Jim Sullivan - Cowen and Company Bill Crow - Raymond James Lukas Hartwich - Green Street Advisors Wes Golladay - RBC Capital Markets

Good day and welcome to the Pebblebrook Hotel Trust Fourth Quarter 2013 and Yearend Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Raymond Martz, Chief Financial Officer. You may begin.

Thank you, Tiffany. Good morning, everyone. Welcome to our fourth quarter 2013 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. But before we start, let me remind everyone 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 2013 that we filed last night and our other SEC filings and could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements that we make today are effective only as of today February 21, 2014 and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain reconciliations of non-GAAP financial measures that we use on our website at pebblebrookhotels.com. Okay so we had another strong quarter is complete and another great year for our company. In the fourth quarter we achieved RevPAR growth of 5.2% which was above to 3% to 5% outlook, largely due to the continued strong transient and group demand in the lateral properties that boost their rates as well as better than expected performance in many of our West Coast properties. Overall, transient revenue which makes up about [25%] of the demand for our total portfolio was up 5.7% compared with the prior year with ADR up a healthy 4.5%. Group revenues which were a little more tempered increased 5.3% with ADR up 1.8%. Our properties located in the West Coast generated RevPAR growth of 9.8% in the fourth quarter led by our hotels in San Francisco, Portland and Seattle. This strength has helped to offset weaker performance from our hotels in the DC area which were negatively impacted by the government shutdown…

Hey, thanks Ray. So as Ray said, 2013 was another terrific year for Pebblebrook. We completed $326 million of new investments through the acquisition of four high quality hotels and similar to last year all of them are located in gateway cities on the West Coast. They include the Embassy Suite San Diego Downtown, the Redbury at Hollywood and Vine in West L.A., Hotel Modera in Downtown Portland and the Radisson Fisherman’s Wharf Hotel and Retail in San Francisco. On a 2014 run rate basis, our West Coast hotels located in San Diego, West L.A., San Francisco, Portland and Seattle, now represent roughly 61% of our forecasted 2014 hotel EBITDA which should allow us to further benefit from the significantly greater RevPAR growth outlook on the West Coast versus most of the rest of the country. We also grew same property RevPAR 6.4% for the year ahead of the industries’ 5.4% growth rate even though the Affinia 50 renovation and repositioning of roughly 87 basis points of our RevPAR growth rate for the year. As a reminder, at the beginning of last year, we forecasted the impact at 100 basis points. In addition, our rooms at service at Viceroy Miami took another 22 basis points off of our 2013 numbers. We weren’t aware of these original construction issues at the beginning of the year but the impact wasn’t part of our original forecast. With same property RevPAR growing 6.4% and same property total revenues increasing 5.5%, same property hotel EBITDA increased to healthy 8.9%. The negative impact of the almost year long renovation at Affinia 50 produced our same property EBITDA growth rate by 184 basis points, so same property hotel EBITDA for the rest of the portfolio grew 10.7% which is perhaps a better indication of the underlying portfolios…

Thank you. [Operator Instructions] We’ll go to our first question from Jim Sullivan with Cowen Group.

Thank you, good morning Jon, and thanks for the intro music, brings back good memories both of the Beatles and the sun. Jon, quick question. You've talked over the years about the positive impact, which I guess was a secular impact, on demand from international inward-bound travel. And I just wonder if you could give us an update on your sense for whether you expect that to continue to be kind of an outsized contributor to demand in your markets over the next couple of years?

Yes, we do expect to continue - the forecasts that have been done by the department of commerce I think averaged something like 3.5-4% a year growth, through the next I think five to eight years. But we think that is a secular trend that will continue, we do continue to see significant increases in travel, you know companies like Boeing, the aircraft makers are benefiting greatly by this secular growth and the globe is adding significant capacity that is meant to accommodate this expected growth on an ongoing basis so, unless we see a very dramatic change in the behavior here in the US in terms of whether we’re going to continue to invite people here and hopefully increasingly make it even easier for them to come here or we see some kind of event take place or maybe a dramatic increase in the value of the dollar. Our view is that that’ll continue to benefit the gateway cities and particularly our hotels.

And Jon, I wonder if you could -- you made some encouraging comments, I guess, about the potential acquisitions. I wonder if you could comment -- give us your view on all of the activity we're seeing in downtown LA versus the rest of that overall market. Clearly, it does seem to be coming into its own in a lot of different ways; and it seems like every month we're hearing news about new development across all property types. And I just wonder -- it's a market where there is a lot of older building stock. It seems to be a market ripe for conversion and maybe boutique hotel development. And just curious what your views are of that submarket?

I mean I think you know L.A. is very gradually changing as a downtown market and probably the most important aspect of that is you know increases in the volume of people who are choosing to live in the downtown L.A. market. You know part of that is driven by frankly lack of availability and development elsewhere particularly in the West L.A. market, but what we’re - so we think it’ll be a gradual process of improvement in downtown L.A. You’re absolutely right about you know that the availability of older C quality office product particularly south, directly south of the downtown area towards L.A. Live and obviously the other thing you have there is, there’s just a lot of land down there, which you don’t have anywhere else really in the L.A. metropolitan area, so it would be natural to think that, that would continue to develop as a residential market, as an entertainment market, I think the one thing we’re not seeing to any meaningful extent yet is an improvement in the office market and any kind of meaningful rotation of quality tenants into the downtown market.

Okay, then. Finally for me, two of the markets which have lagged -- you noted them in your prepared comments, San Diego and Philadelphia. Convention calendar seems to be a very important variable for both these markets. Maybe you can give us your views on convention calendar outlook -- not just for 2014, but maybe 2015 and 2016 to the extent you have visibility on it?

For those two cities?

For those two, yes.

Okay so San Diego has a meaningful pickup in ’15 and ’16 very encouraging, the other encouraging aspect, really two others in San Diego, one is the recent election, the very business friendly mayor who won election earlier this month and that should lead to the reconstitution of all of the funds satisfied by the hotel association and industry in San Diego for the marketing of San Diego which cut off last year and all of the sales people were let go, so that’s being added back and then the convention center expansion which has been approved and is in the final hurdles of one last litigant case, right now it’s forecasted to be completed in either 2017 or 2018 and that will have a very-very positive impact, further positive impact on the convention activity in downtown San Diego. As relates to Philadelphia, it’s a little bit of a different story, they actually expanded the convention center a year and a half ago, it’s a beautiful center, it works well but for the management of the center and the labor at the center. They made a great decision late last year and bringing in a private company called SMG that manages 70 convention centers around the country including some of the biggest including Chicago and Las Vegas and very well qualified private group happens to be based in suburban Philadelphia. And they’re already making some very positive changes that hopefully will resolve in significant improvement in operations and ultimately in marketing and perception of the attractiveness of having a convention in downtown in Philadelphia. So the facility is there, it’s terribly underutilized today because of the problems that have come about in the last two years. And there is great reason to be very encouraged about that being resolved like it was done in Chicago with these changes. But right now, it looks like 15 and 16 in terms of major convention it’s going to be weaker than it is this year.

We’ll take our next question from Bill Crow with Raymond James.

Jon, as Company leader, as industry leader, you're kind of charged with looking ahead two or three years. As you think about how things might play out, does it make you more interested in going back and looking at the East Coast acquisitions at this point?

Not until pricing changes, Bill. Again, it’s not that we’re not looking. And in many case we’re bidding. We’re just not competitive. And I am sure it has to do with our growth rate assumptions for a number of those markets and it has to do with our view of risk to new supply or other issues in those markets. And so as a result of that, we’ve just not - we’re just not competitive in general on the East Coast. And until either our viewpoint or our competitor’s viewpoints change, I wouldn’t be surprised to see that continuing.

John, one of the things that we're hearing from clients and I'm sure you're hearing or you are seeing is that guidance for 2014 that we have received so far is generally in line on a top-line basis, but margin growth is going to be weaker than many had expected. And if you think about 5% or 6% RevPAR growth, and 80% of that driven by pricing, it does seem like -- whether it's 25 to 75 bps or 50 to 100 bps, the guidance has been weaker. So what levers are out there? And obviously your portfolio is a little bit different, and you're going to post better margin growth. But just talk generally about some of the pressures that you're seeing on the expense side.

Well, in our case, we’re forecasting I think a pretty growth in our EBITDA margin for ’14 at 125 to 175 basis points. But I think the general industry pressures are generally the same ones we always see. It’s wage pressure. It’s in particular benefit pressure. The wage pressure comes primarily from the union driven markets which are many of the major cities. And the benefits are obviously something that is an issue not just for our industry but for all industries. And I think in markets we continue to see municipalities and states trying to raise more revenues, so we see increases in business and operating taxes. We see increases or attempted increases in property taxes and in a number of markets. I think the nice thing about our portfolio with but it’s a really heavy concentration now in California which has good and bad aspect. But one of the good aspects is once you reassessed that purchase, you’re limited to at 2% per year increase in your taxes. So we’re seeing pressures in workers compensation cost again driven by experience that the states and cities are having with these dramatic increases in disability claims and so it’s - that is generally where we’re seeing the pressures and then we’re able to offset a lot of that through our efforts in implementation of best practices, investments in energy, investments in technology. Working with our operators to right size or create efficiencies and the amount of supervisory work manager time and staff levels that we need to utilize at our hotels. So it’s always a challenge and you can either kind of let it happen or you can work hard and creatively to mitigate and offset, and that’s what we do.

Yes, that's helpful. Jon, one more question for me. And again, a question that we get asked, which is: what sort of impact are you seeing or can you anticipate from alternative lodging sources? So Airbnb, as an example, which has become more aggressive. How big a threat do you assess that?

I think it’s a real threat, I think it’s hard to know how bigger threat it is right now. One of the things that Airbnb and other providers like them are doing is they are having a meaningful impact on demand growth. They are increasing demand because of the affordability and publicity surrounding their offerings, a city like New York I think I have been told they have 40,000 listings in New York in New York City. That’s a lot, but it’s not 40,000 hotel rooms. And we’re really not seeing it in the demand numbers in any of our markets. And we haven’t heard of customers who said hey we used to stay with you and we’re choosing to stay elsewhere. But I am sure it’s happening and one of the areas it may have the biggest impact, now clearly it’s going to our an impact on the low end of the market, because that’s frankly in a lot of cases where it’s -- who it’s competing with, because of the type of customers they’re currently attracting. Although again that may change overtime and it may become some more upscale customers, but it’s clearly having an impact on the lower end of the market. It’s having impact on the hostels in the market; it’s having an impact on some of the suburban markets to some extent again at the low end of the marketplace. So at this point in time we’re not seeing an impact to our businesses and our competitors. But I wouldn’t be surprised for there to be some no different than I guess technology itself has had an impact on the number of meetings. Particularly lower end training meetings which many of which now get done on the Internet.

We’ll take our next question from Lukas Hartwich with Green Street Advisors.

I was hoping if you can provide an update on the Delfina conversion. Is that complete and how is it being received?

Yeah Lucas the conversions done, the flag change occurred in mid September of last year. It’s been very well received, there is some very minor work in the process of being completed, it’s primarily some furniture and some artwork that’s arriving any day. But all the brand standard S&E, all the other agreed changes for the flag or upgrading that we have done is complete. And it’s an interesting case because we didn’t change a whole lot physically at the property; we really made those changes previously with what was a $9 million renovation the year before. But just changing the flag has actually meaningfully increased the customer satisfaction. And I don’t -- maybe it’s just better situated from a customer base and a flag change, it’s just better, it’s a better well respected flag than I guess what Sheraton is today by many customers. So it’s kind of curious case study and the results have been very positive.

And then just one other question. Do you have any updates on your plans for the National, Benjamin?

We have two different paths we’re going down today hand in hand with our partner. And I think both of those, either of those path will result in a very favorable outcome compared to the losses that we have been experiencing there which have on a joint venture basis been -- have grown back to above $2 million, well above $2 million on an annual basis. So I can’t give you anymore color yet but I think we’ll know more in the next 90 days about which path we end up going down and again in either case I think it will ultimately have a very, very meaningful impact on the reduction in those losses.

We’ll take our next question from Wes Golladay with RBC Capital Markets.

When we look at your exposure to San Francisco roughly around 23% now. Would you guys like to I guess keep a limit on that or if you guys find the right opportunity having more exposure there?

Well we’re going to continue to look in the market, yes. So we’re not uncomfortable having a higher exposure today, and the big reason for that is just the lack of supply in the market. There is I think, a Hampton Inn under construction; and outside of that, there really isn’t anything due to start for some time, so very low activity on the development side, again it will ultimately come but with the rapid escalation that we’ve seen in that market for replacement cost, in land cost, in a shortage of your specialized and experienced labor in that market; again it seems that hotels continue to be a lowest and worst use for land and older stock office properties in the market. So we are very comfortable if that percentage increases and by the way it’s going to increase on its own as it continues to grow faster at the bottom lines of those properties than the average for our portfolio. The other thing we were pointing out and you know kind of comes from your question, we have seen, as I mentioned in San Francisco, fairly significant increases in replacement cost, we’ve actually seen that in most cities around the U.S. and our current estimate for our portfolio right now is upwards of $575,000 to $600,000 a key and we continue to see very significant competition in the markets for land and increasingly for labor. So if anything we expect to see in escalation, in those cost to build versus what we’ve seen over the last 24 months.

Okay, sticking with that would you think that all help slow down the development in New York in 2016, you know, in the light of replacement cost?

I don’t know what’s going to slowdown New York’s development pipeline. We think this year is going to be upwards 7% for the market, we think 15, based upon what we know right now, is in the 5% to 7% range and more probably three months away from having a fairly and even more accurate view because if you haven’t started by April in the market you’re probably not delivering in 2015. So you are on to 16. There is already a significant pipeline where 16 deliveries, some of which is under construction, and just a lot of announcements. Hopefully at some point both the cost to replace, which is going up in New York at a fairly rapid pace, the cost of land and the slower pace of growth in performance. You know New York you need 4% just to keep your EBITDA growing at 4% at a minimum. So it’s a higher cost growth market. You actually need it to be a higher top line market as well, which what it’s been historically but with the change in the way New York is with the Westside in the neighborhood, I don’t think that’s going to happen again in the cycle.

At this time there are no other questions in the queue. (Operator Instruction). There is still no questions in the queue. At this time I will turn the call back over to our speakers.

Thanks operator. Again thank you all for (abruptly ended).