Pebblebrook Hotel Trust (PEB) Q2 2017 Earnings Report, Transcript and Summary

Greetings. And welcome to Pebblebrook Hotel Trust Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Raymond Martz, Chief Financial Officer for Pebblebrook Hotel Trust. Thank you, Mr. Martz. Please go ahead.

Thank you, Bob, and good morning, everyone. Welcome to our second quarter 2017 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 2016 and our other SEC filings, and future results could differ materially from those implied by our comments today. Forward-looking statements that we make today are effective only as of today, July 28, 2017, 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. Okay, we have a lot to cover this morning, so let's first review the highlights from our second quarter financial results. Our second quarter financial performance exceeded the upper end of our outlook range. Adjusted EBITDA was $67.2 million which was $2.3 million above the upper end of our Q2 outlook. This was due to achieving 0.9 million hotel EBITDA greater than our recent June outlook combined with lower than expected G&A expenses which are largely related to savings and preopening and legal fees. Adjusted FFO was $52.1 million or $0.75 per share which exceeded the upper end of our outlook by $0.05 per share. This resulted from the hotel EBITDA and adjusted EBITDA beats, interest expense savings, a lower TRS tax expense, and a lower share count due to the shares we repurchased during the quarter. On the hotel operating side, same property RevPAR declined 2.4% which is in the middle of our outlook of minus 1.5% to 3.5%. Our RevPAR decline was driven by 1.7% decrease in ADR and a 0.8% decline in occupancy. Excluding our San Francisco same property RevPAR for the rest of the portfolio increased 2%. Our second quarter hotel operating results particularly our occupancy was significantly impacted by our renovations at Hotel Zoe San Francisco which is more disrupted than we forecast due to the extended delays getting our rooms completed and back in service. Hotel Zoe's RevPAR declined 59.5% in the second quarter and alone negatively impacted our second quarter RevPAR performance by 174 basis points. Fortunately the redevelopment and transformation of Hotel Zoe is now complete and we're really excited with how the renovation turned out and the very favorable reviews we've been receiving from both guests and the media. Our performance in the quarter was led by Skamania Lodge, hotel Vintage Seattle, W Boston and Monaco Seattle. Three out of the four performance leaders this quarter are located in the Pacific Northwest which clearly highlights the strong demand growth we've been seeing in this area of the country. Other hotels are hotels in Boston, San Diego and Washington DC also performed well during the quarter. Our softer markets during the quarter was San Francisco which come as no surprise, Minneapolis which is largely due to the increase supply in that market, and Coral Gables due to increase supply in Miami, as well as weak international inbound travel particularly from Brazil. Our hotels in San Francisco experienced a 15% decline in RevPAR during the quarter. If we actually Hotel Zoe, our other six San Francisco properties experienced the RevPAR decline of 9.3% better than the 10.4% RevPAR decline in the San Francisco urban market track. Excluding San Francisco from our property results, our portfolio RevPAR results was in 444 basis points better in the second quarter where growth rate of 2%. As a reminder, our Q2 RevPAR and hotel EBITDA results are same property for ownership period and include all the hotels we owned as of June 30 meaning they exclude Dumont NYC and the Parking Garage at Revere Hotel Boston Common since we sold these assets during the quarter. Our numbers do not exclude any hotels under renovation unless they are closed during the renovation. On a monthly basis, RevPAR for our portfolio decreased 3.3% in April, 1.8% in May, and 2.3% in June. Trends in revenue which makes up about 75% of the room night demand for our portfolio was down 1.2% compared to the prior-year with demand up 1% while ADR declined 2.3%. If we exclude the Hotel Zoe, trends in revenue was up 1% in Q2. The overall general softness from our transient segment was largely due to the soft business travel we have experienced the most of our urban markets. Despite the improved profitability in Corporate America, we have not yet seen this translate into increased business travel and at this point, we don't expect it to improve in the second half of the year. Group revenues increased or decreased 7.4% with ADR down 1.6% and group room night declining 5.9%. Over 70% of the decline in group room nights and group revenues in the quarter occurred in San Francisco. During the second quarter, total revenues declined just 0.2% better than our 2.4% of RevPAR decline. This was partly due to the healthy increase in food and beverage revenues in the quarter growing 3.9% or 1.8 million. The increase in the food and beverage were driven by the ramping up of Dirty Habit at Hotel Monaco Washington DC, as well as solid growth in banquet and cadence revenue at Skamania Lodge and Western San Diego Gaslamp Quarter. Rental and other revenues also grew at a healthy rate in the second quarter increasing 23.7% or $1.4 million versus the prior year. Same property EBITDA declined $3 million during the quarter to $71.6 million which was $0.9 million above our recent June outlook. Hotel Zoe alone represented $2.1 million of the decline. Excluding all of our San Francisco properties, same property EBITDA for the rest of the portfolio grew $0.9 million or 1.7%. Our same property EBITDA margin declined 142 basis points which is better than our outlook of a 200 to 300 basis point decline in the quarter. Despite the margin decline, operating expenses were well-controlled increasing only 2.1% as our hotel teams and asset managers continue diplomat our best practices, as well as finding ways to operate more efficiently. The hotel EBITDA percentage growth leader in the second quarter were Skamania Lodge, along with Hotel Zetta in San Francisco and hotel Monaco Washington DC both of which continue to ramp up following the renovations we completed at these hotels in 2016. LaPlaya Beach Resort & Club and W Boston also generated strong EBITDA increases in the quarter. Year-to-date same property RevPAR decreased 2.6%, same property total revenues have declined 2.1% and we estimate disruptions from renovation negatively impacted our RevPAR year-to-date growth by 245 basis points and one time market specific issues such as the Moscone Center expansion, the Porter Ranch gas leak and the Super Bowl in San Francisco negatively impacted portfolio wide RevPAR growth by an additional 315 basis points for a total of 560 basis points. During the first half of 2017, same property operating expenses have increased just 0.3% and hotel EBITDA margins have declined 164 basis points. Same property EBITDA declined $9.1 million versus the prior year largely due to our hotels located in Cisco which fell 6.7 million with Hotel Zoe accounting for $3.6 million or 54% of San Francisco’s impacts. Now let's shift our focus to our disposition and capital market activities since last updated you during our second quarter call. On June 20, we sold the 252-room Dumont NYC for $118.0 million which translates to 468,000 per key, a 3.3% NOI cap rate and 25.2 times EBITDA multiple. And then three days later, we sold the 826 space parking garage at Revere Boston Common for $95 million. The sales price equated to a 4% NOI cap rate and a 23.5 times EBITDA multiple. There was 10500 square feet of vacant space to the base of parking garage that also was part of this transaction. To calculate our NOI cap rate and EBITDA multiple, we used actual financial results for the trailing 12 month period ending May 2017. For NOI cap rate, we deducted from EBITDA and FF&E reserve amount equal to 4% of total revenues. Year-to-date as a result of these two sales in the second quarter, we recorded a net gain on sale of $14.4 million and a taxable loss of approximately $8.7 million. Since we announced in our strategic disposition plan in February last year, we have successfully completed 676.8 million of dispositions at a 4.1% NOI cap and 20.3 times EBITDA multiple, while also improving our geographic footprint by completely exiting the difficult New York market. We have used our disposition proceeds to reduce our outstanding debt, strengthening our balance sheet and repurchase shares which we continue to believe are undervalued. We've updated our NAV following these sales and our stock repurchases and now we estimate our NAV as $36.50 to $41 per share up $0.50 at the bottom end of our prior range and up $1 at the upper end. Year-to-date we bought that 3.2 million shares for a total of $93.3 million at an average share price of $20.77. That includes 1.1 million shares repurchased during the second quarter and an average price of $29.80. And hopefully you read in the earnings release from last night that our Board authorized a $100 million increase to our share repurchase program. As a result, we now have $156.7 million remaining on our upsize $250 million a share buyback program. Turning to our balance sheet as of June 30, we had $43 million outstanding in our $450 million unsecured credit facility. Our fixed charge ratio was 3.5 times, our debt to EBITDA ratio was 3.6 times, and we have no debt maturities till 2020. Of our current outstanding debt, 87% if at fixed rates and remaining 13% slowing. We will continue to evaluate opportunities to lock in fixed rates while also extending our debt maturities. Focusing now on our capital reinvestment projects, during the second quarter we invested 25.5 million across our portfolio where much of the capital related to the renovation and repositioning projects at Hotel Zoe San Francisco, Revere Boston Common in our re-concepted restaurant, and Monaco Seattle call outlier. Year-to-date we have invested $47.4 million into our hotels as part of our capital reinvestment programs. Our last disruptive renovation project for 2017 will be at LaPlaya Beach Resort & Club where we have commenced renovating our Golf Tower which should be completed in early Q4. So that update on our financial and operating results. I would now like to turn the call over to Jon to provide more color on the recent completed quarter, as well as our outlook for the remainder of 2017. Jon?

Thank you, Ray. So let start with the macro. Most economic statistics have been improving since last fall such as employment growth, corporate profits, and consumer confidence. But other ones that also correlate with the travel industry such as business investment and airline employments have yet to substantially improve. And while earlier in the year, there was optimism about the prospects for much improved economic environment due to the changes in government. We are yet to see any benefits in the travel industry. And of course we haven't seen any of the material legislation coming out of Washington that many people were hoping and expecting. Yes, there seems to have been progress made in the area of deregulation but that hasn't translated yet into improving economic activity. In fact if anything, more recent macro economic statistics have shown some minor softening and at least from our perspective, economies seems pretty much of it was prior to the election indicating a modest amount of annual growth with healthy employment gains. But should not alone of translated into better business travel as corporate profits turned up in Q3 last year with pretty strong growth this year, including arguably much stronger growth in topline revenues. Perhaps and alternately there is a pretty good historical correlation between the two. However, it seems business has remained cautious in their investments and discretionary spending. In all likelihood, the way in you see what happens later this year with potential tax legislation and the changes if enacted, that legislation would bring about for Corporations. One other positive that's occurred which if it continues should help our industry and our business is that the dollars has fallen significantly from its peak earlier this year following the election. The dollars is now declined almost 10% and is now trading at a level not seen in almost a year. This should lead all things being equal to more international inbound travel in the future, as we saw declines in international inbound travel last year as a result of the dollars previous run up. As a result of these macro trends, our industry's performance in the quarter was mostly as expected. Industry demand continue to outpace supply growth. Demand was up 2.3%, a deceleration compared to Q1's 2.8%. The Q1 benefited from the holiday shift to the second quarter's detriment. Industry supply growth actually take down to 1.8% from the first quarter's 1.9%. This slight decrease in supply growth came as a surprise to us and was likely result of construction taking much longer than normal due to both shortages of construction labor and overwhelmed city building and inspection departments. Finally, with our occupancy increasing 0.5% and ADR rising 2.2%, RevPAR for the industry grew 2.7% in the quarter down from the first quarter's 3.4%. The other notable observations from the quarter were that business demand both group and transient remains soft with the industry-wide group demand actually negative in part due to the holiday shift that negatively impacted group in April and leisure travel remains healthy in the quarter. Transient outperform group overall for the industry in the second quarter and is outperformed for the whole year so far. For Pebblebrook the trends were similar. We had numerous additional headwinds in the quarter all of which were previously communicated in detail. Groups was soft for us with the majority of it occurring in San Francisco and leisure remains healthy pretty much throughout the portfolio. Our RevPAR decline of 2.4% was in middle of our outlook range. If you look at the portfolio excluding San Francisco which is being severely impacted as expected by the Moscone closures that began following the first quarter RevPAR grew 2%. On top of the challenges due to Moscone, as Ray described in detail earlier, the renovation in Hotel Zoe in San Francisco also impacted Q2's RevPAR results shaving 155 basis points off our performance. In addition, we saw a tough comparison in April in LA for Porter Ranch which we estimate reduced our RevPAR growth by roughly 55 basis points in the quarter. In total, Pebblebrook's specific headwinds from Moscone, Porter Ranch and our renovations in the second quarter negatively impacted our RevPAR by over 500 basis points. The good news about the impact from Moscone this year, as well as our renovations particularly at Hotel Zoe, is that they make for much easier comparisons next year and in 2019. In other words, these headwinds turn into tailwinds for us. In addition, with the completion of the transformation of Hotel Zoe, Hotel Revere Boston Common and Hotel Palomar Beverly Hills and the coming completion of the renovation of the Golf Tower at LaPlaya in Naples this summer, we will have completed all of the major transformations and renovations that we planned when we acquired the hotels in our portfolio. We should see significant upside from these renovations over the next few years, as well as continuing ramp up from the completion of similar renovations and transformations and Hotel Zephyr Fisherman's Wharf, WLA West Beverly Hills, Vintage Portland, Union Station Nashville, Hotel Monica DC, Hotel Colonnade Coral Gables, and Hotel Zeppelin San Francisco. In the second quarter, EBITDA for three 2017 redevelopments declined by $2.4 million with $2.1 million related to Hotel Zoe. Of course with the challenges due to Moscone and San Francisco, some portion of this would have occurred anyway but the total EBITDA decline year-to-date at these three properties is $7.6 million. On the positive side, when we look at the operating results for the redevelopments completed last year, we continue to be extremely pleased with their performance. These properties are ramping up in 2017 as we forecasted at the beginning of the year. Zeppelin San Francisco, Union Station Nashville, Colonnade Coral Gables and Monaco DC combined to deliver $700,000 of additional EBITDA in the second quarter and $3.7 million year-to-date. We're well on our way to delivering the $5.5 million of increased EBITDA for the year that was included and specified in our initial outlook as well as our current outlook. When we look at the portfolio by coast, the East Coast hotels achieved at 2.9% RevPAR gain, while our West Coast hotel experienced a RevPAR decline of 4.7%. This of course is not indicative of the strength of the markets or our properties given the transitory impact in San Francisco from the Moscone closures and the negative impact from our redevelopment of Hotel Zoe which of course is located in Francisco on the West Coast. All of our West Coast markets were positive in the quarter with the exception of San Francisco and the strongest markets were Seattle and San Diego. With industry RevPAR growth of 3% though the first half of the year, and supply growth at less than expected 1.8%, we now expect the industry RevPAR to grow between 2% and 3% for the year, the more likely toward the middle of the range with the second half of the year likely to see RevPAR growth somewhere between 1.5% and 2.5%. While RevPAR growth for the urban markets underperform the industry in the first half by 100 basis points it underperformed in Q2 by over 200 basis points. Interestingly, if you remove both San Francisco urban and Manhattan from the second quarter, urban across the country would've been almost 150 basis points better. So you can see that those two markets because of their large sizes and high occupancies and rates have a disproportionate impact on the overall urban statistics reported by Smith Travel. We expect urban to continue to underperform the industry by 200 basis points or more in the second half as a result of a continuing weakness in the urban markets of both San Francisco and New York, as well as the challenges in Cleveland and Philadelphia that hosted the two political conventions in July last year. For Pebblebrook our revised outlook takes into account the removal of parking garage at Revere from our numbers as that was sold at the end of the second quarter. We actually provided a revised outlook accounting for that adjustment with the announcement of the parking garage sale last month. With our release yesterday, we've increased our new outlook range for Hotel EBITDA for the year by $3 million at the bottom of the range while it remains the same at the top end of the range. This is despite us lowering our RevPAR range for the year to minus 1% to minus 2% which primarily reflects four factors. First, the negative impact and now expect a slower ramp up at hotel Zoe due to the delays in Q2. Second, our current expectations that San Francisco will be weaker than previously forecasted in the second half of the year, they are still better than Q2, third a more challenging third quarter in Boston than we previously were forecasting, and fourth, a slightly more cautious attitude overall about the third quarter in particular as a result of weaker bookings in Q2 for Q3 particularly around the holidays that are in Q3. Nevertheless, we've increased our forecast for non-room revenues throughout the portfolio for the rest of the year including food and beverage revenues, and we've reduced our estimates for expense growth in the second half as we've gained more efficiency than we initially expected. So we're able to raise the bottom end of our outlook for the change in same property margin from minus 250 basis points to minus 200 basis points bringing the midpoint up to minus 175 basis points from minus 200 basis points. We're also raising our outlook range for adjusted EBITDA for the year by $5.3 million at the bottom of the range and $2.3 million at the high-end of the range. This takes into account our second quarter beat which also applies to our FFO per share outlook revisions. We're increasing FFO per share by $0.10 per share at the bottom end of our range, and $0.05 per share at the top of the range. For Q3 our RevPAR range of minus 2.5% to minus 4.5% is otherwise negatively impacted by the Moscone closures which continued throughout the quarter and our renovation at apply at LaPlaya that began right after the 4 of July. We're estimating the Moscone impact to our portfolio in the quarter at roughly 230 basis points of RevPAR and LaPlaya and Zoe renovation impact at 70 basis points - I'm sorry at 100 basis points. Like the Moscone impact in the first half, and the three renovations earlier this year, all of these are transitory impact that should certainly lead to improved performance in the next few years. So that completes our prepared remarks. We'll now be happy to answer any questions. Operator you may proceed with the Q&A.

[Operator Instructions] Our first question comes from the line of Rich Hightower with Evercore ISI. Please proceed with question.

Jon I wanted to ask about your comments on business transient which I think have been pretty consistent over the last few quarters, you haven't really seen an uptick a lot of cautiousness out there and so forth. What I'm wondering we consistently hear that leisure is still a pretty solid segment but if business transient is looked on as a leading indicator so to speak in terms of the different demand segments. I'm wondering if there is going to be any sort of negative follow-through in a leisure side or if you seeing that at all in the portfolio if you have any comments on that?

Yes, we’re not really seeing that in the leisure segment. It continues to be pretty healthy across the portfolio. I mean we see changes from month-to-month either holiday, schedule impacted or perhaps weather impacted but generally speaking leisure continue to be very healthy across the industry and our portfolio.

But nothing maybe on a forward-looking basis that concerns you?

No, not really, I mean, again the holiday impact I mean - leisure was down over the July 4 holiday not surprisingly because July 4 moved to Tuesday from Monday so there just wasn't as much activity over the two or three night long weekend we had last year versus kind of a bifurcated holiday this go around.

And then maybe a question for Ray, you sort of got into this a little bit in the prepared comments but as you think about the different movements in taxable income related to asset sales and other items this year. Can you talk about the prospect for special dividend how you guys think about that?

Sure, of course we have delve it out with a number of factors and cleaning some other potential dispositions we may have later this year and as you also know, we do have a lot of flexibility with how we can record dividend treatment in future years in the current year. So we have a lot fixed effective way to play with that and move things around, but I’ll say right now we’re staying path I think right now our taxable income versus our dividend we’re comfortable in the range but obviously if we have any changes such as in disposition that may change. So we’ll apprise you of that whether that changes and let you know within the year.

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Have you seen any change in buyer interest in hotel assets in recent weeks given some of the business travel softness you've described in June?

No, the active markets continue to be a pretty active. The buyer pool, I would say this year is probably a little broader and deeper than it was last year. It certainly aided significantly by both a very strong debt market or debt markets and that the overall economic growth an optimism that’s out there. So we haven’t seen any change in buyer activity or interest at this point in time.

And two of your markets Portland and Nashville are good places to be at the solar eclipse in August, is there any benefit from that in your guidance in the third quarter?

Well there are pretty much sold out over those couple of days. So there is some benefits to those markets, they probably will at least those days will look pretty good on a year-over-year basis, but overall its unfortunately not a big enough if the eclipse lasted for more than like a minute and a half or two and half minutes, it lasted maybe three or four days that might not be good for economy but it would help our hotel.

Thank you. Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.

So Jon I was curious in your prepared remarks about - some of the comments on the urban performance and it was helpful to think about sort of axing out San Francisco and Manhattan and just - as you kind of think about it and maybe you've looked at this back a little further. We’ve been seeing urban underperformed now for probably the better part of two years. And so my question is, do you think that the underperformance is starting to actually narrow because it is hard, I mean everybody you guys are excluded but just about everybody else has some waiting to a market like New York right. So excluding it is hard to do in reality but I kind of curious just like when you look at the data due you think that underperformance is starting to get maybe less bad or that headwind is getting less bad then it has been in a while?

I think for the overall industry, I'd say it’s probably no change just yet as we are seeing increases in supply and many of the other urban markets across the country. I mean you look at the top 25 and again that's when a travel publishes and again while you have a couple of very large players that impact the market overall, you still have weakness in a number of other markets primarily due to new supply growth. I think the interesting thing for us, are two things Shawn, one is the supply growth in the urban markets begins to decline the rate of growth begins to decline by 2019. But second if the dollar either continues on its path or even stabilizes with this level about 10% off the peak that it was at, that should begin to turn what’s been a headwind and a little bit of a tailwind for international inbound travel which is as you know has a much bigger impact on the urban markets than the industry overall. The reason that dollar so important in the international inbound travel so important is that there is a global secular trend of growth in travel and it’s running for 4.5% on a global basis. And we took advantage of it in 2013/2014 and even part of 2015 before the dollar turned. But when it turned up, it’s had an impact and clearly impacts the urban markets more. So if that's actually turning as it started to, historically the urban markets outperform because they benefit from business travel which historically grows over the course of the cycle, it benefits from the secular trend in international travel which has been going on although we’ve blunted that in the last two years because of the dollar and it’s benefiting from a secular trend of reurbanization of America with people moving back into the city. So historically supply comes late for urban and early in suburban and this time it’s been reversed but supply is going to peak, supply growth is going to peak in urban before it peaks in the industry.

And then it was already asked about the asset sale environment broadly but just kind of curious on could you give any color on sort of the financing markets and impact on that activity because it does seem like those actually have improved and might be supporting some activity out there?

No, you're absolutely right Shawn and we continue to see it’s really - look all that debt avenues are open between bank debt, insurance debt and CMBS and we’ve seen really the CMBS market particular the floating rate side really just awaken this year and so I think we’ve all seen a lot more aggressive pricing when you sort of go into the B notes and the mezz pricing. So the A note were -- most of the CMBS haven’t really moved that much, but the B’s have gotten a lot more aggressive and leverage has also been increased. So if you look at this time versus last year, leverage now and some of these CMBS loans, you can get to that 75% level, and you tack on some mezz, you could probably get above that. And the pricing isn’t really that aggressive. So I think that’s what we can encourage. We’re looking into the transaction market, expecting more transaction to occur because of how good the debt markets are. Now the other side of that is, because the debt markets are really active, I think some owners are now - if they can’t get a good price in the in the sale, they could also look at just refinancing, short-term 3-5 years basis and weighted out. But certainly debt market certainly help the acquisition market as well as the disposition since we’re in the sales mode.

Our next question comes from line of Bill Crow with Raymond James. Please proceed with your question.

Jon, I want to start with the Zoe performance. And not historically, but looking ahead, how do you see that recovery playing out?

I think based upon where we were from a bookings perspective, because of the delay in deliveries, Q3 as indicated by, a meaningful part of our reduction in RevPAR for the second half of the year. But particularly in Q3, Zoe is going to underperform the market, the portfolio. It’s not going to be down 59.5% like it was in Q2 when the rooms weren’t available. But it'll be up. It’s not going to be a positive contributor to the portfolio. We do think it does begin to ramp up. And on a year-over-year basis, we should be up in Q4 both from an occupancy and from a rate perspective compared to last year. And then obviously, we then have not only easy comparisons, but we’ll have had six months behind us in getting really rolling on positioning the property properly in the market at the same time that San Francisco begins to recover next year as a result of Moscone, the impact this year in particular.

Jon, did you consider at all to shutting down the Zoe for the second quarter given the challenges you had and the market had?

Well, we look at that every time for every of these major transformations. We obviously look at that ahead of time, Bill. And we made a decision based upon our experience in the market that it wasn't the right thing to do given the nature of the redevelopment and how small the lobby is in particular in terms of its impact. In retrospect given that we had, I mean, we literally had a couple of floors of rooms completed that the inspector would not sign off on until other work was done that he had requested. As a result of that, clearly in retrospect, it probably would've been the right thing to do. But we only know that in retrospect. So had we not experienced, I would say this sort of hit or miss experience in San Francisco. In Zephyr, we had no issues at all. We opened right on time. Ut was even more extensive work than Tuscan. And yes, we closed that, but we actually completed on time, and we got approvals on time. We didn’t have the same experiences with Zephyr. That was a little bumpier if you recall. At Zetta we didn't have any issues. So it’s hit or miss in San Francisco and it is what it is. So in retrospect, sure, we should’ve closed it.

And then, rate, you talked about the NAV going up your internal calculation. I didn’t catch the driver of that change. Was it cap rate adjustments or market cap rates? What drove that change?

It’s primarily due to the recent sales we have with Revere, and then our share repurchases. And what we publish in that backup in our updated investor presentation after earnings which details by market, but we did not move our cap rates.

Didn’t move our cap rates and we didn’t our what those ultimately what they all average down to on upper key basis, Bill.

And then finally for me, Jon, just thinking longer term about your markets and susceptibility to supply growth. I want to focus in on Seattle in particular because I think most of the other markets are not too bad. But there are growing concerns about Seattle, the new supply coming in there and whether demand can keep up with that. Can you talk about that market in particular?

That’s actually a really good one to talk about because our forecast for supply growth have actually come down significantly since earlier in the year. So at one point, we heard numbers like 22%, supply growth between 17 in 19. I think right now we’re looking at something closer to about two thirds of that, about 14% over that three year period. This year supply numbers have come down due to delays in deliveries. We’re now looking at 0.6% supply growth in Seattle. Again, we’re talking about the downtown that include South Lake Union, Denny triangle downtown down by the sports stadium. So what you and I would consider the urban part of the market doesn't include the suburban markets. We’re looking at a meaningful increase next year. They’re right now about 6.5% and 6% in '19. There’s very strong business growth in that market. I think the last I heard, Amazon had upwards of 10,000 or 11,000 open advertised positions in Seattle. You're seeing this monstrous supply growth in office and in residential in the market. It's all leading up because of the growth in the market right now. It’s the highest growth market probably, and the U.S. has the most cranes, the most under construction real estate, large amounts of migration of people, some from the Bay Area. So we feel very good about the ability of demand to absorb this market and think it’s a fantastic long-term market as it’s evolving from a second-tier city to a first-tier city.

Our next question comes from the line of Jim Sullivan with BTIG. Please proceed with your question.

Just a follow on Bill's question. One of the market that is important for you is Seattle, but the Philadelphia market in terms of kind of the three-year forward supply growth and the potential impact you might see with your asset there.

Yes, that was a little tougher. We think it will be a little more challenged than Seattle. We’re looking at somewhere between five and 5% and 5.5% supply growth this year which is having some impact on the market, though not as much is not having the little co-convention again this year. Between 3.5% and 4% next year, and then with the delivery of a large Starwood driven Tupac property, that’s a W and an element. We’re looking at closer to 7.5% in 2019. Interestingly, we were very concerned about this market three years ago. Probably more so from a lack of demand perspective as the expanded convention center has really struggled. They've really struggled to attract new conventions into the market. But interestingly what we've been seeing is actually pretty healthy demand growth in the market. That’s coming in a couple of areas. One is the relocation of companies from the suburban markets back into the city which people will never happen because of the wage tax. But it is finally happening. Companies have determined they can't. They’re just having a hard time hiring out in suburban markets. And then two, you've got [indiscernible] and Comcast which is growing very rapidly in the market. And when you put together with what is a very well located city between DC in New York and all of the legs of demand that we typically look for, like convention, leisure, culture, sports, business, the market has actually performed much better than we thought over the last few years. And I suspect, Jim, it’ll probably perform better than we think it will as we look at it right now with these supply challenges.

Can you talk a little bit also second quarter, the results in Portland? Was that what you were expecting, or was that a little bit soft? And what's the reason for that kind of subpar RevPAR growth compared to - well, obviously Seattle's incredibly strong demand market. But just generally on Portland. It’s often times we put it in the same bucket with Seattle, but little bit weaker for you this quarter.

We think Portland has a little sister to Seattle and probably 10 or 15 years behind Seattle in terms of its evolution but clearly a city that's evolving very substantially. So Portland this year has more supply growth close to 5%. And it's really the first supply growth other than a couple of select service hotels in the entire cycle. But second quarter was a tough comparison to a very good convention calendar last year and a much softer calendar in this year's second quarter. So Portland is going to struggle a little bit compared to its stronger sister in Seattle probably over the next 18 months as it absorbs the supply growth in the market that is the under construction.

And finally from me, you've obviously talked about the city-wide outlook in 2018 for San Francisco. Can you kind of run down -- in the markets where city-wide are an important variable for demand, thinking in terms of 2018, what the outlook is at this point.

Yes. I would say I’ll be a much better position to talk about it with more up-to-date data in the next quarters call. But I would say offhand San Diego is decent next year, Boston is decent next year. I think in both cases, the calendars are different. They fall differently by quarter within their markets just because of the way the conventions fall. We've talked about San Francisco, and just to be clear, I mean, San Francisco has an improving convention calendar next year. Perhaps might be some confusion out there. But room nights on the books for next year are 15%, and citywide room nights are up 43% next year. Now that's a big percentage number, but the real big numbers follow in '19 when we’re up 50 some percent more in room nights probably 20 to 25% above the prior record in San Francisco. And then compression nights go - right now they’re at 79. I think last quarter they were at 80. So they do move around a little bit based upon activity levels for '19, but you're talking about being up about 30% to 35% from the prior peak year in San Francisco. So '19 shapes up very well. Obviously, we’d love for it to come in '18, but we have one more year before we get there in San Francisco.

Can you make a quick comment on L.A.? The outlook for citywide in '18.

I can't because we don't pay as much attention to L.A. because it’s a downtown market, and our properties are all out in the West of L.A. And other than maybe two or three major events really doesn't get impacted out in our markets.

Thank you. Our next question comes from the line of Wes Golladay with RBC Capital Markets. Please proceed with your question.

Just want to follow up on Jim’s question regarding Portland. How do you see that market performing relatively over the next 18 months versus the other urban markets? You mentioned it would be below Seattle which I think will be a strong market. Just kind of curious about the broader industry.

I think it’s likely to be an under performer, Wes. The issue we don’t know about Portland, and we continuously run into this with the few cities that are growing rapidly like in Austin or Nashville. Because of their growth rates, it's hard to predict how the supply is going to get absorbed. Historically in markets like Austin and Nashville, clearly the first three or four or even five years in Austin, the supply was absorbed without really a hiccup in the market. That’s been the case so far in Nashville, although I think it's beginning to catch up with the market. But that's after three years of very strong supply growth. And Portland really is just beginning to experience it this year and next year. And much of it is select service on the peripheries of the city. So we still think we should expect it to be an under performer, and I would say an underperformer versus the industry. But it could be very different than that in either direction, frankly.

And then looking at business travel demand, it is pretty soft. But you mentioned Seattle is quite strong dynamic economy moving to a first-tier city. Are you seeing a pretty healthy business travel demand out there?

Yes, I mean, you look at the market, we’re running we’re almost into the mid-80s in occupancy in downtown Seattle and what is historically been a very seasonal market because of the rainy and cool season up there. So yes, business travel there is very, very strong. And it’s not just Amazon, but Amazon is a big driver of what's going on in that market. No doubt.

Any other markets? Boston, San Francisco where you’re seeing above average demand on the side.

Again, you’re going to have it in markets like Nashville which we’re in with a small property. I'm sure you're probably seeing it in markets like Austin still. San Diego historically is not a big corporate market, it’s really convention and leisure driven. So I would say in general, the rest of the markets are fairly average.

Our next question comes from the line of Michael Bellisario with Baird. Please proceed with your question.

On our updated RevPAR forecast for your portfolio, are you seeing trends sequentially slow, or are you going to simply just, assuming that the current softer trends persisted, is it more backward looking or is it more forward looking changes that you’re making to your guidance range?

Well, clearly, I mean we indicated we think the industry will grow RevPAR at a slower rate than it did in the first half. We think RevPAR is going to grow 1.5 to 2.5% in the second half versus the 3% that it grew in the first half. Some of that’s supply growth, some of that is holiday impact. But some of that is convention weakness, more so in the second half and first half in some markets. It's also some general cautiousness because we just haven't seen the uptick from what have been very good economic statistics. And a concern that businesses are postponing decision and investments waiting for tax reform, we haven’t experienced this for 20 years, a long time. So it's really those issues more so than anything we’ve necessarily been seeing per se.

And then can you maybe comment on July and did you see the same softness that we saw in the SGR data for the month?

Yes. You mean in our portfolio, I mean we read the data like here, it’s July is soft and I think perhaps people originally when thinking about July and take into account the impact on the industry from the two political conventions and the difficult comparison that creates for the industry numbers. I mean you saw that last week where otherwise clean but – but you didn't have a convention in Cleveland last year. And while at Cleveland, which is not a top 25 market, the same number of people go to the Republican National Convention in Cleveland as they were in New York. So, it's still as the same impact on the industry and the rates that they got convention were dramatically higher than what their normal rates would be. So, I think as I mentioned July 4 weekend and that week were softer both from a leisure and from a business perspective because it fell on Tuesday, which hurt business travel and actually hurt weekend travel as well because a lot of company had Monday which is not holiday.

A bigger picture question, maybe just on lack of ADR growth across the industry. I mean you guys see any diversion between higher-rated hotels and lower rated hotels in particular market. I mean basically are you seeing any share shift within a market that the second of pricing power of your particular hotels?

No. We’re not seeing that, what we have been seeing all year depending on compression levels is when things get compressed, we’re able to close out our corporate accounts because our standard rooms get filled up. And we can – our corporate accounts buy up and pay more for larger better quality rooms that are available because the less expensive rooms are no longer available and we -- what we've seen is that where historically businesses might accept that what they're doing is they are really pressing their people to pick another hotel within their accepted corporate agreements where that may not be the case. So, to some extent it may mean, people aren't trading down from a price perspective, they're just being forced to stay within their price range, if that means going down from a quality perspective at their hotel. So, that’s probably what we've seen more so than it being customer choice.

[Operator Instructions] Our next question comes from the line Stephen Grambling of Goldman Sachs. Please proceed with your question.

I may have missed this. But what’s your expectations for cost inflation, in I guess the year ahead as we look into 2018 and beyond. And your ability to sustain or even grow margins if RevPAR remains sluggish, but you do get the balance in San Francisco?

So, wages and benefits are running, I would say 3% plus and the cities around the U.S. and vary from one market to another. But generally that's what we're seeing. We would anticipate in most cases we’re going to see 3% increases next year in total compensation again benefits probably a little more than that, bring it up slightly above three. A lot of other categories whether it's energy or food or paper materials or supplies many of those things have been in relatively flat or with only minor increases. And so, we've been able to offset some of that wage growth and benefit growth with – with lower inflation if you will elsewhere within the portfolio. I think insurance as an example. This is our third or fourth year in a row with declines in reductions – meaningful reductions in insurance costs. But in terms of additional savings, so this year, I think we’re probably going to run somewhere in the 2% range for overall cost growth within the portfolio, was good to get out in New York, where we've been seeing real estate tax increases of 10% to 20% a year. As an example, where in California we’re limited to because of Prop 13, 2% a year, which is very helpful because half of our portfolios in California. But we continue to press ahead with best practices, new best practices investments in technology, that reduce costs you know whether outsourcing of food and beverage, changing the way we deliver food and beverage, changing our concepts, leasing them out. I mean, it's a lot of little things in the portfolio. We just – we had our sales department and our Embassy Suites property in San Diego that was on the ground floor space, not the best of locations. But we move them into space within the building that we had that wasn't otherwise being used and we leased it out to retail tenant for $60,000 a year. So, there's a lot of those things that we continue to press on through the existing portfolio to offset the higher increases in wages and benefits.

And then going back to one of the other topics. As you look at the temporary impact of Moscone. Are there any other historical presence that you can think of where our market had. This kind of exogenous demand impact and corresponding inflection that may provide a good roadmap?

No. The answer is no, now. Someone told me I think I saw that Louisville closed their convention center completely. But that again, that’s happening concurrently. So no, we haven’t had this experience anywhere else. So, we didn't really have a roadmap to look at. What we did is Stephen was I mean in estimating for this year, I mean, convention bounce around month-to-month. You have months where it could be up 80% and months that can be down 80%. There have been months where you have any citywide in a market and this happened in San Francisco from time to time. So, we really went back and looked at our most recent monthly data and interpolated that across 6 or 12 month period of time. I would say in general our forecast have been pretty good.

Our next question comes from the line Tyler Batory with Janney Capital Markets. Please proceed with your question.

Wondering if you can talk a little bit more about the OTA business. Some of the brands which had varying levels of success, getting more bookings direct and then lowering commission payments as well. So, just curious where you guys are both of those?

I mean that’s now been a trend now for probably five or six years. The contracts have generally gotten less expensive each year. The brands are driving the reductions, the terms of generally gotten better. Each year obviously, the OTA are doing just fine, they continue to expand and grow and take market share because of their half and their acquisition appetite. But in our case particularly with the independent properties or the small brands, I mean our contracts have also gotten better, you know over the course of the years because of the gap gets too wide, the alternatives is that we can stop brand if that’s going to make for more profitability at the end of the day. So, all of that continue to get better and we would expect that to continue to improve and you know we applaud the brand for getting focused on the OTAs of the competition in this regard versus each other.

And then just quick follow-up question on the guidance - RevPAR guidance. I mean you mentioned the third quarter being a little tougher in Boston, and also you mentioned trying to be a little bit more cautious for third quarter overall, given some weaker second quarter bookings for the third quarter. Just give a little more color on what's driving these two factors?

In San Francisco, as we said we used some history as a guide. It looks to us like there's a little more promotion and discounting going on in the market in San Francisco than we expected and so pricing is a little bit weaker in Q3 than what we originally thought it would look like as a result the two of the three buildings at must county being closed. So we didn’t experience that in Q2. It was pretty much as expected for the overall market but Q3 looks to be a little bit softer in terms of pricing. And I would say the same thing for Boston it's not as much a demand overall demand perspective as it is the kind of price sensitivity I mentioned earlier as it relates to corporate accounts in the marketplace. Overall, you know I thought on the overall consciousness really relates to the bookings that were surrounding the first week of July and the two weeks in September around the Jewish holidays.

Our next question comes from line of Floris van Dijkum with Boenning & Scattergood. Please proceed with your question.

Quick question on, Jon you guys have been at the forefronts of getting usage fees or other charges adds beyond the room rates, what would you say to investors who say that those revenues are not as valuable as your ADR and what other markets besides San Francisco and Seattle do you think are subject themselves to - we’ll add surcharges?

Well nobody likes to add surcharges and people don’t like to pay surcharges. So we’re very careful about where we put those in place. It really is about whether the market if there's another way to improve the economics where there have been mandates - what we found is customers are unwilling today to pay for $20 hamburger. But they’ll pay for $18 hamburger with a surcharge that goes towards healthcare for the workers. So it really varies by market Floris and in terms of the value of it and San Francisco is a good example it’s pretty much evident in almost every single restaurant in San Francisco has implemented a surcharge. So we certainly we’re not leading the charge in that market nor do we want to lead the charge overall. We’ve to look at what all the competitors are doing, but it's not just hotels when it comes to restaurants and food and beverages it’s looking at the restaurants it’s looking at event centers et cetera. As for the question about how valuable is it, I mean I don't know the difference between a dollar that comes through a surcharge and a dollar that comes through ADR, it’s the same dollar that gets paid for our dividends that goes to pay for capital improvements. And if anything it doesn't come with additional expenses or very limited expenses whereas ADR may be subject to other expenses that perhaps the surcharges isn’t.

Thanks I figured you would say something like that. One other question I had is on dispositions it sounds like you're not done for the year maybe can you give us some color on what to expect and also are there anymore of these hidden gems like the parking garage in Boston that you have hidden in your portfolio that no one really values?

You shouldn’t expect anything we are being very selective and opportunistic about how we’re proceeding, we have had good success we hope we’re not done. We’re certainly continuing to put efforts into trying to achieve further dispositions but in terms of what else we might have and we’ve talked a little bit previously about the retail that we have at Zephyr Fisherman's Wharf in San Francisco, last year it generated $4.5 million of NOI and we're in the midst of upgrading that completely re-skinning it and for the most part retenanting it. And in the meantime, there is a process where we would need like we did in Boston a fairly lengthy process to separate the real estate legally in order to be able to sell it separately from the rest of the property. It's not going to be something that happens this year nor will the renovation and releasing and retenanting be complete this year. But we would hope that ultimately it's something that makes more sense to somebody else for the core discipline in urban retail than our expertise in it frankly because that's not our expertise at Pebblebrook.

Our next question comes from line of Bill Crow with Raymond James. Please proceed with your question.

Just quick follow-up Jon on Moscone Center we get asked quite often about whether the construction delays that you've referenced at the Zoe and elsewhere through the past few years have evidence themselves in the work at Moscone and whether we’re setting ourselves up maybe for a little bit of a disappointment next year because things get delayed?

It certainly possible Bill, the original schedule for the renovation expansion of Moscone which is a very complicated project did not call for closing the two buildings in the second and third quarters of this year they did that because they fell behind over the first 18 to 24 months of the work. And had to basically take a hit this year in order to get back on schedule so it could happen again obviously we’re not overseeing the project and I'm not sure that would matter anyway, but maybe they have more influence with the city since it's a city project than we do with our own hotels.

Jon they haven’t communicated any sense of delays or anything?

They definitely have not Bill and they were very good they’ve been in the most incredible communication we've ever experienced on a project done by a city in our history. We get monthly updates, our properties get monthly updates from the authority as well as SF travel not only on the construction but on what's happening with every single customer who is booking or thinking of booking at the convention center.

Thank you. Ladies and gentlemen there are no further questions at this time. I’d like to turn the floor back to Jon for closing comments.

Thanks Bob. Thank you all for participating. We look forward to updating you in another 90 days. Have a nice summer. Bye, bye.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.