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, sir. You may begin.

Thank you, Donna. Good morning, everyone. Welcome to our second quarter 2019 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 2018 and our other SEC filings. And future results could differ materially from those implied by our comments today. Forward-looking statements that we make today are effective only as of today July 26, 2019, and we undertake no duty to update them later. You can find our SEC reports in our earnings release, which contain reconciliations of non-GAAP financial measures that we use on our Web site at pebblebrookhotels.com. Okay. For the second quarter 2019, our hotel operating results were largely at the upper end of our expectations and our adjusted EBITDA and our adjusted FFO, both exceeded our outlook. Our adjusted FFO per share of $0.85 topped our outlook of $0.80 to $0.82 per share, though a large part was due to holding several to-be-sold hotels slightly longer than was assumed in our prior outlook. In the second quarter, same property RevPAR increased by 1.4%, compared to our outlook of 0% to 2% and same property total RevPAR rose 2%, which was above our outlook is driven by continued healthy growth and non-room revenue, which is up 3.4%. Our 1.4% RevPAR increase was a result of 1.7% increase in ADR and 30 basis points decline in occupancy as we continue to experiment with pushing rate at expenses on lost occupancy. In total, we are really pleased with our relative performance again in the second quarter. We outperformed the industry overall and we outperformed most of…

Thanks, Ray. My focus today will be on three major items; first, what the trends are that we're seeing in the industry; second, I'll provide an update on our strategic disposition plan and our strategic redevelopment plan; and third, I'll discuss the progress with our portfolio-wide initiatives. So let's start with the industry trends. I would summarize them as follows. Overall, industry demand softened by 50 basis points from the pace of demand growth in the first quarter, primarily due to weakness in transient travel, both business and leisure. Industry demand for room nights grew 1.9% in Q2, below the first quarter's growth rate of 2.4%. With industry ADR grow just one-tenth of a point higher, industry RevPAR growth decelerated to 1.1% from 1.5% in Q1. Urban and the top 25 markets underperformed the industry with urban RevPAR flat in Q2 and top 25 RevPAR up just 0.2%. Urban and the top 25 markets are underperforming, primarily due to greater supply growth than the overall industry. In the second quarter, group demand softened further with industry group room-night demand being negatively impacted, primarily by the calendar shift of the Easter Passover holidays moving to April of this year from March of last year. From our perspective, corporate group demand remained healthy in the second quarter, with strong associated food and beverage and other revenues spend. Because so much of overall group is contracted well in advance, industry-wide group rate has been very positive, increasing 2.1% in the second quarter. Though, that was down from the first quarter's group rate growth of an even 3%. Industry-wide transient demand on the other hand has been much more positive than group this year, and benefited from the holiday shift in the second quarter. Industry-wide transient demand grew 2.9% in Q2 as compared to…

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.

Just a question on San Francisco, you mentioned that some of the weekend conventions were a bit softer than you hoped for. Can you provide some more detail on that? Do you think some of the higher prices may be scared some customers away, and how are you changing your strategy there?

The answer is we don't really know why people don't come. Perhaps the associations that had these conferences overestimated the number of people that were going to come to begin with. These were new conferences to San Francisco and so the history in the market. There is no comparison. In other words, we can't look at and say, oh my god, they're down this year from where they were the year before. So, I don't know that was pricing at all in the marketplace. It's certainly possible. These associations are paid for by generally individuals. There are medical associations, so doctors and other researchers and such. And so it certainly may be that the same consciousness we've seen in leisure transient and business transient, it's pretty much the same business at the end of the day. Just happens to be coming for one specific purpose related to group. So as it relates to strategy change, I mean, we continue to be focused on building weekend base in the market, and that really doesn't change based upon the weak performance of some of these medical conferences. Obviously, we'll hard at any of the other ones this year. And I know our teams have dramatically washed down those groups on their books. So they don't presume that business is going to show up.

And just on the additional asset sales that you may peruse later this year. Does that mean that you could be looking at buybacks later this year if you pursue that option?

Certainly does.

Thank you. Our next question is coming from Smedes Rose of Citigroup. Please go ahead.

I just wanted to ask you, you mentioned that there is still a lot of strong buyer interest and no changes, I guess in their expectations. And given that environment and some, what looks like weakness on the RevPAR front. Would you consider pulling forward asset sales that you may have been thinking about last year, and maybe trying to get them done sooner rather than later?

Not really, Smedes. The sales that we had been looking at and still are looking at for next year, I think we've indicated previously that there's some work that we need to do at these properties before we can put them on the market. And so, we've been moving forward and making great progress on those efforts, but we're still on the same path we were on before. And frankly, I really don't think -- I mean, the kind of softness you're seeing in economy, which is mirrored in our industry and probably many other industries today. Unless you think there's a recession, I don't know why it changes your view of value. At the end of the day, I think the stock market is a good example about. The market certainly in this environment with lower rates and lower short-term rates coming doesn't seem to think companies in general are worthless. And so we don't believe and we haven't seen any evidence of any change in perspective on the part of buyers as it relates to any of the softness that we've seen in RevPAR.

And then sorry if you answered this, but the call went silent first a couple there, but I just wondering on your decision to convert to Margaritaville. Just interested maybe in a little more detail of why you with that and how do the fees work, I guess to pay the Margaritaville, because you have a third-party -- a different manager as well in that company?

That's right. So the Margaritaville arrangement is a license arrangement for use of the name, and the names for any of the venues at the property. And it is managed by a different group, but Davidson who manages other properties for us and actually manages other properties that are Margaritaville hotels, and so really a perfect group of three now. Why did we end up with Margaritaville? After an incredible amount of the original skepticism after the idea was brought to us last year and a great effort of both the Margaritaville and the Davidson folks to educate us on the value of Margaritaville, the huge national and even international customer base that the brand has throughout the restaurants, as well as their resorts, their merchandise, their alcohol sales, their radio station, they have a pretty broad reach into a customer base that we think is the customer base in San Diego and in Mission Bay. And so, we've really thought it was a perfect fit. The numbers that we've seen and that they've provided to us give us a lot of confidence that the way to maximize the upside opportunity of this property is through Margaritaville and not through other brands who are remaining as an independent as the property has been for decades. And so for us, it seems at the end of the day a pretty good fit. It's a spectacular property. As you know, it's very unique. But the customer base that does come to San Diego and Mission Bay is not the same customer base that goes to Laguna Miguel or Santa Barbara, or Delmar. And so, we think it's a good fit. They drive a tremendous amount through the projects that they have of food and beverage and other revenues. People tend to stay on the property much longer and use the venues more so than any other brand or in fact any of the independents that we have. So that was really the rationale behind it in. And I would reiterate we had an incredible amount of skepticism when we heard the idea initially. And maybe that's because we're not parrot heads here, but we really didn't understand the brand and its success today.

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

I had a quick question on some of the mechanics in the guidance. So if my arithmetic is correct and you can correct me if it's not, it implies maybe about a one and three quarter RevPAR growth rate in the fourth quarter at the midpoint. And Jon, you made comments about the fourth quarter group is obviously contributing to that. Is that -- and maybe a better way to ask it is. What would that number have been as of 90 days ago just given some of the changes in transient we've seen since that time?

Well, Rich, firstly your question on the fourth quarter. Well, it implies what your third quarter assumption is to get the fourth quarter. But based upon the range we provided of flat to down 2% in Q3 that imply fourth quarter of up 1% to 3%.

I was using the midpoints. So, what would that have been as of 90 days ago, roughly speaking?

I don't think we have taken down our second quarter at all, I mean, our fourth quarter at all based upon what we've seen, perhaps at the margin a little bit, Rich. But most of the decline really came, is coming from the third quarter, which was our weakest quarter from a pace perspective all year. And third quarter actually got worse based on the bookings in Q2 for Q3, while actually Q4 got better based upon the bookings in Q2. And actually both quarters got better on a group pace basis. So, it really is all focused on transient, which is very consistent with what we we've seen in the industry data and what we've heard after talking to a number of the major brands.

And then my second one here, maybe to turn the recession question on its head here. Given the volume of redevelopments and CapEx spend that's coming down the pike over the next year or two. If we were to enter into a full-blown recession in the next 12 months, and I realized that these projects can't exactly turn on a dime. But could you potentially accelerate some of those plans versus what's currently in the pipeline, or how would you think about that?

Well, we certainly could accelerate projects that we currently have planned out into the winter of 2020, or end of the summer of 2021. We could pull those forward. I don't know that that overall would be the right decision even in that environment that you're talking about. But it really depends upon what kind of recession it is. There's some people who say we had a recession in '15 and '16, a mini recession and maybe that's what we're having right now, I don't know. But everybody has a different definition of what it means. But we would relook at everything and determine what the right thing to do was. And yes, we do have flexibility on a number of these projects to either pull them forward or push them back.

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

Jon, we're ready to enter the special corporate and negotiations this fall, corporate confidence is at low levels. Just curious how is your view towards 2020 evolving?

I suspect it'll -- I mean, we really haven't started. I guess there's starting to be some RFPs. And actually, there are some are RFPs on fiscal years. There are some of the large corporations that are on July 1 to June 30, and we've just gone through those, finalizing them over the last 60 days. And I'd say that the results of those, if that's any indication of the ones to come was pretty similar to what was going into this past year. What we are seeing on average 2% to 3% increase is in average rates higher in markets like in San Francisco, or even Boston and lower in some of the softer markets where there is more new supply and new competition. So I don't a really think it's been a move much from those numbers for this upcoming winter based upon what we've seen in the mid year RFPs that we have just accomplished.

And on the repurchase topic, Jon. Is this dependent upon more asset sales at this point? Or if you had enough confidence in the execution, could you maybe do repurchases sooner given the valuation today?

Well, we certainly -- I mean, it all depends upon -- I mean, our first objective is to bring our leverage down to our target range in the low 4s. And so whether the asset actually close or we have confidence that they will close, because the buyers have significant dollars at risk, yes, that would all be taken into account and when we move forward with any the stock buyback program. We do already have the program in place. So it's not something we have to announce at this point.

And then just finally from me, you gave a lot of high praise to Margaritaville. Any other assets within your portfolio that you think could benefit from switching to that brand?

Potentially, Bill. I mean, it's a pretty specific customer market, I think. And so now anything we do would need to be the right fit for that. But I do think it's an up-and-coming lifestyle brand. I think they are growing rapidly, which frankly in some regards, is always a concern, want to make sure they are focused on us. And we think they are, because we are their first West Coast property. And of course, I think they look at our property and think it's the quintessential prime Margaritaville, if you will. You know the property, it's a chill place, incredible landscaping acreage, et cetera. So I mean, we will be evaluating some additional properties, we already are throughout the portfolio for changes and certainly Margaritaville could be a possibility as are many other things -- any other brands, or our own proprietary brand that we're looking at.

Thank you. Our next question is coming from Neil Malkin from Capital One Securities. Please go ahead.

So since April, you've had 10 operator or brand changes announced or completed. I'm just wondering if that podding concepts where you are leveraging property management and fixed costs. Is there a lot more that to do I guess relative to your expectations when you first acquired LaSalle more to do than you thought? And do you think you can be ahead of your $10 million in synergies you talked about when you made the transaction?

So Neil, interestingly, the savings from the parting are not part of the $10 million estimate. We think there is another $2 million to $3 million in the podding. We think right now we are looking at eight pods, potential pods of two properties each and we probably successfully implemented three of those and we're in the process of executing on the remainder of them. So, we've really not gotten to those savings yet in terms of those benefiting our numbers. So that's to come. And I would guess that those would be completely in place by the end of the year and we'd see those annualized savings benefit us next year primarily.

In terms of your guidance, seems like the comp in 2Q was the hardest you are going to see, but I think RevPAR at 4.8% last year 2Q, looks like 3Q, 4Q have easier comps for you, you have strong San Francisco in the fourth quarter and you have the tailwind from merger integrations and labor strikes last year layering on top that easier said. Do you think your guide is a little bit too cautious in the back half of the year?

I think our guide, as it has been, is very reasonable given what we're seeing. And so, the June performance was a little disturbing as March was earlier in the year, and then we had an okay April and a good May, and then June declined. So, I think given the uncertainties we're seeing in the economy the slowdown in economic activity. Business investment as you've seen is very, very soft. And corporate confidence or CEO confidence is very cautious. So, I think we need to see some resolutions before we see a pickup in activity in travel and the industry. And I would think our outlook is based upon what we're seeing, not in the anticipation of things getting worse.

And then last one from me, at Chaminade you talk about the things you can do to improve the other non-room revenue performance. Have you guys at all thought about putting in RV pads? It's a very popular demographic, they're very cheap to put in, the returns are super strong. I'm wondering if you thought about looking at even more alternative uses for your properties that have larger acreage.

Yes, that's a really a good question. And obviously, the whole RV glamping thing is on the rise. We are looking at RVs, high-end RV Park. We are looking at all different forms of glamping, whether it's yurts, whether it's teepees, whether it's hard surface, treehouses. We have three tree hours in Skamania. We're in the process of our planning two more, adding to the four that we have. And actually at Skamania, we are looking at closing our golf course, taking back those 150 acres and putting other uses on that property. One of which would probably more popular version of golf that would be much more profitable, which would be an executive nine-hole short course and then an 18-hole podding course. And we will be looking that at Chaminade as well, which currently doesn't have any golf amenity at all. So all of those things you're talking about yurts, teepees, RVs, silver clouds, all of those are opportunities. You see them up and down the West Coast in varying degrees where we could be putting those on our properties to dramatically improve revenues, as well as utilization of the properties, food and beverage in other facilities.

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

Jon, you mentioned group demand remaining pretty solid at least on the corporate side. Any change that you've seen in cancellations or attrition from the group that you saw in 2Q, or early 3Q?

No. We look for that, right, because that's really an indicator of a turning point oftentimes when we see an acceleration in group cancellations or significant attrition. And outside of those medical conventions, I mentioned earlier, we're really not seeing anything related to an increase in group cancellations or attrition, so all positive on that regard. And as I indicated, at least in our portfolio, we actually had an increase in group pace out of the bookings of the second quarter for the rest of the year.

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

Can you update us on your time with the supply forecasts for this year and next year? And then maybe can you contrast that with how it's changed throughout the year with all the dispositions? And will it change more with the planned disposition?

As we noted before, Wes, in terms of -- our supply growth, has continued our estimates of continuing to be higher at the start of the year than it's really translated to currently. Right now, for 2019, our supply growth is now under 3% and right now in 2020 it's around 3%, and that's the result of projects in 2019 just taking longer, again pushed out to 2020 and then it dips down to under 2% in 2021. Obviously, that's less confidence in that, because that tears out. And overall, our supply growth for 2019 declined by about 30 basis points versus last quarter. And our second quarter -- and then for 2020, our supply forecast is declined by about 20 basis points as well. So again, supply we think is largely in check. There's a couple of the larger hotels when they get open in these smaller markets like Seattle. And Portland, they tend to move the supply growth up a lot. But overall, we think supply is pretty well in check given how strong the demand growth has been.

And then looking at the leisure customer, can you further segment that into how the domestic consumer is doing versus the international?

This one is harder, because on the international side, the data is a little bit spotty. Now, commerce has been coming out with their data much more quickly, which frankly is in response to legislation that got passed that directed them to do that. And so, what we've seen from their numbers, I think through May, is overseas inbound up 2%. Now that's inconsistent with what we're hearing from the brands who believe, I think they believe or they certainly indicated to us that they think international is down slightly in the first half of the year. So at best I'd say it's probably flattish to slightly up, slightly down, based upon the different data sources that we're hearing from. So one thing we do know is outbound is up significantly. So Americans are traveling. Growth there is a high percentage, whether it's going to Europe or its going to Asia, or other places around the world. And of course, we'd rather have those people stay in the U.S.

And last one on the disposition front. Is the street retail largely ready to be sold at your various properties?

Not quite. We're making progress. As we said, we're working through the creation of condominiums, and for the various our different segments of the property. And so we're not there yet but we're hoping that there will be an opportunity to offer at least some of the portfolio of retail before the end of the year.

And is that the comparable cap rate to where the hotels are selling?

We think that is the indications of value we're being provided by more expert retail investment brokers. Certainly, we don't know that much about it. It's not our expertise. But based upon what we're being provided, yes, it's in the same ballpark.

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

On the willingness to sell additional hotels, maybe I missed this. But can you give us any sense for how you would think about prioritizing the remaining assets as you think about the different segments you've outlined?

I mean, we are going to look at -- we have a look at a number of different things. First, from an operating perspective, we're going to look at our short to intermediate term perspective on the market on a particular property is capital required, what do we think the return on that capital is, is it attractive or not. And then is it strategic from a branding perspective for us in terms of that second opportunity of ultimately trying to see if there's value by creating our own brand or brands with our portfolio. We continue to have a West Coast bias of our long-term viewpoint on value creation versus some of the East Coast markets, and that would impact. And then we need to look at what the taxable gains are and how much of that capital would be available for either stock buyback, or either additional dividends that we would need to pay out, which we're more than happy to do in selling in asset. But it certainly wouldn't achieve the objective of taking advantage of an arbitrage as much so between the public and private market values.

And then you mentioned your broader outlook is based on what you're seeing in the market now. Your guidance is based on from what you're seeing in the market now, and you aren't expecting recession. As you think about cost control and communicating with your managers. Are they bettening down the hatches at this point as it relates to cost containment? Or what are the triggers that would drive that approach?

We certainly aren't at, what I would describe as what you just defined bend down the hatches arbitrary across the board cuts. We're not doing any of that are at this point in time. Right now, we're doing what we normally do where if there's top line softness, let's look with a finer set of glasses at where we can be more efficient or make some cuts, or defer expenses though. Frankly, we don't want to defer anything that impact long-term value, quality of the experience for the guests, the value proposition at the end of the day, because that's the savings that will ultimately get offset by reductions in revenue at the end of the day. So, no. We are not -- we are definitely not looking at what we did back in '08, '09 or what we did back in '01.

Thank you. Our next question is coming from Gregory Miller of SunTrust Robinson Humphrey. Please go ahead.

First question, given that you have a number of leisure markets in their portfolio. How are you interpreting relatively better leisure trends in say South Florida versus some of your more challenged markets? Are some of attractive destinations pulling up better than markets where you have more client demand?

That's a good question. We haven't looked at it that way that's a reasonable way to look at it, and something that often happens in a slowdown where your drive to benefit. I do think part of the South Florida benefit that we've been seeing continues to be the recovery from after those hurricanes, both in the one that hit in Naples, which is impacting our Naples property and those in Key West, where I think Key West is continuing to recover to it's getting closer the demand level it was at prior to the hurricane. And so, I don't think its representative of a broader trend necessarily as much as its representative of some local market recovery from impacts from prior events. And I think if you talk to folks in Miami, or Miami Beach, you'd probably hear that they're not seeing that as much as we're seeing in Key West and Naples. And probably because they didn't have the negative impact in that market that we saw in the two others.

One other question just on Moscone Center. We've heard that Moscone has started to attract new annual conventions that booked for the first time in 2019 and perhaps now annually, going forward as a consequence of the renovated and expanded center. I'm curious if you're hearing this as well? And if so, is this a potential material benefit to pace as we look out to 2020?

Well, we're definitely seeing that. I mean, the expanded center has attracted significantly more and newer conventions. I don't know -- certainly, it's a mix. Perhaps some of those are annuals. But a number of those are newer rotational conventions that come every three year, four years, because they rotate regionally at the end of the day. But there's no doubt that Moscone is running at a much higher pace. We believe that will be on an ongoing basis. Bookings for next year, as an example, are now up over a million room nights. And recall maybe two quarters ago, we were down in the low to mid 9s. So, they do continue to make progress. It's very encouraging. It will drive more consistent long-term demand. And you do actually raised an interesting comment that is true to San Francisco versus other markets. I believe San Francisco has more annual repeat conventions than any other market in the United States. And that does reduce risk and it does reduce uncertainty that happens through these rotations and certainly, volatility from the ups and downs. So, I think that expansion and renovation has been received extremely well, and have led to more conventions some of them annual and many rotational that drive more demand on a regular basis annually. And '21 right now looks to be up from 20 based upon pace.

Greg, right now, 2021 has over 940,000 room nights, and that's two years out. So that's running at a better booking pace than 2020 is. And so several years ahead of us in terms of on the convention side.

Thank you. We are showing time for one additional question today. Our last question will be coming from Lukas Hartwich of Green Street Advisors. Please go ahead.

This is David on for Lukas. Just sticking with San Francisco again not to put words in your mouth. But it sounds like you're pretty optimistic on San Francisco for the next few years. Would it be fair to say that's going to be a top-performing market across your portfolio?

Well, I certainly think it will be one of our better performing ones next year. I do think -- I mean what we've stated and I think right now we believe is with the slight reduction in room nights next year, we think San Francisco is likely to be more of a average performer versus a much stronger performance next year. But then we think it recovers in 2021 with growth off of '20 to being an outperformer again. Particularly as the underlying demand base of technology based, or medical based, or even leisure based business, continues to drive forward in the city. So -- and a little to no supply in that market, as far as the eye can see.

And then just one more quick one on the renovation projects, the two in San Diego. It looks like the renovation costs went up last quarter. Was there a market specific issue there or was it something else?

We added some scope at the Westin that relates to a more complete renovation and redevelopment of the restaurant and bar, adding a lot more seats, adding outdoor areas, adding private dining that we didn't have in the plan before. And as it relates to the Embassy Suites, we added a little bit of bathroom scope of there. And then both properties were subject to some additional costs related to some new ADA guidelines in San Diego that we have to add to the scope.

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

Thanks very much, Donna. Thank you all for participating. Sorry for the lengthy call but hopefully, you found it worthwhile spending the time with us. And we look forward to seeing you over the course of the quarter and updating you again in another 90 days. Have a nice summer. Thanks.

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