Greetings and welcome to the Pebblebrook Hotel Trust Fourth Quarter and Year-End 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, Ray Martz, Chief Financial Officer. Thank you. You may begin.

Thank you, Donna, and good morning, everyone. Welcome to our fourth quarter and year-end 2018 earnings call 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 2017 and our other SEC filings and future results could differ materially from those implied by our comments. The forward-looking statements that we make today are effective only as of today February 26, 2019, and we undertake no duty to update them later. You can find our SEC reports in earnings release, which contain reconciliations of the non-GAAP financial measures that we use on our website at pebblebrookhotels.com. So given all that's happened during the quarter and the year we have a lot to cover today but let's first review some of the highlights from the acquisition of LaSalle Hotel Properties. On November 30, we completed the acquisition of LaSalle for approximately $5.1 billion, which was calculated based on our $35.18 share price at closing, which accounted for 67% of the acquisition consideration to LaSalle shareholders with $1.2 billion in cash for the remaining 33% of the consideration. The $5.1 billion transaction amount includes the $112 million termination fee paid to Blackstone, approximately $180 million in closing and transaction costs, $260 million in preferred equity that was assumed and $1.1 billion of LaSalle debt paid off at closing and replaced with new debt. We estimate that the LaSalle 41-hotel portfolio generated approximately $343.6 million of hotel EBITDA in 2018 and $300 million of net operating income after a 4% FF&E reserve, which results in a 14.8 times EBITDA multiple and a 5.9% NOI cap rate.…

Thanks, Ray. My focus today unlike prior earnings call is to outline for you what the new Pebblebrook looks like, what the opportunities are, what our focus has been since the acquisition and what our focus will be in 2019 and beyond. To say that we're excited about the new larger Pebblebrook and the opportunities we see would be a major understatement. All of our efforts since the announcement of the deal in September have been focused on integrating the people and the organizations, integrating the properties and operators, financing and closing the overall transaction, determining and executing on our strategic disposition plan, developing a plan and vision for each hotel being acquired and organizing for and launching extensive efforts related to portfolio-wide initiatives. I intend to address each of these areas of focus today. As you know we closed on the LaSalle acquisition on Friday November 30. We had already determined who would be part of the combined company, made offers, received acceptances and by Monday December 3, everyone was already moved into their new offices. We integrated our accounting team in one office and just down the street we integrated the rest of our team. We've recently executed a new lease to bring everyone together in new offices and we've targeted that move for early in the fourth quarter. We continue to expect total corporate G&A synergies of $18 million to $20 million, and we've built these synergies into our outlook for 2019. Between the announcement of the execution of the merger agreement with LaSalle to the closing of the transaction on November 30, our finance, investments and asset management teams have worked tirelessly to not only properly capitalize the combined entity, but contract and close on the disposition of five hotels on the same November 30. And…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Anthony Powell of Barclays. Please go ahead.

Hi, good morning everyone.

Good morning.

Good morning.

Good morning. Starting with some of the brand topic there was a lot of talk about brands including rebranding hotels, launching your own brands, your current non-brand the Z Collection. How do soft brands fit into this long-term, especially given the ability to maybe secure some key money from the brand companies? Going forward do you expect to be largely independent still or could you increase your exposure to the big brands? And how would owning a brand work in the context of the larger REIT?

Sure. So, the brands often mean a brand of one, so you could take a look at a property like the Argonaut and say that's a brand. Now, if you go around the industry, there are lots of folks who have brands of one, two or three and they do call them brands. I mean we do develop a brand profile and a brand story and narrative for every individual property we have. And so to the extent that we want to take all of our independent experiential resorts and begin to tie them together with a brand message even if it's our own brand if there's a way to tie them together to the benefit of those multiple properties, it's something we'll be looking at. It's the same thing that we're doing with the Z Collection. To the extent that we can tie these Z's together from a customer perspective, with the benefit of the unique DNA and the common DNA that they possess that we've created with the Unofficial Z Collection, there's a benefit of that ultimately that benefits each property within the portfolio. So, it's not our plan to go out and franchise these brands certainly although there could be potential for that somewhere down the road, but that's not in our current plans. We expect these to be pretty soft a sub-brand or almost a non-brand being tied in with whatever operator or brand within their portfolio where it might exist. As it relates to the collection brands, I mean, we'll continue to look at collection brands just as we have done over the course of really the last 10 years, the five years more explicitly as these brands have really come about to determine whether there's some benefit to rebranding as a sub-brand from an independent or in fact going in the other direction which we also look at. So, the nice thing about having our own independent brands whether it's a brand of one or it's a brand of five is that we have complete flexibility to do whatever we want whenever we want to do it which could include not only soft branding it but hard branding it if there were a benefit to that. So the fact that there's key money that gets involved which is a payment of capital there's a return in loss of flexibility and long-term contract when you do that. So, all of those things ultimately impact value and given that we are not in need of capital as a public well-capitalized company, we'd always rather see lower terms than we would key money at the end of the day.

All right, great. Going to operations in the release you mentioned that you expect San Francisco RevPAR at your hotels to be at 9% to 11%. What does that imply for the rest of the portfolio? And how have the expectations for both the San Francisco hotels and the non-SF hotels changed over the past few months?

So, there have been no changes in expectations in San Francisco. We still expect the market to be up 8% to 9%. We expect our portfolio to be up 9% to 11%. Some of that is the tailwinds from the renovations. Some of that is ramp-up in the portfolio from prior renovations in prior years. And some of that ultimately is probably going to come from the synergies that we talked about in that individual market. As it relates to the non-San Francisco markets in total, with our 1% to 3% overall corporate RevPAR outlook, it means those markets are generally -- in total we're forecasting RevPAR between minus 1% and plus 1%. And those -- the non-San Francisco market is where all of the renovations in 2019 are occurring and so that impact is between 75 and 80 basis points so sort of a -- if you look at that view of the markets or those properties within the markets without that impact, you'd be somewhere pretty close to 0% to 2% for those markets. And I don't think our view of those markets in terms of overall performance has changed in the last few months either.

All right. That's it from me. Thank you.

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

Hey thanks. One quick clarification. I just want to make sure I heard this right but you made some comments about capital allocation potentially beyond the asset sell down. I guess maybe if you can just repeat what you had talked to there and how you think about the appropriate leverage ratio and any kind of puts and takes when you think about the broader environment as you think about the right leverage ratio for the business.

Sure. So, our view as to and I don't know if it's the right leverage level, but it's the level we feel is appropriate for Pebblebrook. Given our portfolio and the markets we're in and our experience in prior cycles we're comfortable at a leverage level between four and four and a quarter given the size of the portfolio. And so for us it means once we get there which we believe we'll get there by the end of this year with the additional $350 million of sales that we've planned out and included in our outlook for this year. It means that additional sales that would likely occur late this year or in 2020 that we have planned the capital from those sales would be used for any of the above, right? It would include paying down debt; it would include buying our stock back if there was an arbitrage opportunity; it would also include potentially even calling our preferreds that are already callable; and it could include even additional acquisitions should we find the right properties out there. So, that's kind of the way we look at it Stephen.

That's helpful. Maybe one follow-up. I guess do you think the ROI project spend and integration spend should then come down into call it 2020? And any sense to how we should think through the free cash flow that you'd be generating at that point?

Yes, good question. It's a little premature for us to lay out where we think 2020 and 2021 are going to be from a capital investment perspective. We're reviewing those potential projects now. It'll take us several months to determine the ones we want to proceed with the capital involved what we think the ROIs are and obviously we're only going to proceed with those that meet our return hurdles. But I would say at this point in time I wouldn't expect necessarily next year's capital investment which will be project-driven these ROI project-driven investments. I don't think it's necessarily going to go up much or down much, and I think that's probably the same for 2021 as we plan these out in a balanced way.

That's helpful. And as one unrelated follow-up on the Marriott disruption. How do you think about quantifying the impact that you've seen from the integration and what needs to change to correct that disruption? Thanks.

Sure. So, well the best way to measure it is to look at prior year performance. So as an example group production, and how is that production going compared to what's typical for that hotel in order to hit its group objectives. So those are pretty easily quantifiable. The second way is to look at competitive RGI or competitive RevPAR share in the market and see what happened. And when we look at the performance in Q4 and we look at the performance for the year, we see a huge amount of what I would describe as unique share loss at our -- particularly our Marriott managed hotels, which happen to be our Starwood legacy properties. And so in terms of what we see that needs to change, I'd love to tell you that Marriott has given us the answer yet or that we have the answer. We don't, but it's likely to be some combination of additional staffing, probably at the property level. It could be complete staffing back at the property level, which is where we were before. And then as it relates to some of the issues with the revenue management system, some of it is going to be our revenue managers getting used to the way it works and how that changes, how much business comes through each channel. And some of it's probably going to be modifications to the software that allow our property teams, which are very sophisticated with very sophisticated inventory management techniques -- for those things to change in order to allow our properties to manage the inventories and maximize occupancy and ADR the way they were doing before with the previous software system. So those are the things that need to happen. We would have hoped those things would have already happened and we'd have the loss share from 2018 as a tailwind in 2019 but that hasn't happened yet and it's not for lack of trying or lack of responsiveness or flexibility on the part of our Marriott partners. It's just that we haven't gotten there yet.

It's super helpful color. Thanks so much.

Yeah. Thank you.

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

Hi, good morning, guys.

Good morning.

Good morning. Can we get a yes or no question?

The yes, hello…

Just kidding.

This one might be quick. So, Jon, back to your prepared comments with respect to the synergies of scale with vendor partners, service providers, et cetera I just want to clarify that that is separate from the G&A synergy target that's very distinctively laid out in the guidance. And then how much of some of those other synergies are included within property level guidance if any at this point?

Yeah. So it is completely distinct from the G&A savings at the corporate level and none of it is included in our individual property or portfolio wide numbers.

Okay. So it's fair to say then that's potential upside surprise given that you said that some of that could begin in 2Q to some extent?

That's correct.

Okay. Fair enough. And then just with respect to the volume and the pricing of asset sales over the last few months and then what's expected to come for the remainder of this year. Can you -- obviously some of this news is public and we can see it ourselves, but can you generally describe, or characterize the buyer pool for what's maybe currently on the market?

Sure. I mean, I think we're at a period of time where the buyer pool is very broad and pretty deep particularly for urban hotels and resorts, although we're not planning to sell any of our resorts. And so the buyers are unique. When you look at what we've sold the two Park Centrals were sold to private equity. Guild was sold to a local very large real estate owner in New York City, high net worth entity. Embassy Suites was sold to a local commercial real estate owner in Philadelphia. The Liaison was sold to a combination of a brand company as well as a high net worth real estate investor out of New York. The Palomar was sold to a REIT. So the buyers have been very different. We do see significant foreign interest, particularly from foreign brands or branded owners in some of our individual offerings, but I would say the pool is very deep, very broad. The debt markets are great, so your levered buyers are competitive today, and we would suspect as we sell additional properties that again the buyer -- the ultimate buyer is likely to be somewhat different than the buyers we've had so far.

Right. Thank you, Jon.

Thank you. Our next question is coming from Shaun Kelley of Bank of America. Please go ahead with your questions.

Hi, good morning, everyone, and thanks for all the detail, Jon on the strategic layout. Just one question for me, which is you highlighted the portfolio of the seven major brands in some of the key gateway cities. Just curious when you dig through the details here, is there substantial margin differential for those hotels as you think about those relative to what you've been able to do on the independent side? And then secondarily, how many of those hotels are actually franchised versus are any of them brand managed?

Yeah. So, they're a mixture of brand managed and franchised hotels. There is a difference. I mean, the biggest difference is EBITDA per key at the end of the day and the interesting thing is the branded properties as you know tend to drive significant other revenues, food and beverage, audiovisual parking, et cetera on a fairly larger scale, particularly this group of seven properties, which has some pretty good medium to large size hotels, or at least, how we define them. And when you look at the EBITDA per key these major branded properties were $31,000. The portfolio is at $36,000, so it's a $5,000 differential there and there's a 140-basis point differential on the EBITDA margin. So we've always said brands are expensive, but when you get to a certain scale you're probably going to make more money on a per key basis with a brand than you will taking a 700-room hotel and making it independent.

Great. Thank you for the details

Yeah. Thanks, Shaun.

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

Good morning, guys.

Good morning.

Good morning, Mike.

Can you maybe walk us through just the drivers of your slightly lower NAV estimate and then what's changed in terms of how you think about values for both the assets that you've tried to sell and the remaining portfolio?

One of the bigger impacts is always that when you sell the properties you have transaction costs, and so we've -- as we've always said this is a gross NAV meaning this is what the gross sale prices would be and as you sell assets, and we've sold $1 billion, you have transaction costs related to those, and so the proceeds that you get effectively lower your NAV, your gross NAV at the end of the day. So that's the primary driver Mike at the end of the day. I mean we tweak these numbers twice a year based upon information we see in the market. We, obviously, have full 2018 actuals; we have 2019 budgets and forecasts. We factor that all in and the numbers can move around a little bit, but we're talking about $0.50 at the midpoint and again most of that is because of going from gross to net on the dispositions of over $1 billion of hotels.

Got it. And then, just kind of switching gears on the fundamentals side, can you maybe touch on your updated view on overall demand trends and kind of where you're still seeing pockets of strength and weakness within your portfolio?

I mean, it's really the same Mike. We haven't seen much change. Obviously, it's winter. We have all sorts of weird weather going on, whether it's record blizzards in Seattle and Portland or record cold in the Central and East Coasts, or lots of things that impact numbers. But when we look at the underlying demand, we really haven't seen any change in leisure or business travel, whether it's group of transient. And actually the demand numbers have been pretty strong. I mean, they continue to be run in the mid-2's even on a tough comparison to demand last year that was positively impacted by the aftermath of those two major hurricanes. So we really haven't seen any change. For us the biggest difference is, much more laser-focused on driving ADR, experimenting, taking chances, being willing to take some risk at the end of the day and we're seeing some pretty good success doing that in a number of markets. So that's really about the only change we've seen. And we are beginning to see that a little bit more in some of markets we're in from the competition, which is a positive.

That’s helpful. Thank you.

Thank you. Our next question is coming from Bill Crow of Raymond James. Please go ahead with your question.

Hey. Good morning, guys. Jon, could you give us two or three of the former LaSalle hotels that have the biggest upside as you think about what you can do to them?

I'll give you a few. So Paradise Point in Mission Bay San Diego. I'll give you one factoid, the property is doing -- In 2018, it did the same ADR it did 12 years ago. So it's lost a lot of share in the market, ADR and RevPAR. And we think with investment, with the proper investment, with the proper branding and repositioning there's a lot of opportunity there. So that would be one place. I would say, a second place would be in some of the Kimpton properties in D.C. that have not gotten meaningful investment in many, many years, where there is significant upside in renovating and redeveloping those hotels. And then I think there are some cases within the portfolio, and I don't want to talk about the specific properties. But there are some places where we'll benefit from some operator changes, which would come along with a transformation, a redevelopment and/or a brand change, even if it's one independent brand or small brand to another.

All right. And maybe a short answer on this one, but can you just give us your initial thoughts for 2020 on San Francisco, L.A., San Diego and the Boston markets?

Sorry, say that again, Bill?

Yes. I'm just trying to get a feel for the markets, your biggest markets, so San Francisco, L.A., San Diego and Boston, as you think about 2020 versus 2019.

Sure. So, I mean, in general, the convention markets get better. We see Portland better, we see San Diego better in 2020, we see Chicago better, we see Boston better, we see D.C. much better. We think Seattle will be slightly weaker. San Fran will be a little bit weaker, but still very strong obviously from a historical perspective. And Atlanta won't have the Super Bowl, which will move to Miami, which will help that market. So that's kind of the way we see, at least for our major markets 2020, in terms of convention impact.

Okay. That’s it for me. Thanks.

Thanks, Bill.

Thank you. Our next question is coming from Jim Sullivan of BTIG. Please go ahead with your question.

Thank you. Jon, just a question to kind of follow on the integration issues that -- there was a question about that earlier in the call but -- I mean as I recall back in the first half of 2018, LaSalle had talked about the negative impact from both the Marriott Starwood integration, as well as the Kimpton integration as being about -- a negative RevPAR impact of about 8.5%. Now you've talked earlier about the continued issues, I guess, that you face with Marriott. But I just wonder, if you could address the Kimpton issues as well and whether those have been resolved, solved and whether there's a tailwind at least with respect to that segment of the portfolio.

Yes. I think, there is a tailwind as it relates to the Kimpton properties at this point and we're already beginning to see that. When the integration started -- or happened in January, the beginning of early January on the 10th of last year, we saw a lot of share loss and when we look at the Kimptons, as they're running so far this year in the first quarter, we're seeing us gain back a good chunk of that share loss. It's not 100% across the portfolio but it's certainly a large majority of the portfolio, if we don't have any other issues going on at the properties. So the biggest impacts are past us. We think it's primarily a tailwind. Don't think we'll get it all back this year, but we'll get much of it back this year in terms of recapturing share.

And then, can you also address -- you just talked in response to Bill's question about some of the markets, but Key West obviously is a major market now for the combined entity. And again, it had its issues in the first half of last year. Can you just update us on what you're -- where you are in terms of prospects for 2019 and 2020 in Key West? And then also if you could talk a little bit about Portland.

Sure. So as it relates to Key West, we're seeing a very healthy recovery so far this year, as compared to last year, for not only the two properties we have in Key West, but the market overall. So Key West seems to be recovering well. People are coming back. They're paying these high ADRs, because this is season in Key West. And I would say, Key West and South Florida overall is going to be -- that's going to be one of our stronger regions this year. Hard to say anything about 2020. We don't do -- there's not a lot of group and the group that's been -- that works down there is pretty darn short term, so I couldn't comment on 2020, other than saying the trends so far in 2019 are very positive and the booking paces are very positive in the market. As it relates to Portland, Jim, it's a good evolving growing city that's suffering from a few years in a row; last year, this year and next year; of just way too much supply, given the demand growth. So it's nowhere near the kind of dynamism that a Nashville or an Austin are, where you can absorb 10% or 12%, or 8% supply growth in a given year. In Portland, you get healthy demand growth in the 4-plus range, given the growth of the city, but not in these higher 7% or 8% ranges which is where supply growth is running these days.

Okay. And then, final question from me. When you talked about capital allocation, you talked about a share buyback and currently the shares are quoted at about a -- well, somewhere in a mid-teens kind of discount to the NAV that you've indicated in your presentation. You've bought back shares in the past with asset sale proceeds. Although, as I recall, the discount might have been greater at that time. Could you just help us understand, how much of a discount is enough to trigger the share buyback?

Well, that's always a tough one, because there are other variables we have to consider, but I think -- I do think, Jim, once you're getting into the mid-teens, it looks -- starts to look pretty attractive and we have to evaluate what -- where we are from a balance sheet perspective, what's our confidence level in additional sales, what does the cycle look like, where are we in the next few years. So all of those things are going to come into play, but I think we've shown and will consistently say we're not afraid to sell assets and buy our stock back. So, that creates value for our shareholders. It's opportunistic in total. And yes, it would need a reasonable discount in order for it to make sense.

Okay. Very good. Thank you.

Thank you. Our next question is coming from Wes Golladay of RBC Capital Markets. Please go ahead with your question.

Yeah. Hi, guys.

Hey, Wes.

Looking at other revenue growth this year for the fourth quarter, it slowed quite a bit compared to the prior quarters. Is there anything special there? And what are some of your other revenue initiatives that you have going on?

Yeah, I don't think there was anything special there. I mean, we'd have to go through it in detail to see if there was a property that was under renovation that might have dragged down the numbers for other revenues. But a lot of the initiatives related to driving other revenue are either these portfolio-wide initiatives or they relate to these redevelopments and transformations where we really change the way a property is used, where it's positioned, trying to drive much higher profitability -- higher revenues, but higher profitability in the food and beverage spaces, as well as the meeting and venues spaces. So a good example would be in Portland where we're adding -- for $1.2 million we're adding an outdoor pavilion that's going to -- that's likely to be highly seasonal, maybe seven months out of the year for weddings, for events, for corporate outings, great views of the Columbia River Gorge as we sit up on a hill. And interestingly, we're already booking it and in fact we've booked two winter weddings, believe it or not where people say, we know it's going to be cold, but it's a unique experience and that's what we want to have. So, it's looking at those kinds of things I mean, where we -- when we look at Chaminade and we say we might put ziplines in or adventure parks, those drive additional revenues in addition to driving additional room demand at the end of the day. I mean, we make a few hundred thousand dollars a year off of the ziplines and adventure park in Skamania. So, it can be a lot of different things very specific to each individual property.

Okay. And then I don't know if you had a chance to update your numbers. But do you have a view on supply in 2020 looking at it from a perspective of weighted average 2019 versus 2020?

We do. We've been finding that we continue to be well off each year. 2018, we ended up at 2.4% and I think when we initially came out, we were in the upper 2% for the year. For the year we're looking at 2019 being in the low 3% and we're looking at 2020 to be relatively similar to 2019.

Okay. That's all for me. Thank you.

Thanks, Wes.

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

Thank you, Donna. Thanks everyone for enduring our long comments today. But we are a new different larger and we think much better company than prior to the merger, and we certainly encourage you to review the investor presentation which is brand new that's on our website. Thanks very much. We look forward to updating you on the first quarter in just a few weeks.

Ladies and gentlemen, thank you for your patience -- or thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.