Greetings, and welcome to the Pebblebrook Hotel Trust Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Chief Financial Officer. Thank you. You may begin.

Thank you, Donna, and good morning, everyone. Welcome to our second quarter 2018 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. But 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 2017 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, 2018, and we undertake no duty to update them later. You can find our SEC reports in our earnings release, which contain reconciliation of the non-GAAP financial measures that we use on our website at pebblebrookhotels.com. Okay, we have a lot to cover this morning. So let’s first review the highlights of our second quarter financial results. Our second quarter financial performance exceeded the upper end of our outlook range. Hotel EBITDA was $74.8 million, which was $1.4 million above the upper end of our lookout. Adjusted EBITDA was $72.8 million, $6 million above the upper end of our Q2 outlook and adjusted FFO was $56 million, or $0.81 per share, which exceeded the upper end of our outlook by $0.09 per share, so a solid quarter for us in all financial metrics. On the hotel operating side, same-property RevPAR increased 2.6%, which is at the upper-end of our RevPAR outlook of 1% to 3%. Our RevPAR increase was driven by 1.5% increase in our average rate and 1.1% increase in occupancy. The hotel operating beat was primarily result of higher growth and forecasted in non-room revenues, which grew a strong 4.4% in the quarter and greater success was ongoing cost reductions and…

Thanks, Ray. The second quarter was a very positive quarter for both the industry and for Pebblebrook. Overall demand growth accelerated in the second quarter from the first quarter as a healthy signs of improvements in group and transient travel that we saw late in the first quarter, continued throughout the second quarter and certainly seem to be a trend at this point. Leisure travel continues to be strong and data published by tourism economics indicates that international inbound travel has turned positive. So the demand side of the industry’s equation is clearly showing an accelerating trend in growth this year versus last year. And I'll be spending a little more time this morning trying to put all of the industry statistics in perspective in order to help everyone to understand the positive trends. On the supply side over the last twelve to eighteen months, we've seen a flattening of not only net deliveries, which seem to be running in the 1.9% to 2.1% range, but industry-wide construction starts, which are now running slightly below deliveries clearly indicating construction starts are slowing and the industry is in the process of topping out the rate of supply growth. And the good news is the rate of growth in supply is topping out at a level below this year's accelerated rate of demand growth. So occupancies should grow this year by another 50 basis points to 100 basis points on top of an already record level of occupancy overall for the industry. Supply growth in various urban markets will continue to be a challenge through next year particularly with delivery stretching out due to even longer construction delays. With demand exceeding supply growth this year and occupancy levels rising from record levels, we're seeing industry RevPAR growth accelerate from last year's rate…

Thank you. The floor is now opened for questions. [Operator Instructions] Our first question is coming from Jeff Donnelly of Wells Fargo. Please go ahead.

Good morning, guys. Actually just maybe a first question for the housekeeping is on – on the disruption what's the total EBITDA that you're expecting to have lost from renovation disruption in 2018 and then specifically LaPlaya.

Give us a second here. I think as it relates to LaPlaya, it's between the $1.5 million and $1.9 million, which represents also the settlement. And then in total, we're talking about $6.3 million from renovations.

Okay, that's helpful. And maybe Jon, I just had a question for you about pricing power. The industry and most of your markets are at record occupancy, but the incremental demand that we're seeing isn't necessarily translating to the rate spikes that maybe were accustomed to seeing in kind of comparable periods in the past. Is that a reflection of just price transparency that now exists in the industry, let’s kind of call it corporate austerity is? I guess I'm curious is there something about the nature of the demand that maybe has curtailed the ADR spikes that maybe we used to see in some markets.

So I think it's likely a result of quite a number of factors, Jeff. I mean I think part of it we've talked about in the past there are some structural issues in the industry that some of which can be addressed obviously the issue of transparency and pricing cannot and that’s to the clear benefit of consumers. But I think as it relates to some of the structural issues we've talked about in the past, most of them are in the process of being corrected. It involves the terms upon which basically the agreements are made with the customer where most of our properties cancellation rights need to be outside of either 48 or 72 days. The industry as well as our properties have been selling much more advanced purchase rates and terms, which means those are prepaid nonrefundable rates. And both of those allow our properties to at this point as those changes have been made. It allows us to better revenue manage our properties and in many cases to wait for the higher price later business that we've traditionally had particularly coming from business travel. And with the improvement in business travel, we've seen an improvement in ADR growth. We haven't seen a dramatic increase in ADR, but we have been gradually seeing ADR increases as I communicated in detail and in the comments. But I think the improvements in cancellation terms, the variety of pricing alternatives and term alternatives being provided to the customer are beneficial ultimately to pricing. I think the increased regulation that's being passed in many cities will be passed in additional cities along with increased enforcement related to short-term online rental management that violates zoning. I think that is beginning to benefit markets as we've seen in both New York and probably San Francisco just recently passed in San Diego, just recently passed in Boston was passed in Chicago. So I think that's beneficial. And then Marriott is relaunching a combined loyalty program of their three brands, the Starwood SPG program as well as the Ritz in the Marriott loyalty programs on August 2018. And with that they're changing the – and we’ve talked about this before. They’re changing the reimbursement formula for redemptions to owners to make it much more of a slope instead of an on/off switch at 95%. And we think that will have as well a very positive impact on future ADR growth and opportunity as revenue managers don't need to try to do everything they can, including really lowering rates at the last minute in order to get to that 95% on/off switch if they have a lot of redemptions on the books. So we are seeing things move in a very positive direction and it certainly wouldn't come as a surprise to us as this demand supply imbalance continues in a positive way that we continue to get more pricing power in many of our markets.

That's helpful. I know it's a far reaching question. And maybe on the expense side, I guess, how do you think we should be thinking about expenses in the next 12 to 18 months? Labor costs seem to be a significant and growing part of the expense pie if you will. And it's hard to point to other expense categories that can provide some offset. I'm just curious how you're thinking about expenses and maybe flow through in the pace of sort of rising RevPAR that we're enjoying.

Yeah, I mean, I think the fallacy of just thinking of it that way Jeff is that there are lots of new ways to do things. And so technology is beneficial. Efficiencies can be found through investment and energy reduction technologies and green programs. There are new technologies that come out every day. As you know we are seeing a shift. It’s very gradual and should be as the technology needs to be substantiated and any bugs taken out. But we're seeing more folks bypassing the front desk completely and going right to their rooms with the ability to open their doors off their phone devices. So I do think as we've shown already this year and as we're forecasting for the second half of the year, I think we are able to find efficiencies, different ways of doing business, different concepting in our food and beverage outlets, changing the way we do business, job sharing, all sorts of things that offset the wage and benefit pressures, which are probably running 3% plus in our markets throughout our portfolio.

Yeah, thanks. I’ll jump back in the queue. Thank you.

Thank you. Our next question is coming from Rich Hightower of Evercore ISI. Please go ahead.

Hi, good morning guys.

Good morning.

Good morning.

Jon, I want to go back to the question about the Marriott, Starwood sales reorganization and see the impact that it's had on your portfolio this year. Is there a way to frame out for us what the market lost share or RevPAR index share has been this year? And then what those easy comps might look like next year that you sort of alluded to but did you give maybe as much detail on? Is there a way to frame that out quantitatively for us?

Yeah. So, right now, the combination of the lost RevPAR from the Marriott, Starwood integration for the year and the integration of Kimpton with IHG were estimating a total of 100 basis points of RevPAR loss for the whole portfolio. So, obviously, it's much greater with the impact of hotels.

Okay. And is that broad based across every market that you're in? I mean would you say it's isolated to a handful of hotels and markets?

See I wish it had been isolated. Unfortunately, it's pretty broad based across the three Marriott managed hotels because those are the three that have been reorganized and all of the Kimpton properties because the systems integration and changes had an impact on all of them. It was varying degrees at all properties, Rich. Obviously none of them were exactly the same, but it was pretty broad based that none of those ten properties in total were spared.

Got it. Thanks, thanks for the color there. And then the second question here, just as you’ve described the incremental improvement in underlying trends since last quarter, since the beginning of the year, have you thought about updating your NAV estimate in the – for investors now that presumably the value of the properties is going up in that period.

Well, we did do it last quarter in…

In June…

In June, so last month. So I think that that took those things into account already.

Okay, got it. Thank you.

Thank you. Our next question is coming from Anthony Powell of Barclays. Please go ahead.

Hi, good morning everyone. A few questions on the San Francisco renovations. I think every REIT that we cover is doing some kind of renovation in the market this year. Given that do you expect any kind of RevPAR index gains from Sir Francis Drake deals? Or is it more of a matter of keeping up in the market?

Well, we do expect gains not just because of the bathroom work but because of the guest room work that we're doing as well. Those were already previously scheduled renovations for the guest rooms and we made a decision after touring the market and having conversations with our operators that we would benefit from doing additional work and substantive work in the bathrooms. And so, we've done that work previously at Zetta and Zeppelin and Zoe, a lot of Zs, sorry, that's our thing though and it's paid dividends. And so we do think we'll pick up share. Overall, we don't think it's completely defensive. It certainly is some somewhat defensive as others, as you’ve indicated, have made similar improvements in their properties.

Good. Thanks. And a couple of the renovations like I think particularly [ph] Zoe had some delays in recent years given the strength in the market. It's important that the renovations are done on time. How will you ensure that there aren’t any incremental delays at these two projects?

Well, we've been – I don't know if we can ensure given the challenges in the market, but it goes to having extremely experienced project managers on the job now who've gone through many of these in the market same with the contractor and subs that’s get selected making sure they have the crews available and committed to the schedule that that they've provided to us. We've tried to build in plenty of cushion. Don't know if it's enough, but we know how these things have worked in the past. And in our case, we've also built in additional dollars that might be needed in order to accelerate any work that might otherwise get behind. So we've also been careful in what we've selected, how – try to limit the construction, but for the work we're doing in the bathrooms, we've limited the construction, which limits the permits that are required and the ultimate inspections that are required. So, we're doing everything we can. There's no assurance that that we won't have issues, but hopefully we've built-in enough cushion and enough contingency.

Got in. And so one more for me, supply growth has been an issue in Portland. What's kind of the next two years looks like in terms of supply growth there? And when you think your RevPAR can kind of turnaround in that market?

Yeah, so, it gets a little bit better next year, but not much. And then with the delivery of the 600 room Hyatt over adjacent to the convention center, it continues on into 20. So I'd love to tell you we see a light at the end of the tunnel in Portland, but we don't right now. That's probably one of the markets with the most supply growth outside of maybe Nashville in our whole portfolio. And the good thing is Portland is a strongly growing market economically. It’s benefitting from being between the really strong markets of Seattle and San Francisco, but it's a lot of supply. And we think the Portland market is going to continue to be a challenge over the next couple years.

Okay, got it. That’s it for me. Thank you.

Thanks, Anthony.

Thank you. Our next question is coming from Michael Bellisario of Robert W. Baird. Please go ahead.

Good morning everyone.

Good morning.

Just first on San Francisco maybe kind of your near-term outlook there. How should we think about kind of the quarter to quarter performance 3Q and 4Q this year, volatility up, volatility down before…

Yeah.

We had a good run rate next year.

Yeah, that's a good question because the two quarters are dramatically different. So we think the third quarter is going to be mid to maybe upper middle single digit RevPAR growth. It's a good calendar compared to last year. We’re up in compression nights in the market by 11 versus 8 in the quarter last year. We have sales force that moved from November to September. So that should help obviously July 4th was a big negative following as a Wednesday right in the middle of the week and that impacts all markets and the Jewish holidays in September. And then Q4 is sort of the last week convention calendar. As I said with sales force moving out of November into September that room nights are down about 205, 24% right now and Q4. So we expect Q4 to be probably flat to down as a market albeit with more than normal rooms out of service for renovations not just with our properties, but a number of properties in the market including as an example the W and the big Marriott marquee.

And all those numbers are for the broader San Francisco market, right?

Correct.

Got it. That's helpful. And then just kind of in the whole LaSalle process, it's clearly dragging on, but maybe when do you think about regardless of the outcome there looking at other acquisition disposition opportunities for your existing portfolio to use your cost of capital advantage that you have today you know obvious smaller deals, but potentially value creating transactions on that outside?

Yeah, I would say for now and for the foreseeable future until there's a resolution will be I guess solely and hyper focused on trying to put these two companies together which makes so much sense.

That makes sense. That’s all for me. Thank you.

Thanks, Mike.

Thank you. Your next question is coming from Stephen Grambling of Goldman Sachs. Please go ahead.

Hi. Thanks for taking my questions. I guess excluding the proposed transaction out there and I guess given the strengthening debt market and strengthening underlying trends, how are you thinking about approaching hotel acquisitions and dispositions?

So it's similar to what I just mentioned. As it relates to acquisitions, we're really not focused on other acquisitions at this point. It's really hard to pursue other acquisitions and plan out your financials with a potential $5 billion combination up in the air. So for us we're very comfortable waiting because of the benefits of being successful there if we ultimately can be. As it relates to dispositions, our disposition effort will be relatively limited. We’ve talked about a couple of assets in the past that we would have an interest in selling one of those is our Minneapolis property and the second is the retail space, the 44,000 square foot retail space at Hotel Zephyr that we call Zephyr Wharf. And we're in the process of working with the ground lessor to divide the ground lease into two ground leases, one that would be just for the retail and one for the hotel, the parking and the rest of the property and that that will probably take us another nine months to a year to get finished. We are moving forward with that and hopefully get a final agreement with the ground lessor because it creates great liquidity for them and more flexibility to have two assets that they could treat separately versus us. The other thing is as we've said in the past street retailer, retail in general is not our core discipline and expertise. And so net asset would be much better performing if it were in somebody else's hand too, actually knew what they were doing versus our efforts. So that's really how we look at it in general. We do continue to receive unsolicited offers for individual properties and we continue to be open to selling any of those properties at the right price and as you know we sold about $700 million over the course of about an eighteen month period and some of those were clearly opportunistic in nature.

Great and maybe a follow up on that. I guess I appreciate the time constraints with the current deal, but maybe more philosophically as you're seeing strengthening trends and loosening debt markets. Are you changing your own or would you be changing your own underwriting standards? And as you look at deals that are done in the markets, do you feel like others may be changing that underwriting standard too?

Yeah that's a fair question. I don't think so, Stephen. In fact we've talked in the past that we would look even before the major trend – potential major transaction here. We've talked about that we'd be looking at acquisitions based upon what we see as maybe reacceleration in the industry and in our portfolio in our markets. But it still has laid in the cycle and frankly going out and paying cash, given the aggressive nature of some other buyers and the pricing that's out there. I guess we’d be probably – we'd be looking and we'd be underwriting. I'm not sure that we'd be committed enough to take advantage of our cost of capital advantage enough to offset the extra risk we see in buying for cash assets just laid in the cycle. So I think we would be a looker. We'd be in underwriter. I doubt we'd be successful. Given – I do think the levered buyers in general may have an advantage out there given the increasing availability of debt and the attractive cost nature of that debt.

That's super helpful context. Thanks so much.

Sure.

Thank you. [Operator Instructions] Our next question is coming from Lukas Hartwich of Green Street Advisors. Please go ahead.

Thanks. Hey guys, is there a way to quantify the impact on San Francisco’s fundamentals from those new home sharing regulations?

I wish there was. I mean there's not really great data. What we look at is obviously the anecdotal evidence, the drop in the inventory that that’s happened because of the new law going into effect and the enforcement of that. And I think that those will continue actually to decline over time as the enforcement gets batter and in some cases gets more aggressive in the market. So I wish there was a way to quantify it. There wasn't a way to quantify the impact of the growth in the short-term online rental other than anecdotal and there really isn't a way at least for that we've seen to quantify it in the other direction.

That's helpful. And then I have another quick one. Just the 2019 pace that you talked about, what was it 23%, 29% or some like that.

28%, 29%, yeah.

Okay, 29%. What percentage of your expected business in 2019 is that? Is that like 10% to 15% of your total business in 2019?

Yeah so the group – well, the group that we have on the books right now represents about 25% of what we expect will be the budgeted group for the year.

Okay. And then that 29% was that group plus transient or was that just group?

Well, we gave two different numbers, Lukas. Group was up 28.3% on which 22.9% growth in room nights and 4.4% in ADR. And so that number, the 25% I just gave you was for the group.

Okay.

And then the pace in total is up 23.6% in room nights, 4.9% in ADR and 29.6% in revenue. Obviously not a huge amount of transient on the books although the big piece, the big impact would be transient related to JPMorgan, which is in the first two weeks of January in San Francisco and with average rates particularly in the Union Square Market north of $1000, when those are up 10%, its $100. And so some of that obviously is showing up in our pace data.

Great, really helpful. Thank you.

Sure, thank you, Lukas.

Thank you. At this time, I would like to turn the floor back over to Mr. Bortz for closing comments.

Okay, thanks, Donna. Thanks. Thanks everybody for participating. Hopefully, we'll see some progress on some of these issues and certainly we look forward to a great third quarter and second half of the year and we look forward to communicating our results to you in another ninety days and in the meantime we wish everybody a great summer. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.