Good day and welcome to the Pebblebrook Hotel Trust Second Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Raymond Martz, Chief Financial Officer. Please go ahead, sir.

Thank you, Ashley. Thank you very much. Good morning, everyone. Welcome to our second quarter 2016 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. Before we start, a quick reminder that many of our comments today are considered forward-looking statements under Federal Securities Laws. These statements are subject to numerous risks and uncertainties as described in our 10-K for 2015 and our other SEC filings, and future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today, July 26, 2016, and we undertake no duty to update them later. You can find our SEC reports and our earnings release which contain reconciliations of the non-GAAP financial measures we use on our website at pebblebrookhotels.com. We have a lot to cover this morning, so let's first review the highlights from our second quarter financial results. Our same property RevPAR growth in the second quarter was 2.5% which slightly exceeds the revised outlook of one to 2.25% that we provided in early June. Our RevPAR growth is driven by a combination of occupancy and rate growth. As occupancy increase 1.1% and ADR increase 1.4%. Room revenue grew 3.1%, higher than the RevPAR growth due to the increase in the average room count as we added 44 guest rooms from the prior year period due several renovation programs including 32 keys at Hotel Zeppelin which reopened in March. Our performance in the quarter was led by our hotels on the West Coast as our hotels out there generated RevPAR growth of 6% in Q2 with ADR increasing a healthy 4.3%. Our strongest West Coast markets were Portland where our properties grew RevPAR 12.4% and West L.A. which grew RevPAR 10.7%. As a reminder,…

Thanks Ray. During the second quarter industry operating trends continue to moderate and our performance was no different. While the industry's RevPAR growth actually accelerated to 3.5% in Q2 from the first quarters 2.7% growth rate, it benefited from the Easter shift to March from April last year, as well as the shift from July 4 falling on a Monday this year instead of a Saturday last year. As you saw from Smith Travel statistics, the last week of June significantly benefited from the shift at the expense of the first week of July. I'd like to take a shot at summarizing the overall industry trends that we saw in the second quarter which we believe will likely continue in the second half of the year. The group continues to have a pretty good year based primarily of healthy convention calendars across most of the major markets. This business consists primarily of major association and corporate sponsored meetings, this accounts for the industry's positive pace this year. Small and mid-sized corporate meetings which are primarily booked in the year for the year, in the quarter for the quarter, or even in the month for the month have continued to weaken as represented by the slightly weaker overall industries group volumes year-to-date. While we and others continue to go into each quarter with generally healthy group pace levels, we often come out of the quarter far from the pace we started with due principally to weakening short-term group bookings plus a minor amount of increased attrition and corporate cancellations or reductions in group size. Business travel trends which began to noticeably weaken in Q4 last year softened further in Q2. It seems that the combination of declining corporate profits and rising economic and geopolitical risks has taken its toll on business…

Thank you. [Operator Instructions] And we'll take our first question from Anthony Powell with Barclays.

Hi, good morning everyone. If you could just go ahead and talk about the overall transaction environment, if you've seen more or less interest in hotel deals after Brexit?

Anthony, it certainly would be too early to come to any conclusion about what the impact Brexit might have on the U.S. real estate market. And in particular hotels, we certainly haven't seen anything to-date, we've read a lot of stories that Brexit vote should cause capital to head to the U.S. from the UK but we certainly haven't seen anything yet.

Got it. And your overall outlook for the rest of the year seems to be bit more conservative than some of the other releases we've seen. Recently Starwood, that was burning [ph] with 3% to 4% RevPAR growth in North America, if other reach it be bit more positive. What do you think makes you bit more negative on the outlook than some of your peers?

Well, we don't have any franchises to sell so that may make us more pragmatic than the brands who provide outlooks. The other thing I'd mention is, I don't know how Starwood's outlook breaks down between the U.S. and North America but I suspect Canada and Mexico are having pretty good years giving the U.S. outbound travel and the weak peso and the week loonie. So I wouldn't be surprised at all if their U.S. outlook was more consistent with actually what our view is, up 2% to 3% for the year.

Got it. And I guess the last one is just on the renovation activity, that seems to -- and continuing on with your renovation plans in San Francisco and Nashville despite kind of slowing trends, have you thought of maybe adjusting similar renovation plans given the overall environment?

Well, the assets that we bought with planned repositioning and transformations -- we have not changed our desire to move forward and execute on those redevelopments, we think there is very significant value to be added from very modest investments. And so we've made no changes from that perspective. We've looked at a couple of renovations through the rest of the portfolio, there were two room renovations we were going to begin late this year and complete into the first quarter and we've postponed those for a year for various reasons. So we've looked at those Anthony but as it relates to the major redevelopments -- I mean, we have to keep in mind that these are properties we bought that in many cases were tired needed to be redeveloped, would benefit from the capital infusion significantly and will continue to spiral down from a market share perspective if we don't invest in them. So from -- we're in the long-term investment business, we have to invest through the cycles, and we need to make sure that our balance sheet is in a condition where we can do that and that is the case.

That's all for me. Thank you.

Our next question comes from Rich Hightower with Evercore. Please go ahead.

Good morning. So I know that you have not previously given third quarter guarantee of course until last night but can you give us a sense based on just the change in trend during the second quarter, perhaps implicitly where the third quarter was in your mind as of three months ago versus where it is in the guidance as of last night?

Yes, I mean I think if we look at the second half Rich, I think overall we thought the second half might be a couple of hundred basis points higher than where we think it's going to be now.

Okay, that's actually quite helpful. And then…

Sorry to surprise you on that.

You know, there is actually a quantifiable answer, that's good. The second and last question I promise is on asset sales, so with respect to the $1 billion target a lot of that is a Manhattan collection, that of course has been pretty well telegraphed for a while in terms of Pebblebrook's intentions there but can you just give us a little more general sense as to the screen that you guys use to evaluate what's for sale and why it's for sale and why now is the right time to sell a particular asset? I mean is it based on reverse enquiry or are they all marketed? Just a little more color on that front will be helpful.

Sure. Well, the plan we put in place in February that we announced was based upon identifying the assets that would be -- we would be putting up for sale. So they are all being marketed, they are being marketed differently depending upon who the likely buyers are. So as an example in the case of The Redbury in Hollywood, we didn't do a broad marketing, we did a very targeted offering to high net worth individuals, a few brands and some foreign capital that we thought would find that property an asset that they wanted to own. And so we did hire a broker but we didn't go through a formal overall bidding process, we just worked with the likely buyers for that particular asset. In Miami, it actually was our intention to do again a fairly targeted -- again, not broad but targeted process. The process lasted about three days and we had an interested buyer who ultimately bought the property, who gave us an offer attractive enough to take it off the market and work with them exclusively. So when we look at what we're going to sell, I mean we evaluate a lot of things; we evaluate the individual market, what we think the intermediate to long-term prospects are, the barriers to entry in those markets, the capital that needs to be invested, any short-term negatives that might impact our returns, the value creation that we may have created -- the value we may have created in those assets. But we're really looking at things from a longer term perspective, it would include the land that we saw at Revere that -- we're not in the development business, we're certainly not in the apartment or condo development business, and there are others that are far more capable and skilled that working their way through the Boston, rezoning an approval process then we. So we made a decision to take a piece of land that looks no bigger than my front yard and to sell it to a developer.

Okay, it's very helpful Jon. Thanks.

And our next question is from Shaun Kelley with Bank of America. Please go ahead sir.

Good morning, guys. Jon, you've always been pretty helpful on saying -- I think last quarter you give us a little bit of the pattern about the monthly trend you're expecting and it did play out because I think you were calling from May to be your strongest month and that seemed to be the case. I know a lot of people listening are probably interested in how you think about some of the movements in Q3 particularly, given the Jewish holiday shift between September and October in some of the key urban markets. And then also the impact that you expect August to have given the way that Labor Day played out last year. Could you give us any color about sort of your thinking on sort of the monthly trend? I appreciate it's a relatively short-term focus.

Sure. So I mean from what we see right now Shaun, I think September is likely to be the strongest month in the quarter, positively impacted by the Jewish holidays which unfortunately will then negatively impact October. I think as it relates to the way Labor Day is falling, I think the conclusion we came to last year after doing more research was we think the last week to ten days of August, almost regardless of the way Labor Day falls; unless it falls at the very, very beginning, it is likely to be weak on a secular basis. We think the change in the school system dates, when kids go back to school is having a negative impact on leisure travel at what we used to think was a prime part of the summer and we no longer think that. So strategically, our properties have been highly focused on getting business on the books well in advance for that last ten to two-week period in August. And so that will have some negative impact obviously on pricing but hopefully for the benefit of occupancy for us. So that's kind of the way we think it's going to fall out, we think July is running weak because of the negative impact from the July 4 shift. You saw that in the Smith Travel numbers that were mid-single digit negative I think for the first week and marginally better, certainly positive but probably more in the normal range we're expecting -- kind of 2% to 3% in the second week. We do think there is some lift in July, clearly from the two political conventions from an industry perspective and obviously those will positively impact Cleveland and Philadelphia. We don't have any hotels in Cleveland, we do have one in Philly [ph] and it is benefiting but we don't have the Pope coming back in September which was a benefit in the quarter in Philly as well. So that's kind of the way we think Q3 lays out and Q4, I think you've probably heard previously from most folks, both brand and some of the other reads that Q4 looks to be weaker than Q3 when you look at the back half for the year; group paces are not great in Q4 and obviously, part of that is definitely the shift in the Jewish holidays, what is otherwise a very prime business travel and group travel period.

That's really helpful. And then my longer term question if you will is, obviously renovations are having impact in just the absolute magnitude of your RevPAR. So could you just help us think about when 2016 is kind of said and done what is the overall renovation headwind you're expecting for the full year this year? And then next year, I appreciate that at least one of the assets, the big one that we're doing in 10% scope may not be open for the full year but do you think renovations are a net headwind or tailwind for 2017?

Yes, I think for this year we're in the 100 point range, negative impact for the year. Next year should be meaningfully less than that but most of it's going to be pushed into the first quarter of next year when we're doing the Palomar and the Revere, and we're starting the Tuscan which will probably run a little bit into Q2. Right now the only thing we see at all major would be doing the Golf Tower at Naples in the summer. We're doing the beach building this summer and outside of that we think overall next year should be meaningfully less from a disruption impact versus this year.

All right, thank you very much.

Shaun, the other thing I just pointed out is that the projects that we have planned for next year really complete all the projects we had planned when we made our acquisitions over the last five years.

That's great, thank you very much.

And next up is Wes Golladay with RBC Capital Markets. Please go ahead sir.

Good morning, guys. I can't believe you don't have any hotels in Cleveland. Looking at the incentive -- the short-term incentive group, when we look at the labor data, it shows the -- it's really hard to get employees, its looks like a pretty tight labor market at the high end. So what do you think is behind the lack of incentive group, is that's what it's fallen off within the quarter bookings?

Now you know it's not the incentive groups Wes, because the incentive trips tend to be much more elaborate and generally booked well in advance; it's really the 5/10/30 person meeting that companies are deciding to differ, maybe they are doing it in-house, saving the travel; maybe they are doing it by phone, I don't know but I know that you know it's certainly under pressure like business transient travel is. So you're right in making the correlation between the strong employment markets, the challenge in finding good quality people, and the need to continue to have incentive travel; and that's what makes this environment a little bit more unique than what we've seen and in some prior -- you really got to go all the way back into the early 90's to see an environment like today.

Okay. And then looking at the industries that are cutting back on business travel; is it broad based or you're technology customers hanging in there; pharma hanging in there with the financial services? Can you give us a little more drill down color on who is cutting back and is it incrementally negative or positive for that segment?

Yes, I mean it -- overall, it's certainly being led by financial services. As you are on the phone asking the questions or listening now, probably the two industries struggling the most; energy and financial services, in the environment we're in. So whether that's banks, insurance companies, investment managers, whether it involves consulting or to some extent even accounting and legal, we're definitely seeing significantly less travel in those areas and certainly more price sensitivity in those areas. But it's broadened over the last quarter, it certainly includes more companies, more industries, multi-nationals in particular are certainly cutting back on travel, we've certainly seen it in the manufacturing sectors. There is just an overall cautiousness on the part of business as it relates to travel. I mean we're even hearing it from some of the real estate companies believe it or not -- some of the service companies. So it seems to be fairly broad based, interestingly outside of individual company situations and technology; we're not really seeing it in technology, we're not seeing it in biomedical or pharmaceutical -- those industries continue to be growing, being able to grow top lines and therefore they seem to be -- seem to have a pretty positive attitude about travel.

Okay. And last question for me, the big picture -- what's going on with the Z-brands -- we take it outside of San Francisco, just like the letters Z, anything going on there?

Well, we like the letter Z; some of the consumer studies show that customers are attracted to companies that start with either and A or Z. And so we like the Z-letter from a naming perspective; it's also different in the market like our properties. So we think it's -- the names are a little bit experiential like the properties are. We don't have any plans to make it a brand, take it necessarily outside of San Francisco. And as you know our properties with the Z-names have different operators as well in many cases. So it's not a new business strategy for us.

Okay, thanks a lot.

Our next question comes from Jeff Donnelly with Wells Fargo.

Good morning. A question about how you see the relative strengths of the various segments at this point. The last few quarters, corporate transient has been a segment that was softening and group was seen as relatively resilient, now with some of your peers with more group exposure are seeing increasing group cancellation rates and you cited the weaker group pace, I'm just curious where we sit today. Do you think the potential for incremental softness now is greater in the group segment than it is in corporate transient?

Is it greater?

I guess I think of it as a potential for deceleration or do you think that it's maybe more balanced at this point?

I think it's probably more balanced Jeff, I mean -- I think if we were to have a recession it's obviously much more at risk, that's always where the substantial cutbacks occur. That's where the big money is from a corporate perspective at the end of the day in terms of potential savings. But I think in the environment we're in, I would say they are probably -- they are reasonably balanced from a downside perspective.

And I'm just -- I have two questions on just corporate transient -- I have got periods in history where I guess this kind of environment sort of reminds you of where it seems like it's more about -- call it a corporate recession and consumer recession. I'm just curious some of your perspective there and maybe as a follow-up just to give us some quantification. What are your expectations on corporate transient demand, I guess earlier in the year and how is it evolved to where it is today?

I think we have to go back to the 90's. Maybe you'd see it during the Iraq -- the first Iraq weighted average rate, over that period of time where businesses got cautious because of the environment and the uncertainty. And then -- I'm sorry Jeff, what was your second question?

Second question was, I was just curious -- I'm just quantifying your outlook for the corporate transient demand, maybe where was it earlier in the year and where is it today. I'm just kind of curious if you had any sort of numbers to how you were thinking about your outlook for corporate transient demand?

I think what we've seen is probably somewhere between a 1% and 2% decline in business travel which would account for much of the change during the year in demand. It's funny it doesn't sound like a lot and it's not on a percentage basis but in an industry where a good year is 1.5% or 2% demand growth and a great year is 3% demand growth or 3.5%, it's not a big difference overall. So I think it -- the numbers aren't large, business is still traveling; you hear from the airlines as well, they've seen softness in business travel as well. I think we still have the international headwinds, I think business travel in-bound is probably down, we don't have good statistics for that obviously but with the strong dollar and the weakening economies abroad, that impacts global business travel as well. So our viewpoint is, if we see a pickup in global growth, we see a pickup in U.S. growth, we see a pickup in corporate profits; it wouldn't take a lot to see a turnaround in the direction of business travel.

Okay. And just maybe to wrap up on asset sales, I think that earlier in the year you talked about how you could potentially lift up or I think the number is $1.5 billion of assets to sell somewhere between $500 million and I think $1 billion. You now had a few sales under your belt in there -- it maybe gives a better perspective on the markets. If you had to update that view today and those numbers today, would they change much either in terms of where you would expect pricing to sort out or would it cause you to bring more or fewer assets to market?

I think the first thing we do is correct them, a misconception if that's the case because we never talked about $1.5 billion, we talked about $1 billion to -- a $0.5 billion to $1 billion in terms of assets we'd ultimately bring to market. That is kind of where we are right now in terms of what we've brought to market at this point in time, either -- again, actively or in a very targeted way. We've sold a little over $100 million. Obviously, we continue to pursue the ultimate disposition of our interest in New York, that's a meaningful piece of the potential overall $1 billion number. And I don't think our view in our strategy has changed at all from the beginning of the year. I think what we plan to bring to market, we've brought to market. It's a long process, I think -- I understand that people are anxious but this isn't -- we're not putting these things up on eBay. They are very complicated properties and we're looking for the right buyers in many cases for some of these assets. And some of the situations like New York are very complicated so it takes time. And our viewpoint as to what we thought would likely get executed when we put the plan in place earlier in the year, and announced it to you all and where we are today -- I don't think our view has changed at all about what we think is likely to happen from when we put the plan in place.

And just since you mentioned concerning New York, has there been any meaningful change or -- I guess advancement since your last time in front of investors and said many reads in the NYU Conference there?

Well, there is nothing that's changed than what we're saying which is, we're not going to provide a play-by-play of what is an extremely complicated situation where talking about any of it publicly would not increase our chances of getting anything done. So we'll maintain that posture, hopefully everyone understands and appreciate that when we have something to announce, we'll announce it. And until then we're not going to talk about the process at all.

Okay, thanks.

Sure.

[Operator Instructions] We'll take our next question from Lukas Hartwich with Green Street Advisors.

Great, thanks. Good morning. So on the weakness with corporate transient, I'm curious -- do you think that's the majority that's driven by weakness in corporate profitability or do you think that part of it could also be explained by Airbnb taking share for the corporate traveler?

Yes, I don't think it's the latter. I think it's the former, it's -- I mean you're seeing it in all forms of business spending, you've got weak capital investment, you've got weak discretionary spending on the part of businesses. And I think it's no different in travel, companies are having a difficult time growing top lines in order to mitigate or grow bottom lines they are cutting expenses and not making investments. So that's what we're seeing on the business side, I don't think any of it has to do with Airbnb.

And you look at New York, specifically, RevPAR in Manhattan market was down 5% in the second quarter but we know Airbnb units have gone from 17,000 units last year to under 7,000 this year. So the supply of Airbnb units in New York has gone down but the demand is still weak, or let's say the RevPAR is still weak there as a result of the corporate transient travel challenges that has supply concerns.

That's helpful. And then I just have a quick follow-up, last quarter you talked about the benefit in L.A. from the Porter Ranch gas leak. Is there any boost in the second quarter from that? And then I guess if there was, how much of the benefit was there for L.A.?

So the Porter Ranch which kind of ran into April at a few of our properties benefited us by about 50 basis points overall for the portfolio.

Great, that's it for me. Thank you.

And we'll take our final question from Bill Crow with Raymond James. Please go ahead.

Good morning. Gentlemen, when you think about next year not looking at your portfolio but your markets. Can you name two or three that are going to be stronger next year than they are this year or maybe identify one or two that you think might be negative RevPAR declines next year?

Yes, I think the two -- well, really three markets kind of stand out to us of being stronger next year. One of those would be San Diego which has an even better convention calendar and less supply growth in the market. Boston which has a very good convention calendar next year and has almost no supply growth next year, our forecast right now is only 0.6% for next year and Boston it's 5.2% for this year in Boston. So Boston is clearly struggling even with good underlying industries today to absorb that much supply in one year. Washington DC should have a better year next year, it has an improved convention calendar on top of having an inauguration as well as benefiting from the first year of new administration which is historically one of the stronger years of activity for Congress and also for overall activity of people coming to the market to meet with their new congressmen and senators. In terms of weaker markets; San Francisco is the one that obviously stands out the most. Again, I don't -- but we're not at a point to be able to make a prediction as to whether any particular market is going to be negative next year but clearly, San Francisco would be the market with the most risk, it's a short-term phenomenon in terms of market impact with the expansion and renovation of Moscone and the closing of two of the three Moscone buildings for the better part of the second quarter next year. So San Francisco has a good first quarter as of very weak second quarter has a relatively flat fourth quarter and a weaker third quarter next year. And San Francisco travel is doing a yeoman's job in making up for convention shortfalls by booking larger meetings into the larger hotels in the market and I think the pace that we last saw in San Francisco has in-house meetings up over 100,000 -- maybe a 115,000 rooms while the convention room nights are down something like 330,000 or thereabouts.

Okay. And Jon, finally for me; as you think about the implementation of the higher minimum wage and the scale that it ramps up a little bit each year, how much of an impact looking forward is that for next year? Do you give a sense yet for how that will impact margins?

I think what it's causing us to do is to continue to look -- focus a lot of efforts on creating efficiencies to absorb that. So generally that means reducing our headcounts at our hotels from where they've been operated. In some cases it also involves adding surcharges on -- particularly in restaurants for living wage, for healthcare in San Francisco as we've done there, as we've done in Seattle, as we're doing in L.A. in order to absorb some of that. So I mean I think overall Bill, labor is probably running somewhere in the 3% range with benefits being offset by 1.5% growth at most in other expenses and ending up in kind of 2.5% run rate range for expenses. And then we have projects and other capital investments and best practice implementation that should ultimately work to keep that number at that number or lower.

Okay, thank you.

Thanks, Bill.

And that concludes our Q&A Session. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you, Ashley and thanks everyone for participating. We look forward to updating you in another 90 days. Thanks. Bye.