the gateway international market, if you will, certainly the largest. I would say that some of that international travel tends to be price sensitive. I guess they are saving their money to fill their empty suitcases they are bringing along because they are definitely coming to shop. And I think what that’s done is it continues to cause some pressure on otherwise greater ability to raise rates in the city. That extra growth isn’t coming as much from the corporate traveler as it is from international travelers and they are more price sensitive than the corporate traveller. So historically you could look at these high occupancy levels in New York and I’d say there’d be double-digit pricing power in the market and we’re just not seeing that ability to do that in the market right now because of the tide of fill that we are seeing in New York city. So I think New York from our view, Jeff, is playing out pretty much the way we thought at the beginning of the year, which is it's going to be at the lower end of our industry range in overall RevPAR growth.

And just a last question on the Westin Gaslamp, how does that hotel today (indiscernible) from the Westin San Diego and I guess how you think about any impacts from the renovation of the Westin San Diego, do you think that’s next year or performance for the complete two different segments –

Yeah, there is a pretty significant difference in the rate and in fact, our rate is going to go up significantly because of the comprehensive renovation that we just undertook. So we’re running I think in the mid-70s right now, we should be running in the upper 70s, into the low 80s for the hotel ultimately. We’re running about 1000 basis points below on a RevPAR penetration basis in the first half than where we think we should be with the renovation. So we’ve got a lot of opportunity at this property to dramatically grow up the top line and bottom line. In terms of the other property, its location is not attractive at large, it’s on Broadway, it’s in an office complex. It’s not as attractive architecture and it’s further away from the convention center and the Gaslamp district. So its appeal tends to be a little bit more to the price sensitive customer in the market than our property is.

We will take our next question from Rich Keller from IFI Group.

Actually just a couple quick follow-ups to Jeff’s questions. First on the Gaslamp, is there any abnormal seasonality maybe on the back of the renovation that we should be modelling over the next four quarters? And then second question concerns international demand with outside New York, let’s say in some of your other markets, are you seeing any softness in maybe some of the leafing West Coast markets and if you have any insight into what's driving that?

Sure, I don’t – there isn’t any unusual seasonality in San Diego. I think it actually is much more influenced by the convention calendar and how the conventions fall each year and maybe change somewhat from year to year. As it relates to your second question, I think that deceleration in the growth rate of overseas travel isn't just affecting New York, I think it's affecting all of the gateway markets in the U.S. So the higher growth rate in inbound international travel that we saw in the first quarter is moderating in the second and it’s going to -- how we do in the second half is really going to depend upon the dollar, the exchange rate with those currencies and related currencies as well as the economic activity in those international countries.

Do you have any -- any clarity as to whether it's more of the exchange rate issue or more of just the underlying economic demand, and foreign markets driving that or I guess are they both related?

Yeah I think they're pretty both related Rich. It’s hard enough to figure out even how many international guests we have let alone why they're coming or not coming and what influences on the show. It would even be hard to speculate the difference of the two other than just to say they both have an impact.

We will take our next question from Bill Crow with Raymond James.

A couple of questions here. Do you anticipate a pickup in the fourth quarter after slowdown in the third quarter, do you think the quarter is going to come out about even –

I think the fourth quarter will be better than the third quarter primarily again because the July shift. You're talking about a 400 basis point differential for the industry between June and July, June running -- June ran 9.5 and July likely running in the 5. So that just will make the third quarter look worse. But I don’t think the underlying trends are any different other than really the international travel I mentioned. I think the fourth quarter will look a little better than the third quarter, and interestingly one of the things we've been looking hard at is -- with the fact that holidays have seemed to be changing the way business books its meetings and travel. We are taking a harder look at the holidays in the second half of the year and one of the things that actually is the positive that came out of this look is that the UN General Assembly meets pretty much over the Jewish holidays in New York, which would really help mitigate what would normally be a pretty tough week to two weeks in New York City on a negative basis. So that at least is positive with the way that holiday falls in one of the more material markets in the U.S. impacted of the Jewish holidays.

In the 12.9% RevPAR growth, this quarter is terrific but I know last year you he had a lot of disruptions. Do you have a number for what that would be in terms of normalized had you not had the disruptions a year ago?

Now we don't do that because it's much of the upside is it's not just because the rooms are back in service or there was disruption but because we are a much better product and better marketing plans. And frankly we don't know how to separate those two. It is really one of the reasons why we really don't go through this taking out of properties that are under renovation. There's always something under renovation in the portfolio typically that had some impact. We try to estimate the negative impact but when they come back in service, it's hard to differentiate the two.

Two more quick questions from me. You talked about the SkyBar and the impact that had on F&B. Did that also hurt the room performance at the Mondrian? Have you lost some market share because of that?

Absolutely. No doubt about it. The SkyBar is apparently an integral part of a portion of the travel for that property, maybe a fairly meaningful portion. And so it definitely had a negative impact on our market share. The other thing that had an impact on the market share is frankly that our team didn’t do a very good job there. And we've made modifications to the team, two of the three executive members have been changed, so we have a director sales and marketing and a revenue manager of the property that we are very excited about in both regards. And they seem to be doing a lot of really good things but we’re still losing market share there. And while we pretty rapidly lose business when you close SkyBar or do a renovation, unfortunate it takes longer to get the business back and it’s going to take us a little while to rebuild. So we are going to suffer in the third quarter at that property on a market share basis both on a rooms basis and on a food and beverage basis.

And then finally, Jon, as you think about external growth opportunities, acquisition opportunities, are you considering now the potential impact of the government per diem FICO reduction in rates might have on specific markets you might otherwise acquire assets in or specific assets themselves?

I would say that of course we would take into consideration the greater risk that per diem may not be as attractive as it has been. And so when we look at a markets particularly like Washington and what we think the growth rate is going to be, we would definitely take that into consideration. I would say nevertheless, there's a lot of issues with Washington that we take into consideration. We think it's a great long term market obviously but we do think that it's going to continue to be a weaker market, but for the inauguration next year and hopefully what it is a little more active legislative year, next year, which would be typical for a first year after presidential election. But it could be another deadlocked year. And it’s definitely a slightly greater risk today based upon what we see politically than what it was two or three years ago.

Does the DoubleTree have a greater sensitivity to government demand or –

Yeah in the portfolio it definitely has the most government business. We do a lot of NIH business, being the closest hotel to NIH we do a lot of business with the National Naval Medical Center. We do business with the Federal Drug Administration and a number of the other government agencies that are out in the Montgomery County suburbs. So of all of our hotels in the portfolio it’s definitely the one that has – that does the most government business.

And are you in the budget process for that asset right now and what are they thinking for next year?

No, we haven’t started the budget process. We just did a transition of our operators, part of our new strategies with our new operator was to broaden our sales and marketing efforts to a much greater extent to the private sectors and from the public sector, which relates both to what we see going on in government. So I'm sure we're not the only ones doing that. But we were probably doing far less of that before than we should have been doing. And so we do think there's some opportunity there, particularly with the property being fully renovated. But it'll definitely be the one ultimately that probably would have the most impact, if in fact there is a change in methodology on a per diem basis, which I don't think is necessarily a sure thing.

We will take our next question from David Loeb with Robert W. Baird.

Can I lobby for the Ramons (ph) or is that a little too – I think I know the answer to this but you have raised a lot of capital recently. I understand the timing of the term loan. Can you talk a little bit about the timing of the raise on the ATM and does this signal that you think you will be deploying proceeds very soon like in the next 30 days as opposed to in the next six months, five months?

I think what you should assume and we have pretty predictable behaviour. We have decent visibility into what our pipeline looks like and we've historically not been a gratuitous raiser of capital. The caveat I'd make is the windows are little more unpredictable than they've been in terms of issuing equity at a pricing that we are willing to issue equity at. And so, you should -- you shouldn't necessarily assume that an acquisition’s right around the corner. It doesn’t mean it isn’t. But we’re a little more sensitive to maybe looking out a little further into the pipeline than maybe we were this time last year.

We will take our next question from Enrique Torres with Green Street Advisors.

Hi Jon. Can you comment what change you have seen if any in asset values and return expectations in the last 90 days?

Well, I think asset values continue to go up as cash flows go up. And I would say that we haven't really seen a change in return hurdles. I mean I can't speak for our competitors. I would say the market is active and we lose our share of deal as well in the markets that are competitive. And so, I don't know what return -- what people have done to their other return hurdles. I do believe that we will continue to get our share of the market with similarly conservative underwriting that were successful last year and in 2010.

We will take our next question from Wes Golladay with RBC Capital Markets.

You mentioned the Mondrian might have a lighter food and beverage in the third quarter. I am looking at the rest of the portfolio, how will that look third quarter to fourth quarter relative to expectations?

I think the way we are looking at it right now because we have some decent occupancy growth continuing in the second half of the year and less disruption from some of our big properties like Westin Gaslamp and Delfina that definitely negatively impacted food and beverage, that we should see some decent growth in food and beverage in the second half of the year.

Okay. And you guys are also getting aggressive on the guest mix, how well can you get the group mix as part of the mix?

Yeah, I mean it's interesting because there are still properties that we believe a higher group mix will be extremely beneficial and ultimately maximizing overall profitability, and that includes two of our big properties, the InterContinental Buckhead and it also includes Westin Gaslamp, where we’re actually trying to significantly push up group at both of those properties. And then with the expansion of the meeting space and renovation at the Affinia Manhattan we are also trying to increase by about 5% to 10% the group mix at that property as well. So I think we're probably ultimately in the range – we’re going to be somewhere in this 25% to 28% range for the portfolio with some of the middle sized properties moving to slightly higher transient for the few of the bigger properties moving to a greater percentage of group.

And looking out towards next year for the Manhattan Collection to debt maturity in 2013, looks like the portfolio is performing well. And I am trying to see how I guess the refinancing of that debt maturity to the better performance –

So Wes, we had talked to debt financing in June in New York and we had very good attendance. We had about 30 lenders and insurance company, so there is a lot of interest. We are going through the process right now. What we expect to start getting turn proceeds in the next several weeks and from what we hear there is a lot of dialogue and a lot of interest from both the balance sheet lenders as well as CMBS providers. So we will see how that comes out looking into call route to say there is a number of lenders that have been meeting, they are also on this call. So we want to make sure we don’t negotiate against ourselves. But we feel pretty good to where we are at the point of time. So we expect I would say – as we get into the fall, we will have clarity of that direction and then probably go with either whether it’s a balance sheet lender, or CMBS and we will work through that. But right now the good take aways are at Manhattan, has a lot of interest from lenders. That assets continue to perform very well and point in the right direction. That was all the positives and we will work through any other if they pop up. So far we feel pretty good at where we are and we will, I am sure, have an update for you at our third quarter call which will be in October or November on that process.

And we will take our next question from Stephen Boyd with Cowen and Company.

Jon, I was hoping to get your thoughts on the OTA business and particular interested in your view of its relevance for independent hotels and if that differs from branded hotels. Tell your usage of the channels involving here.

Yeah, I think the OTAs continue to be a distribution channel that's important to the industry. We clearly hope to continue to shrink that usage over time and push more business to our brand.com or hotel.com. I think the Internet is in and of itself is extremely helpful to the independent properties or the small brand properties because of the visibility that you get for your product. The fact that it creates a level playing field visually, you now have third party independent sites like Traffic Advisor (ph) and others that provide supposedly the independent third-party reviews. And so the information that you have out there is so much greater for customer today and so much more reliable than what it used be to call a travel agent, have no visual frame of reference for what your choices were. And I think the brands tended to benefit from that process. So I think the playing field is a lot more even today, and we do drive a lot of business even on our branded properties through the OTAs when appropriate and in all cases, we’d obviously like to shrink that, as well as shrink the cost over time, which we do believe will continue to happen as we get closer and closer to at the end of the day maybe a travel agent commissions kind of model on the OTA side.

So I guess as a follow up, do you see additional margin upside from reducing the portfolios usage of OTAs and are you able to quantify it if you do?

I think what we ultimately see is continuing rate growth which as we shift more business out of the more discounted channels, because most of the OTA channels like Expedia come through on a net basis, not a gross basis. And so as it gets converted through gross basis, we will have both more revenue and some additional expense. But we'll have more profit per key, which is really the ultimate objective. So, I think we'll get more rate growth, and I think that's part of the mix shift that we talked about sort of religiously each quarter and where a lot of our revenue management focus is within the portfolio.

If I can just switch gears, assuming a 50 renovation, I am not sure I caught all of the numbers, but I heard adding about 41 rooms with the mid point of the spend about $18 million. My rough math works out to about 440,000 per room. I understand there are some system upgrades you need to make but the figure struck me, it’s a little bit higher. Just wondering if you could comment on your thoughts.

Well, it includes the complete renovation of the other 210 rooms. So that’s the differential, that full renovation of those rooms would probably be running us to $30,000-$35,000 a key. Maybe $40,000 a key on their own because of the size of the room. We’re also doing a complete -- it's really a complete hotel. We’re reconfiguring the ground floor, we’re actually expanding the lobby, we’re creating a transportation between the ground floor and the second floor, lounge. And so the costs that we would allocate to the increased room count, which would relate to the reconfiguration work, the conversion of the kitchen to bathrooms and extension of the elevator our estimate is that that’s somewhere in the vicinity of about 175,000 to 200,000 a key.

And then just last question I guess for Ray, it sounds like you are creating a lot of value here at least, have the opportunity too. Are you going to be able to capture some of that in the refinancing, how does this impact your thoughts on refinancing on Manhattan Collection I guess?

Well, you have nailed on this one because that’s exactly I think as we are working through the process, on one hand, every quarter we go by and you see in the numbers, Manhattan Collection and this is larger than the Affinia Manhattan renovation. But the RevPAR growth and EBITDA growth is pretty tremendous quarter to quarter. So in a perfect world we wait the last day of the loan matures and finances that because you probably get the best in execution (indiscernible). So we try to balance that in terms of the benefit from the renovation on the Manhattan and improving operating side of manuals and what’s going on at, we are seeing The Benjamin, the national and all that sort of thing, and that’s one. On the other side is on the renovation of Affinia 50 we are working through that. That’s where I think inroad the balance sheet lenders will probably be able to work done easier than on the CMBS side, because the CMBS is a little more problematic with how proceeds are provided, more based on the trailing 12 versus a prospective basis. We are working our way through all that I think, we are starting to see that value there, there are some created structures we have to handle that and we are working through that.

I think the other thing I would say about it is that capital that exceeded $20 million is being put in by the partners, we are not seeking to borrow that capital. And so the value that ultimately that’s created is additional security and upside frankly as collateral for the lenders. So I think we view it as a big positive, it shows our confidence in the opportunity. We have a track record with the Denihan executing two prior reconfiguration and renovations within the portfolio and we have some incredibly successful numbers from that, that relate to both the Affinia Manhattan and Shelburne that tell that story that we're letting out in front of them with the Affinia 50.

Stephen, also Jon mentioned in his prepared remarks but the disruption in 2013 with Affinia 50 renovation we noted between $4 million and $5 million. Of course, we are going to incur 49% of that with our pro rata interest. So as you model that and start looking at 2013, that’s the decent number you should model in.

So I guess at this point, given the capital you are putting in and current valuations in the market, do you think there will be a need to put some additional equity in there, do you think the valuation for support refinancing?

We don’t know at this time. We will see how that progresses in the fall. We are going to look at what’s the best execution for the property on the debt side. So we don’t know it’s going to be same proceeds, less or more. We don’t know. But as we progress through this, we will update you on the situation.

I would say that we have talked about this before both partners are prepared to put into some capital and get the right growth to get there.

We will take a follow up question from Jeffrey Donnelly with Wells Fargo.

I just had one question, Jon, because in your remarks, you made reference, you talked select service hotels were getting little fall in their pricing I think on a key basis. Are there cities in particular where (indiscernible)

I don’t think I used the language copy. Basically, I think it's pretty clear that select service hotels in New York and DC as two examples are selling above replacement cost. And that just isn't for us, that just takes us out of a market for those because that from our view creates greater risk as a result of that and ultimately less upside even though, we can make an argument that’s clearly the business model in and of itself probably has lower risk than the full-service model though.

We will take our next question from Dan Donlan with Janney Capital Markets.

Just one question on amenity creep, we haven’t heard much talk about that, just kind of curious what you are seeing from the brand and perhaps you talk about and the certain costs that are not coming back, that were associated with recession. Just curious your thoughts here, Jon?

I mean we may not be the best party to ask because right now I don’t think we have a broad enough portfolio to all of the different major brands but at least from our view of the brands that we're dealing with, we're not seeing amenity creep. So the brands have been working extremely well with us, in fact, on reducing costs and staff and management levels and actually trying to reengineer some of the brands in order to provide services and amenities of the customers really willing to pay for and taking away things that they really don't care about. That cost us money. So we can either put those dollars somewhere else to generate more business or just come to the bottom line. So far we really haven't seen an amenity creep like has have happened in prior cycles.

Gentlemen, at this time there are no further question. Mr. Bortz, I will turn the conference back over to you for any closing comments.

Thanks very much Cynthia and thank you all for participating in our second-quarter call and we look forward to our next update at the end of the third quarter. thank you.

Ladies and gentlemen, this concludes today’s conference call. We thank you for your participation.