Greetings, and welcome to the Pebblebrook Hotel Trust Third 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 third quarter 2018 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 Annual Report and Form 10-K for 2017, the joint proxy statement perspective that we filed on October 29 and our other SEC filings. Future results could differ materially from those implied by our comments this morning. Some of the factors that contribute to these risks and uncertainties include but are not limited to the outcome of any legal proceedings against us or LaSalle or others related to the proposed merger, unanticipated difficulties or expenditures relating to proposed merger, risk associated with Pebblebrook’s and LaSalle’s ability to consummate the proposed merger including required approvals from both company’s shareholders and the timing of the closing of the proposed merger. Forward-looking statements that we make today are effective only as of today, November 2, 2018, and we undertake no duty to update them later. You can find our SEC reports in our earnings release, which contain reconciliations of the non-GAAP financial measures we use on our website at pebblebrookhotels.com. Okay, so we have a lot to cover this morning, so let’s first review the highlights from our third quarter financial results. At the bottom line our overall third quarter financial performance exceeded our expectations. Same property hotel EBITDA was $75.9 million, which was $0.2 million above their operating of our outlook. Adjusted EBITDA of $69.4 million was $1.8 million above the upper end of our Q3 outlook. Adjusted FFO was $51.2 million or $0.74 per share, which exceeded the upper end…

Thanks, Ray. The third quarter exhibited the same positive underlying trends as the second quarter, but with a lot of noise perhaps obscuring those trends due to holiday calendar shifts and hurricane impacts this year and year-over-year. Demand trends from business travel both group and transient and leisure travel, including international inbound travel remained healthy and stable in the quarter. 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 understand the positive trends. On the supply side, over the last 15 to 21 months now, we've seen a flattening of not only net deliveries, which seem to be running pretty consistently in the 2% range, but industry wide construction starts, which importantly have now been running slightly below deliveries for the last year or so. With construction starts slowing, the industry is in the process of topping out its rate of supply growth. With development costs continuing to increase at rates 2 to 5 times the rate of inflation depending on the market and construction financing terms becoming increasingly restrictive and demanding and with interest rates climbing, we're very encouraged that the rate of growth and supply is topping out at a level below this year's accelerated rate of demand growth. This means industry occupancy should grow this year by another 50 basis points or so, on top of already record occupancy levels overall. Supply growth in various urban markets will continue to be a challenge through next year, particularly with deliveries stretching out due to even longer construction delays. So what happened to demand growth and RevPAR growth in the third quarter. As we and others have been indicating all year, the third quarter was expected to and did suffer from both negative…

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Anthony Powell of Barclays. Please go ahead.

Hi. Good morning, everyone. Just focusing on the 4Q, 2018 RevPAR at the outlook, if you exclude the impact of the renovation and some of the market issues you've talked about. Could you talk about just the sequential change in underlying demand in your markets in 4Q relative to 3Q?

Sure. Well, obviously when you take those out, you end up with a positive spread. I think it's 0.7% to 2.7% of RevPAR growth that we're forecasting. I think in terms of the sequential changes, the biggest change, Anthony, would be San Francisco in the fourth quarter has a much weaker really flat convention calendar, which we've talked about all year. So doesn't quite have the same positive benefits that Q2 and Q3 have. But then, of course, it picks up dramatically next year with in fact the first quarter of 2019 being the strongest quarter now estimated for San Francisco.

Got it, thanks. And the management company for a few of your properties and a few of LaSalle’s properties is being bought by a large brand. What's your view of that transaction and how do you make sure that you minimize any of the kind of integration issues that we've seen happen this year when those hotels either are going to a new system or converted next year?

Well, that's a good question. We're still educating ourselves on that transaction and in fact we're still -- we still need to be educated by both Hyatt and Two Roads about what integration means not only to them, but most importantly to the six properties that we and LaSalle have on a combined basis. So we're ways off from having any conclusion, but I would say we have a lot of knowledge, which Hyatt has been appreciative of us providing to them about where the risks are, where the challenges are, where the downsides are and important for us, important for them to communicate to us what are the positives at the end of the day. And give us the strong rationale from an owner's perspective for the benefits of combining from the acquisition by Hyatt of Two Roads. So that'll be something we evaluate very closely, we work with Hyatt and Two Roads on and ultimately we’ll make some decisions, obviously one way to mitigate the issue of those integrations is to make changes. And that certainly is one alternative we'll be looking at keeping those properties independent potentially by changing operators or keeping them within the system, but understanding what system changes are required here, how our properties sold by Hilton versus the way they're being sold today. So what know what will change at the end of the day in terms of operations and if it's very little then the good news is there'd be very little impact on the properties if the changes are significant then obviously we have to take that into consideration.

Go it. So, given the hotels are independent now if you were theoretically keep them independent with the new manager, would the disruption be less than what you've seen this year, with I guess the small brand to big brands and the conversions?

Yes, typically it would be just because you -- the systems changes would generally be fairly minimal from one independent to another. And typically the way the properties would be sold would be the same. You'd have on property teams for everything which is what we have right now.

All right, great. That's it for me. Thank you.

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

Hey. Good morning, guys.

Good morning, Rich.

Congrats in order for a record prepared comments section. I think that was 35 minutes. Anyway…

We're just trying to limit the question, Rich.

Yes, I know, well I was going to say. So we've covered quite a lot of ground. So a lot of my stuff has been answered. But maybe as we think about the -- there's always challenges when integrating two companies. We've covered a lot of I think the areas where things have turned out to be better than expected upon original inspection. And so maybe thinking about it from the other side, where do you see some of the challenges potentially to the integration with Pebblebrook and LaSalle?

Well, the main challenge is that we don't know those properties like we know our own portfolio. And so from that perspective when you don't have as much information arguably you have more risk, right? So that’s where we would say the biggest risk is right now is what do we not know at the end of the day and because of the way the two groups and people are working collaboratively and because we’ll be essentially retaining almost every single asset manager within the current group at LaSalle at least the property level knowledge from an owner’s perspective is going to get retained. And unlike a regular property acquisition we also retain all the files, all the history, all the information. So we think we’re mitigating that, but that’s where I would say the biggest risk is at the end of the day. And of course the other main one Rich would be the fact that we are anticipating selling a significant dollar volume of assets and more of the market to change meaningfully and become less attractive from a sales perspective then obviously other pricing or transaction volume would meet our objectives.

Okay, that’s helpful, Jon. And my second question as you go through the outlook for 2019 and the buildup in terms of what the different demand segments are looking like in Pebblebrook’s portfolio it sounds like pricing power, which has been a bit of a missing leg of the stool for a while for the industry has turn the corner at least as it relates to what you guys are seeing. Can you overlay any of that on top of the industry or maybe at least the urban upper upscale segments, and talk about how pricing power maybe in the aggregate is trending and what some of the changes have been, if I'm correct in characterizing it that way?

I think you are correct about it, we talked about it in more detail last quarter that we are beginning to see more pricing power you see it in the industry data, you certainly see it in the urban data. We’re continuing to see it not only in industry data, but in the performance of our own properties in our future group booking paces, which we shared with you which have the best ADR growth we’ve seen this cycle frankly I think at the end of the day. And I think there are a number of things helping that, I mean, we continue to grow overall occupancy as an industry to record levels. We have more and more days that are getting sold out. We as an industry are in the process of addressing the cancelation terms, which have been stretched out some, which has been very helpful from a revenue management perspective. We’ve begun to address the redemption, reimbursement formulas, which have created negative motivations, particularly in the urban markets that have impacted pricing over the course of the cycle with Marriott’s new combined loyalty program, the redemption program was also changed and the reimbursement program was also changed. And it now has a slope that eliminates the sort of on, on switch that was motivating property teams and revenue managers from dropping rates at the last minutes. So you combine those two you add in progress being made in various cities with not only legislation to make sure illegal hotels get eliminated and enforcement in that regard. And you put all that together and I think you get -- and a strong economy and you continue to get an improving environment from a pricing perspective and there’s going to be a tipping point if this continues. We think where psychology changes and we may be in that very early stages of that and it may end tomorrow, but from what we’ve been seeing it continues to get better.

Okay, that’s great, Jon. Thank you.

Thanks, Rich.

Thank you. Our next question is coming from Sean Kelly with Bank of America Merrill Lynch. Please proceed with your question.

Hey. Good morning, guys. I wanted to go back to the sort of Kimpton and sort of integration as you called out both for this quarter. And then just thinking a little bit more about how this plays out for kind of next year and years beyond. Can you guys just tell us whether or not I think, Jon, in your script you mentioned some of these things will be easy comps as we move into next year, but given some of the substantial changes I think our understanding at least for Kimpton is that this is being much more meaningfully integrated as opposed to being less separate from the kind of broader IHG family. I mean, is there any just risk that these issues linger longer. And what’s Pebblebrook’s response or what steps you are taking to kind of mitigate the fact that some of these things -- this just seems to be a way that the industry is headed with some of these independent managers.

Yes, I mean, I think as it relates to the two integrations. The good news is we continue to see very cooperative partners on the other side working to mitigate the negative impact to us and other owners. I think part of the issue with Kimpton and IHG and we’ve talked about this previously is when you change the way your systems work and it impacts the level of volume of business that goes through different channels. You can immediately unfortunately reduce distribution volume when a system doesn't do what it was doing before or doesn't have the same flexibility it had before. And the benefit of the brand integration is that they have a broader base of customers that they can expose to the property and who ultimately choose the property, and also in many cases choose it on a direct basis. The challenge is that it takes longer to gain that business than it does to lose the business from the channels that get negatively impacted. And so we've been working very closely with IHG as have the Kimpton people frankly as part of the difference between the Kimpton team, the legacy Kimpton team and the corporate team in Atlanta or in Europe to modify the systems and allow them to do more of the things that the Kimpton systems were able to do. So that's one thing. The second is continue to push folks like IHG and Marriott to put more resources in place to drive that new business more quickly into our hotels. And as I said earlier, they're both being very cooperative in that regard and we are seeing them do those things. Do I think -- do we think that it's going to run into next year and have some impact? Yes, next year, yes. I would say it would, just because it's not an on-off switch. It's a gradual improvement. And as it relates to the sales reorg particularly at the bigger properties once you get behind it's a little harder to catch up at those than it is I'd say at W, where we book so much of our business in the month for the month. And if you get behind you can catch up by throwing more resources at it and more educated sales people. So how do we protect ourselves in the future for these kinds of sales? The same thing we've been doing, we have multiple different independent operators. We maintain our terminable at will contracts. And to the extent that folks buy these operators when we have these contracts and we eliminate and move on. Maybe at some point they're going to stop buying them or they're going to stop paying so much for them. Because the revenue stream they're buying isn't turning out to be the revenue stream they thought they were buying.

Thank you for that. It's very clear. Sort of the follow up to it would be, Marriott was pretty adamant last quarter at least. They weren't seeing or measuring any outsized impact even across I think some of their Starwood legacy hotels some owners clearly disagreed on that. And not to air any like this necessarily in public, but the question is are you seeing either continued signs of that or is there a new any new integration issues as it relates more to systems in 4Q that's happening on that side?

Well, the systems integration is happening in Q4 and it's rolling through the brands. And so it has a different impact on different properties at different times depending upon what brand you have. We've had some of our properties transfer over, most of our properties have not yet, they're later in the quarter. And as it relates to the overall integrations, so I would just say what I said earlier and repeated just so it's clear. Both Marriott and Intercon are working very closely with us to mitigate the issues. And so, what they do or say publicly really not in my business. At the end of the day what we care about is are we getting the time and effort and money that's necessary to improve performance at the property level and I would say our answer to that would be yes. It's just an unfortunate thing that when you make all these changes there is a short-term negative impact and we are experiencing it.

Understood. Just switching gears for one other one then. On sort of the incremental asset sales, Ray or Jon, where does this take the kind of leverage range outcomes if you're successful in reaching the new target?

Well I think at 750 we get down to…

The mid fours on a debt to EBITDA basis.

Yes. And probably -- that would be on today's numbers, on 2019 numbers it would be lower than that. So we feel pretty comfortable at the low end of the range. We get pretty darn close if not to our leverage target. So the additional sales will give us flexibility as it relates to taking that number lower, buying back our stock if it continues to remain depressed as compared to the underlying NAV of the portfolio. And like we did two years ago, I know people may not want to believe us about values, but we proved those out two years ago and I believe unless things change we're going to prove out those values again with the sales that we're making. So -- and look you see other folks including some of our peers who've made some sales pretty attractive multiples and low cap rates and I can tell you for the right assets, particularly assets that are unencumbered those -- there's a robust buyer pool for those assets.

Thank you very much.

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

Hey, thank you. I guess first on the strike, I guess looking back at history do you have any sense for how quickly demand could bounce back? I mean, is that an immediate thing, or is there more of a build once the negotiations are settled.

Yes, we don't have a -- I mean, you got to go back pretty far for strikes that actually occurred as opposed to those that have been threatened. But what I would tell you is there is generally the only impact we see from strikes is groups that have a union clause because they there they may be union employees having meetings in different industries or they may be particularly sensitive to it because of the business they're in. And so that business you know goes away pretty immediately and comes back pretty immediately. So not really think once there's a resolution of the strike that there's that we won't see an immediate pop back. Because really the only thing we've lost there are particular groups.

And then maybe bigger picture question, as you increase your concentration to the West Coast market. I mean, what do you view as any of the kind of risks or things that we should be thinking about whether it's things that could impact the strong supply demand environment or outside competition and maybe gets a little bit more comfort that that's the right concentration and approach?

So, I don't know if we're right, whether we will continue to be right. We've been right so far. We just -- we’re driven by the underlying supply demand dynamics of the West Coast where in general it's harder to build, it takes longer, it's more expensive. And today you have these fairly large clusters of knowledge growth industries that are driving demand at a very strong pace and we would expect to continue to drive strong demand because these are the future industries and they're real and they're big. I mean, if you look at the 10 largest companies in the world most of them are now located on the West Coast and that's the change in the world in the U.S. compared to where it was 10 or 20 years ago. So we think it's the right strategy. Obviously there's a history out there of stronger swings or greater volatility in some of those businesses. Although I think again those businesses have evolved and are very different than what they were, if you go back to 2001 I mean that's 17 years ago at this point. So I think it's a typical risks, it's demand and supply, and I think you have fewer -- you have lesser demand risk out there and we have lesser supply growth risk as well.

Fair enough. And maybe one last one, if I could just on wages, maybe I missed this, but any expectations as we think about 2019 that could dictate how wage inflation compares to 2018?

Yes, I mean, we expect it to be pretty similar. It’s in the 3% plus range throughout the portfolio there are obviously some markets that might have living wage increases that are greater and in most markets actually just impacting our tipped employees as opposed to our regular hourly employees, who generally are already making significantly more than the minimum wages in those West Coast cities and East Coast cities in particular. So I think we’ll continue to see that 3% plus increase with benefits higher and as indicated this year and last year, this year is very similar from a wage growth perspective. We’re finding and expect to continue to find ways to mitigate that through greater efficiencies, use of technology, job sharing as we say every quarter necessities the mother of invention. And part of it is an inability to fill certain positions. And so we have to operate the hotels 24 hours a day, seven days a week, 52 weeks a year and we’ll continue to provide those services that the guest are looking for.

Thanks so much.

Thank you. Our next question is coming from Michael Bellisario of Robert W. Baird. Please proceed with your question.

Good morning, guys.

Hey, Mike.

Good morning.

Can you just in the cadence of the LHO dispositions, first question is it possible that there are more deals that maybe close before concurrent with the merger?

I would say it’s possible, but not likely.

And then could you give us a sense of how you’re thinking about timing of those other assets that are in process right now that are currently being marketed for sale?

Yes, I mean, I think the timing is that we think there’ll be quite a few of those that happen over the next three to six months. And it’s certainly possible that the full program doesn’t get completed for 9 to 12, but I would expect that some point over the course of the next 6 to 12 months we’ll be complete with the program.

Got it, that’s helpful. And just as you kind of sum up all the negative impacts from 2018 renovations, manager transition issues still how should we think about that getting recaptured, that lost RevPAR and lost EBITDA getting recaptured next year kind of what the net impacts to 2019 RevPAR growth should be as we think about modeling for next year?

Yes, I think the renovation impact will be a little bit less next year, we’ve talked about the renovations we have roll into next year that include the Mondrian, that include the W Boston, that include Skamania, which starts in January, the Sofitel in Philadelphia that starts in early January of next year. The renovations will fall differently there’ll be a bigger impact on Q1 than there will be based upon what we can see right now for Q4. We do have a couple of projects within our portfolio that we have planned to start in the fourth quarter next year that would be a refresh of the rooms at Weston and a similar maybe slightly larger renovation of the rooms including the bathrooms of the Embassy Suites in San Diego. So in the fourth quarter next year in San Diego is the weakest quarter next year. So I think in general, we would expect most of the impact integrations where we should see recovery in the share that we lost next year. And we wouldn’t expect -- of course who knows what impact there’s going to be from other one-time events. But the contracts that would get signed with the union and the legacy properties with Starwood would be multi-year contracts at the end of the day. So we certainly wouldn’t expect any impact from that next year.

Got it, that's helpful. That's all for me. Thank you.

Thank you. Our next question is coming from Jeff Donnelly of Wells Fargo. Please go ahead.

Good morning, guys. I think aside from leverage levels, which Jon you addressed in an earlier question. I think one of the maybe overhangs if you will on the company is Pebblebrook had an otherwise clean year and I think there are some concern and the integration with LaSalle will cause some disruption to FFO next year from branding changes or whatever might transpired as a result of the merger. Can you talk about how you prioritize FFO per share growth versus maybe NAV growth as you think about 2019 and 2020?

Well, I think maybe a different way to answer that would be to say we make decisions for real estate, which are long-term. These are long-term assets and long-term businesses. We make them further long-term. So if it make sense to change an operator and keep in mind, if we're changing an operator we're probably losing share. We're doing it for good reason. And so while sometimes there is some short-term disruption there is usually significant long-term gains for making the change. So we think that actually enhances NAV. And yes it may have a minor impact on FFO per share in the short-term. I hope that's not the focus of our investor community, but nevertheless if it is, it's like anything else. It's short-term pain for long-term gain. Same thing we do when we renovate. I mean, we can try to melt the portfolio not to these renovations that have an impact. But it catches up with the overtime. And so if you don't do it you are going to lose value. You'll maintain FFO in the short-term, but you have the opposite happening. You're negatively impacting NAV both in the short-term and the long-term probably. So we tend to make our decisions based on longer term focus. We did try to balance out our renovations, Jeff. And the good thing is most of our renovations were done a year or 18 months to two years following the acquisitions that we made. The good thing and it's about the LaSalle portfolio is we'll be able to face those. We're not going to have some big chunk at onetime that would be a catch up if you will within the portfolio. And we don't think there is much that are going to impact 2019. Because where that renovations being considered, we're really starting over with the visioning and the project scope and in almost to every case the team that's visioning the property with us. So that won't really have much of an impact on 2019, I guess that's the good side of it.

I guess maybe another way to ask it. When you look at -- it sounds like you might have answered me for 2019. But when you look at 2019 and 2020, do you think the level of renovation disruptions you're going to have across the combined portfolio was going to be I guess I'll say typical rather than maybe outsized?

I mean, we don't know enough about when each of these renovations is going to get phased and what the impact will be. But I would guess based upon what we learned through touring the properties and laying out in general what we're going to renovate, what we're going to enhance, what we're going to transform. That it will continue to be relatively normal, if you can look at our history and say it's reasonably normal.

And then one…

Yes, go ahead.

No sorry, I interrupted you.

No. I was going to say that my comment was going to be if what we do, you consider normal. And certainly a clean year. I'm not sure I would called 2018 a clean year given all the integration impacts that existed this year. So I'm hoping that's not a normal thing every year.

Got you. And just one follow-up on San Francisco, you've shared your view earlier. I think expectations of your peers seem to cover a pretty broad range. Some people I would say sort of share your view others maybe are sort of encouraging folks to exercise a little caution. I think that might result from where their hotels are in the city? I'm just curious if you're expecting a high-single-digit RevPAR next year for San Francisco. Can you talk about how you think maybe a Fisherman’s Wharf versus Union Square, Moscone or downtown submarket would perform relative to that? Are there ones that you look at as clear leaders versus that thresholds or laggards?

Well, I think that the whole city is going to be just on fire next year in a positive way. Given the amount of business in the city the continuing business growth in the city, the economic strength of the city, the leisure destination attraction of the city. And so I think all the markets are going to are going to be impacted in a very positive and dramatic way. You can make an argument that says Union Square is going to benefit a little bit more than the Wharf. Although interestingly there's two properties going out of business in the Wharf that are getting closed, one I think if it wasn't closed two days ago it’s closing any day, which is a big part of the Holiday Inn and then the 2620 property on the Wharf was bought and is being transformed -- being renovated and then transformed completely to Timeshare. So we think the Wharf has some other things going forward, which is actually a shrinking of supply that may offset to a great extent maybe the extra benefit anything in the South of market or Union Square area gains disproportionately from the improvement in the convention center business.

Great. Thank you, guys.

Thank you. Our last question today is coming from Wes Golladay of RBC Capital Markets. Please go ahead.

Hey. Good morning, guys. Looking at the Fisherman's Wharf property the Zephyr, is the retail -- can you give us an update on that? And how much EBITDA you are expecting from the retail component next year?

Yes, good question, Wes. The property kind of gets lost because of the retail nature of it. But -- so where the renovation was completed mid-year, we have leased all, but about 4,000 square feet. So we we've leased about 92% of the space, we've leased about 88% of the revenue at this point we have a couple of small spaces, we have three spaces left in the property one the larger one we think is soon to be committed, but we don’t have a lease signed yet. And so we should pick up based upon how tenants roll into the space after doing their improvements and getting through the city process. We should pick up another million dollars in EBITDA next year. So I think we're doing about $2.5 million this year, we should get to $3.5 million next year and we should be at $4.5 million assuming the tenants pay and we lease the rest of the space by 2020. And hopefully we'll get to that run rate in the second half of next year.

Okay. And then you made a comment about the development cost inflation and that seems really large, that should considering that low RevPAR environment and you've been through multiple cycles. Have you ever seen a situation where development costs are running multiples of RevPAR growth?

No, we haven't. And so obviously as an owner not a developer we're particularly encouraged by it. Yields -- the yields you can build through today have come down significantly at the same time that interest costs are rising. So -- and we think those will continue to rise. So we think it's going to continue on an accelerating basis to restrict new starts within the industry.

And I don't have you had taken a look at it yet, but have you looked at how starts have trended in your markets maybe for next year, just based on the planning?

Yes, I mean, starts are way down through the urban markets and that would be expected when you consider that that's where you have the biggest increases in costs -- development costs as opposed to some of the secondary and tertiary markets that haven't seen the same kind of labor shortages and wage increases and commodity increases in those urban markets that the smaller projects that might not use steel or might not use some of the commodities that the big buildings in the urban markets use.

Thanks a lot, guys.

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

Well, thanks everybody, if you're still on the call and not on the next lodging call. But thanks for participating. Thanks for your support related to our combination with LaSalle. We look forward to our next update on that and there’ll probably be some pre-quarter release of revised outlook once that transaction closes. We look forward to updating you. Thank you, bye-bye.

Thank you, this concludes today’s conference. You may disconnect your lines at this time. And have a wonderful day.