Good day and welcome to the Pebblebrook Hotel Trust third quarter 2012 earnings call. Today’s conference is being recorded. At this time I would like to turn the conference over to Ray Martz, chief financial officer. Please go ahead sir.

Thank you operator. Good morning everyone. Welcome to our third quarter 2012 earnings call and 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 and could cause results to differ materially from those expressed in, or implied by, our comments. The forward looking statements that we make today are effective only as of today, October 26, 2012, and we undertake no duty to update them later. You can find our SEC reports and our earnings release which contains reconciliations of non-GAAP financial measures we use on our website at pebblebrookhotels.com. Okay, so the good news is we have another solid quarter to talk about. So let’s get started. Our third quarter RevPAR growth of 6.3% was at the lower end of our outlook for RevPAR growth of 6-8%, yet we still significantly outperformed the U.S. industry’s RevPAR growth in the quarter of 5.1%. This was primarily due to the underperformance of our Manhattan collection, caused by a relatively weak September in New York. However, the rest of our portfolio produced a really solid quarter, despite some sluggish growth in business travel demand. For our portfolio on a monthly basis, RevPAR increased 8% in July, August was up 7.7%, and September climbed 3.3%. As a reminder, our RevPAR and hotel EBITDA results include all the hotels we owned as of September 30, except for the Milano, since we don’t have verifiable prior year data, W Westwood, since we owned this hotel for less than half of the third quarter, and Palomar San Francisco, since…

Thanks Ray. So the lodging industry continued its recovery in the third quarter. Fundamentals remain strong, demand growth continued to outpace limited supply growth, which has allowed for healthy increases in rates. However, due to the impact of calendar and day of week shifts for holidays, both in July and September, and economic headwinds and increasing uncertainties due to the impending elections and the so-called fiscal cliff, the third quarter was certainly rockier than prior quarters this year. In our last call with you, we already discussed the negative impact of the July 4 shift, so no need to repeat that here. But in September, the shift of both Jewish holidays into September versus having just one in September last year and their shift to weekdays this year from a mix of weekday and weekend last year, had a substantial negative impact on business travel in September. And you can see that in the September Starwood results, which showed industry demand up just 1%, still greater than supply growth of just 0.6%, but the midweek holidays impacted the average rate growth in the month which climbed just 3.4% versus the prior trailing 3-month growth rate of 4.4% in ADR. So RevPAR rose just 3.8% in September, bringing down the third quarter’s RevPAR growth rate to 5.1% from the second quarter’s 7.9%. September in particular, for both the industry and our portfolio, was impacted far more than we expected. But was September’s weakness fully attributable to the holiday shift? I think that’s a big question. We think it represents much of it, but not all of it. When we analyze all of the industry data, I will say it’s difficult to clearly discern the trends from the disruption from the holidays. However, we do believe that business travel has moderated more…

Thank you. [Operator instructions.] We’ll go first to Jeff Donnelly from Wells Fargo.

Just to kick off, and maybe this is a little open-ended, but you had talked about the deceleration in business travel demand. Could you just maybe talk a little bit about the corporate mindset out there, either what you’re seeing in your hotel bookings or what you hear just from your own peers in conversations? I guess I’m trying to understand whether you feel that is broad-based and the tip of the iceberg, or is this maybe more of a speed bump, just because it’s around companies making year end budgets and concerns around the election and fiscal cliff.

Well, I think it’s primarily the latter, although when you say widespread, I do think it’s relatively widespread. I think it shouldn’t be that surprising given the dramatic, fairly meaningful slowdown in business specific data. And I thought it was interesting this morning, if you had a chance to catch it in the GDP report, but non-residential business investment was reported to have declined 1.3% in the third quarter. And I think that’s indicative of that mindset you mentioned, which is more cautiousness around the impending fiscal cliff, the election, and the uncertainty that revolves around both of those. And I guess it’s a speed bump, because I’m hopeful that there will be a resolution to those matters, but again, that’s a hope, and certainly there’s no definitive evidence yet that Congress and the administration are going to get their act together and resolve this at the end of the year or even in the early part of next year. I think what’s interesting, Jeff, it’s a dichotomy right now. Your consumer statistics are reasonably good. Whether it’s retail sales, consumer confidence, whether it’s auto sales, whether it’s home sales, increasing home values, all of those are a positive for the consumer, and that actually is showing up very positively in our week end statistics, where we’ve seen healthy demand growth and healthy RevPAR growth. I think the other thing that we’ve seen, which is interesting, is that the sluggishness in business travel growth is more evident on the East Coast than it is on the West Coast. And whether that happens to do with the proximity to Washington or the technology base that’s out in California or the what-me-worry attitude on the West Coast, it’s hard to say.

Are there any industries that seem to be showing it more than others? I mean, for example, in the New York market. Is it more evident to you there?

Well, I think it’s more evident overall in the New York market, whether it’s specifically related to financial service firms or other firms I’d say is a little less clear. I mean, we haven’t seen cancellations. We haven’t seen any meaningful increase or noticeable increase in attrition. We’ve just seen a bit of a slowdown in bookings in both the group and the transient side. And I think that’s translating itself into more moderation in the growth rate overall for business travel. And what we’re worried about, and what we’re cautious about, is will that accelerate into the latter two months of the year and impact those months even more so.

And just one last question, I guess two parts, on Palomar. First, I’m curious if you’re able to put a number to it by complexing the hotels that you have in San Francisco with Kimpton. What sort of margin efficiency do you think is possible across that pool of hotels? And then second, can you just talk about how the ground lease with the Palomar works there? And is there anything on the horizon that could ultimately trigger renegotiation of that contract?

As it relates to the issue of synergies and complexing, Kimpton already does complexing in the marketplace for some of the overall sales approach, just like they do in DC and Boston and a couple of other markets, where they have numerous hotels. So we don’t believe there are any potential efficiencies from the acquisition of the hotel. I think we’ll benefit from having, basically, two properties, ultimately, on the same block. In terms of marketing knowledge and the customer base in the marketplace, it will be helpful. And I think we’ll be able to implement our best practices and our efficiency programs into the Palomar based upon our local market knowledge of specific expenses. And so I think we’ll benefit from that and we didn’t underwrite that. But I think that’s really where the positive efficiencies if you will, or operating advantages, will come from. As it relates to the ground lease, it’s a very long term ground lease with Jamestown. You know, now’s not the time, with low interest rates, to be renegotiating a ground lease, because all we do today with low interest rates is increase the value of a relatively steady stream of ground lease payments. So there may be a time down the road, and there may certainly be a time, if Jamestown has issues down the road, for us to buy it out, but that’s probably the more likely scenario, somewhere down the road, than a renegotiation necessarily.

Oh no, I wasn’t looking for you to do that. I was actually concerned that something you would do might trigger that it had to be renegotiated. Actually, could you just maybe explain how that payment works? Is it fairly fixed?

It’s a combination of base and percentage, percentage based upon room revenues and food and beverage revenues. And the payments today are mostly base, and partly a percentage. And then the base goes up at the CPI over the long term.

We’ll go next to Jim Sullivan from Cowen & Company. Jim Sullivan - Cowen & Company : Jon, quick question on New York and the marketing execution in the third quarter. You had talked about the UNGA week as kind of the Superbowl. I’m not sure if that was you or Ray, that used that term. This year it was not quite as super, I guess, as it usually is. And I guess the question is, to what extent do you feel that your team was kind of flatfooted by the weakness this year, and to what extent did that poor performance result from not being prepared for that as opposed to perhaps being able to do something if they did correctly assess the demand?

I think that’s part of it, Jim. We did underperform our competitive set in the market, particularly in September, in the quarter. And I think that had to do with certain decisions made along the way, either to turn down group business or overprice based upon what ultimately happened, or not take certain business that might have been more modestly priced. And you know, everything’s clear in retrospect. I do think once there was a recognition that the business was going to be weaker, and I guess we can fault not staying in tune with our clients in the marketplace, I think there was an overreaction on a price basis at our properties. And where we lost in the quarter was not occupancy, but it was rate. So we managed to fill, at much lower rates than we probably should have, and that our competitors filled at. Jim Sullivan - Cowen & Company : Your comments in the prepared remarks about group pace, I just want to be clear on that. Was that only in relation to New York market, or was that general?

No, that was general. Jim Sullivan - Cowen & Company : And so I guess kind of part two of the question, you’ve obviously as a company decided to allocate significant amounts of capital to the West Coast, where the markets have been robust for the most part. And I just wonder, as you think about going forward here, and as you think about projected supply growth in New York, what your attitude is about the New York market. There seems to be a significant shadow supply, certainly there’s a lot of starts. There’s also significant shadow supply in New York. How do you feel about capital allocation to the New York market and I guess the Washington market, as a part of that kind of geographic dichotomy you referred to earlier?

It’s a good question. I think our viewpoint on New York right now is extreme cautiousness, and it’s due primarily to the supply side, not the demand side. We’ve seen very significant supply growth in the market. We’ve talked about this pretty religiously, that New York has changed. There’s a lot of submarkets in New York that have been opened up due to less crime, whether that’s the downtown market or lower Manhattan, or whether it’s the west side, which is probably even the most active area from a development perspective in New York, including with hotels. I think we feel like the barriers to entry that preexisted in New York are not quite the same as they were, and not as high as they were before. And so we’re very cautious about New York. We just spent about a week with a fairly meaningful team going through every construction site in New York. And our estimates on a preliminary basis are that we’ll see a 4% supply growth, which I think is relatively consistent with what folks have talked about for next year. And I say that as 4% the way Smith Travel calculates it, so you actually probably have a few more openings than that. And then more troublesome is the 8%, or 7-8%, growth in 2014 that we see. And again, this is based upon hotels under construction, not proposed. So, you know, I think there’s some folks who need to understand what’s going on in New York from a lending perspective, even though those are mostly non-traditional lenders right now, and understand, this is a lot of supply that’s coming into this market. And it’s troublesome. So we’re very cautious about New York. When it comes to DC, we’re far less cautious. We don’t have a supply issue in DC. There’s a hotel that’s going up down by the ballpark, and then you have the large Marriott hotel that’s been under construction for some time, that will open in the spring or second quarter of 2014. And you know, hopefully that’s kind of a wash. It brings more conventions to the market, and that offsets what would be a fairly significant increase in rooms on a one-time basis. So our viewpoint on the East Coast is not quite as strong as our viewpoint on the West Coast, but I’d say our caution is more so concentrated in New York than it is in the other markets on the East Coast.

We’ll go next to Bill Crow from Raymond James and Associates.

Jon, let me follow up on that question line about New York. You’ve talked for years about the growing geographic location of putting hotels in the market and the lack of concentration in the midtown area. As you look back on it, was the joint venture a mistake, then? Because you’ve seen some of this coming?

I don’t think so. We feel really good about what we bought that portfolio at for our joint venture basis. I think it was very attractive. I think we said at the time, and we’re executing as evidenced by the Affinia 50, that there’s a lot of value enhancement opportunity within the portfolio. It’s still significantly below replacement cost in the marketplace, and while we are seeing a lot of select service hotels, and that totally depresses the ability to raise rates in the market, and increases the risk, I still believe, and we still believe, that it’s a great long term market to own in in midtown. And so we continue to be excited by our investment there. We’re in the process of refinancing the asset at an obviously far more attractive basis than what we thought when we bought the asset, and I think that will add to our after leverage returns for the portfolio. So it’s still performing ahead of what we underwrote, despite what’s happened so far on supply. Whether that will continue with the new supply coming into the market, we’re just going to have to see.

You talked about the operators gave up rate in New York in September. And I guess we’ve seen through the last few cycles that that’s the way they react. There’s a panic that goes on, and rate is cut. Are you starting to sense that across more markets outside of New York where there’s a little bit more of a panic on the part of the operators?

Well, one, I think that the overreaction that I mentioned I think was limited to September in the market. And I think it was a reaction to a pretty large event that occurred that came in far weaker than what was expected. And we do see that happen from time to time, particularly in convention markets, when conventions don’t come in and provide the compression that people thought. It’s just not as big a deal overall as it was in New York. I think the overall psychology continues to be moderate as it relates to price increases kind of across the industry and across markets. I’d say most markets, we continue to get price increases. We’ll see pretty healthy corporate rate increases, we believe, in this set of negotiations this winter. We think it will be mid single digit to upper single digit as described by both Marriott and by Starwood previously. And so I do think there continues to be a decent pricing power, and I think we continue to discount less in general and have fewer promotions, and mix our business better. But I think we need a much more positive economic environment in order to get more aggressive. And I think San Francisco is a good example of that, where you have a much more optimistic view of the economy, with the amount of employee growth going on in the San Francisco and Bay Area. And we’re not seeing demand up at all in San Francisco this year, but rates are up double digits. So an awful lot of that comes from a much more positive attitude, which I think will be attained once we begin to see an acceleration in economic growth, which we’re obviously very hopeful of. I think we all are. Which, I think, will come with a resolution of the fiscal cliff and hopefully some reform to the tax code and other aspects of the fiscal issues.

You mentioned Starwood and Marriott, and they’ve both offered kind of a preliminary outlook on 2013. I just wanted to see what your thought process is, and how your portfolio, which I think now is 20-plus percent skewed toward New York. How do you think your portfolio does next year relative to the industry overall?

First of all, I think we’re going to continue to outperform the industry. I think due to our renovation activity and our asset management, I think we’ll continue to gain back share lost, as we mentioned in our remarks, at the vast majority of our properties. And I think that will continue to allow us to outperform the industry on a RevPAR growth basis. I think our ownership in New York today represents about 21.5% of our EBITDA, and by the end of the year it will be lower, as our other markets continue to outperform New York, which was what we said going into the year. We thought New York would be at the bottom end of our range for both the industry and to some extent for our portfolio, excluding what’s going on at the Affinia Manhattan that benefits us. So we feel good. In terms of next year, there’s a lot of uncertainty about next year, and the range is put out by Marriott and Starwood of 4-7% or 5-7%. It seemed very reasonable with economic growth in the 2-2.5% range, and a more positive outlook from the business community. But we don’t have those yet, and so we’ll just have to wait and see.

[Operator instructions.] We’ll go next to Wes Golladay from RBC Capital Markets.

Looking at your acquisition pipeline, which markets are you seeing the most opportunity in?

Well, I think we continue to see a fairly healthy opportunity in most of the major markets. It certainly picked up in the second half from the first half, and you see that in our activity level, and in the activity level of others. So I think the opportunities, there’s still a reasonable amount of good properties in those major markets, and we’ll continue to be active in pursuing them.

Okay, but I guess more specific, if you look at your pipeline now, is it heavily weighted toward the West Coast versus the East Coast? Or spread across the board?

It’s not something we tend to talk about in terms of specifics about our pipeline, because we think a pipeline is when you sign a contract and close versus just pursue activities. I think, again, when it comes to the overall industry and what’s available in the market, I think it’s pretty widespread from East Coast to West Coast. There’s certainly a lot of stuff in secondary markets. We obviously don’t pursue those, but you can see that activity from sales by many of our REIT brethren who have invested in those areas who are now selling in those areas. So I think there’s activity in all areas, and I don’t think it’s weighted to one particular coast or another, or any particular market.

Okay, and you guys had mentioned the large cash balance you have on the books right now. Should we look into that, say you guys have additional acquisitions teed up in the near term, or just preparing for next year?

I think you should think of it a couple of ways, and we’ve talked about this previously. We want to continue to have $200-250 million of capacity at any point in time, because the assets we tend to buy are larger, $80 million on average, and often $125-135 million. And so we feel comfortable carrying meaningful capacity on the balance sheet whether it be cash or whether it be access to our line of credit. We also want to continue to keep the leverage level of the company low in this 30-35% area for debt to gross purchased assets. And so I think what you can draw from what you’ve mentioned is we want to continue to be prepared to make acquisitions, and I think as we’ve historically said in the past as well, that we tend to be a match funder for acquisitions and we tend to be a match funder in advance of acquisitions not afterwards.

We’ll go next to Andrew Didora from Bank of America.

Jon, a follow up to an earlier question. Does the recent slowdown and the business travel uncertainty you’re seeing now change your view at all on the cycle, whether it be to duration, ability to get back to peak, or anything like that? And then does it affect your outlook as well on the pace of acquisitions and plans to grow your portfolio?

As it relates to the cycle, I would say that what we’ve talked about in the past is to the extent that the recovery is slower, it’s likely just to stretch it out. Now, we’ve also said that the cycle could end tomorrow, and I heard the CEO of Black Rock on the TV this morning saying that he believed that if we don’t get this fiscal cliff resolved in some manner, we’d like see a recession in the first quarter. And there’s certainly a lot of talk about that. So does that end the cycle? It ends the economic cycle for what many believe is a short period of time. Hopefully wiser and cooler heads will prevail, and we’ll get a resolution. But certainly if you take 5% of spending off the table through the sequestration and the tax increases it’s going to have an impact in a negative way on the economy. And we can’t avoid that in our space. But that will stretch out the supply growth cycle, and maybe that will create more opportunities for us on an acquisition basis. So I think from our perspective it’s both good and bad what might happen. But I tend to think we continue to go through this bumpy recovery, and we’ll have slower periods of growth and higher periods of growth, and this is one of those slower periods for growth. And I think our business will pop back up as we see higher periods of growth. So I think it’s more likely temporary, but there’s certainly a chance we could go into a recession in the first part of next year.

And my final question, just looking at the Affinia 50 renovations next year, I know you outlined the $5-6 million of total renovation disruption expected, but can you give us a sense of how you came up with that estimate, whether it’s how much EBITDA the hotel generates, or something along those lines? And then what kind of return requirements do you typically have on projects like this?

The displacement is estimated based upon the actual schedule for rooms out of service, and our schedule for the public areas. So we go through and we do a day by day, week by week analysis with our operator and we come up with the amount of inventory we’re going to have and how much we’re likely to sell and at what rate we’re likely to sell it at based upon what we’ve done in the past. And you know, the good part of this is both we’ve done this very often in our portfolio and when I was at LaSalle, and [Denahan] has done this already twice in their existing portfolio with us. Both the [Shelborn] and the Manhattan both had almost exactly similar renovations and displacement. So that’s where the numbers come from. As it relates to your second question, if I got it right, which was does our viewpoint on the economic cycle change our view on making acquisitions?

Well, I was just more interested in terms of when you do big renovation projects like this, what type of return requirements do you have?

Typically we’re looking for similar kinds of returns to the investments we make in new acquisitions. So we’re looking at that 10-12% unlevered IRR return hurdle. And generally, even though we think the risk is lower than in a new acquisition, because we obviously have a lot more knowledge of our existing asset than we do of anything new that we’re going to buy, we do tend to still look for similar returns because of the potential disruption and the possibility that we’re going to underestimate what that impact is going to be.

We’ll go next to Dan Donlan from Janney Capital Markets.

First question, for Ray, Can you maybe talk about the negotiations on the Manhattan collection debt and how it’s progressing?

It’s a very competitive debt market, certainly for our sort of product, and in New York there’s a lot of interest from a wide range of lending sources, including banks and CMBS providers. Certainly what we’ve seen over the last 45 days with QE3, that’s certainly helping the CMBS, pretty significantly, with pushing and repressing rates down. Has a positive impact for us. So that’s all very good, and certainly where we stand today is better than where we thought we would be from an our options let’s say 90 days ago. Now, we’re talking with a number of folks right now. We are diligently working through. We have nothing signed up at this point in time, in terms of the definitive, but we’re working through that. We feel good about it. We hope by the end of the year, early January, we’ll have something announced publicly. I know there’s been some things in the press about the different rumors, because this is a particularly high profile transaction, but for us it’s not news until we say it’s news. So we’re ongoing. We feel pretty good about where things are, and I would just say stay tuned as we make progress.

And then Jon, as it pertains to your external growth via acquisitions, given the kind of softness you’ve seen, is your expectation that we could see some more assets shake loose toward the end of the year? And just also curious if you could kind of comment on, given the strength that Ray’s just talked to on the CMBS market, have you seen more private equity bidders when you’re going to the acquisition table?

I think it’s too early to think that what we’re seeing right now is going to shake loose more assets. I think what’s shaking loose more assets is as performance has continued to improve, and values creep above debt amounts, that those assets, to a greater extent, are the ones that have come to market. And I think that will continue. I think it will take a little more time. The market reacts slowly to these kinds of changes in the wind. So I think as it relates to us, we’ll continue to be cautious. I don’t think the CMBS market had an impact on the acquisition market yet. I don’t think it’s had an impact on the construction market at this point. But I do think it’s become much more attractive for borrowers overall. The challenge to an acquirer is CMBS still takes significant time to get done, and to try to arrange that coincidentally with an acquisition is challenging. And sellers who have other choices like us and other all-cash buyers continue to have the advantage in the market for assets that we have an interest in.

And then just as it pertains to L.A., was just curious, obviously you own two assets now in West L.A. Was kind of curious as to your thought process on Downtown L.A. given kind of the revival going on there, the talk of potentially getting a stadium. Do you think that they’re going to take market share from you? Or do you think it just compresses the overall market in general?

That’s a good question. I think the answer’s probably both. I think it’s really great to see the revival of Downtown L.A. I think you began to see it with residential development, or redevelopment, down there. I think that’s always what has to come first. And then you’ve seen the entertainment venues get developed, and some hotels. And so I think actually Downtown L.A. is getting better, and I think it will continue to get better as we see more entertainment development down there potentially, with a football stadium and the redevelopment of the hotel by Korean Airlines, which will add a new product into the market. But it’s never been a great convention market, because the convention center’s not very large, and it’s not considered a particularly attractive venue in terms of overall Downtown L.A. I think that’s improving, and I think with the development of the theater down there you’ve seen some business go from Hollywood to Downtown. Some of the award shows have gone downtown from Hollywood, and I think that has had an impact in the West Hollywood market. But I do think the entertainment and numerous media businesses that are growing today are replacing that business, although potentially not as attractive because those tend to be pretty high compression events. So I think the answer is both. I think you’ll continue to lose some business. I think the market will generate some business that pushes out to Santa Monica and out to Hollywood and West Hollywood as it becomes more successful. So I think it will be kind of a combination of the two.

Okay. And since you mentioned Santa Monica, just curious, I think the Sheraton flag could potentially come off, or is allowed to come off, I think maybe third quarter of ’13. Maybe it’s the fourth quarter. Any thought process there on what you may do?

We’re really just starting the analytical process with looking at what our alternatives are, including obviously keeping the Sheraton flag on the property. We wanted to get through our renovation. We wanted to see how the performance improved, which it has meaningfully. And we wanted to see what the customer reaction was to the new product, which has been very favorable. And we wanted to have sort of better post-renovation numbers to utilize in order to do the evaluation. So nothing to report at this point, Dan. And my guess is our decision making will go pretty deep into next year.

We’ll go next to Jeff Donnelly from Wells Fargo.

Just one quick follow up. Jon, I think you had mentioned in your remarks a handful of small renovations going on in calendar 2013 that I think have about a $1-2 million EBITDA impact. Do you have what the total cost is of those renovations?

I don’t think we have that. We’ll probably have to get back to you. We certainly know what it all is, we just haven’t… We’re just starting the budget process, and there may be some other things that come up through the budget process where we can give you a more complete number for the full year. But the numbers aren’t huge. The projects tend to range anywhere from $1.5 million at the Sir Francis Drake to I think roughly $3 million for the Sofitel. So they’re all relatively small numbers.

And did you give us the disruption you expect from closing the Milano for three or four months?

We didn’t give you any disruption, because it wasn’t included in our hotel EBITDA numbers. The comparative numbers. And its impact on this year’s performance was relatively minor and it will be open again. And we didn’t own it until April of last year, so from a comparative basis, actually, Milano will add to next year, not have a negative impact.

At this time, we have no further questions.

Thank you again for participating in our call, and we look forward to updating you early next year. We’ll give you a view on 2013 at that point in time, and many of you we look forward to seeing you at NAREIT in San Diego next month. Thank you.