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Edited Transcript of PEB earnings conference call or presentation 28-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Pebblebrook Hotel Trust Earnings Call

BETHESDA May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Pebblebrook Hotel Trust earnings conference call or presentation Friday, April 28, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jon E. Bortz

Pebblebrook Hotel Trust - Chairman, CEO and President

* Raymond D. Martz

Pebblebrook Hotel Trust - CFO, EVP, Treasurer and Secretary

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Conference Call Participants

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* Anthony Franklin Powell

Barclays PLC, Research Division - Research Analyst

* James William Sullivan

BTIG, LLC, Research Division - Analyst

* Jeffrey John Donnelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Richard Allen Hightower

Evercore ISI, Research Division - MD and Fundamental Research Analyst

* Shaun Clisby Kelley

BofA Merrill Lynch, Research Division - MD

* Stephen White Grambling

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Tyler Anton Batory

Janney Montgomery Scott LLC, Research Division - VP, Travel, Lodging and Leisure

* Wes Golladay

RBC Capital Markets, LLC, Research Division - Associate

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Pebblebrook Hotel Trust Fourth Quarter and Year-end Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Raymond Martz, Chief Financial Officer for Pebblebrook. Thank you, sir. You may begin.

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Raymond D. Martz, Pebblebrook Hotel Trust - CFO, EVP, Treasurer and Secretary [2]

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Thank you, Brock. Good morning, everyone, and welcome to our First Quarter 2017 Earning Calls 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 2016 and our other SEC filings, and future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today, April 28, 2017, and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain reconciliations of the non-GAAP financial measures we use, on our website at pebblebrookhotels.com.

Okay, so 2017 has begun as we expected and we have a lot to cover this morning. So let's get started. Our first quarter performance was in line with our overall expectations. Same-property RevPAR declined 2.9%, which was towards the upper end of our outlook of down 2.5% to down 4.5%. Our RevPAR decline was driven by 3.4% reduction in occupancy, which was partly offset by 0.5% increase in ADR. Our first quarter results, particularly our occupancy, were significantly impacted by several ongoing renovations during the quarter, excluding the negative impact of the renovations at Revere, Boston Common, Palomar Beverly Hills and Tuscan Fisherman's Wharf, our RevPAR performance would have been 330 basis points better in the first quarter or a growth rate of 40 basis points. Our performance in the quarter was led by Monaco DC, which benefited from the inauguration in Women's March in January as well as more political activity in general. In addition, our Union Station Nashville Hotel generated strong results following its recently completed redevelopment, followed by Hotel Vintage Seattle and Zephyr Fisherman's Wharf, which also continues to ramp up its performance and market penetration following the completion of its redevelopment in 2015. Our hotels in San Diego also did well, benefiting from an active convention calendar, particularly in March.

Our softer markets during the quarter, which should come as no surprise: for Los Angeles, which lost the demand driver driven by the Porter Ranch residents displaced by the methane gas leak in Los Angeles in early 2016; and San Francisco, due to loss of the benefit of Super Bowl in 2016. These combined factors, which helped to enable us to generate an 8% portfolio-wide RevPAR increase in the first quarter of 2016, presented difficult year-over-year comparisons for our portfolio in the current -- combined, the benefits of Porter Ranch and Super Bowl created a headwind of roughly 280 basis points in Q1. Room revenue declined 4%, which was greater than the RevPAR decline. This was primarily due to 1 less day in the current quarter compared with last year due to leap year in 2016. Overall, for the quarter, transient revenues, which makes up about 75% of our total portfolio rooms revenue, fell 5.6% compared with the prior year. Transient ADR declined 1% in the quarter. Group revenues declined 0.7% in the quarter, as room nights were down 4.3%, but ADR increased 3.8% due to the solid convention calendar in San Diego as well as the inauguration in Women's March, which benefited Washington, D.C. Overall, our group performance -- performed pretty well given all the rooms lost at high rates for the Super Bowl in San Francisco last year. Because of these dynamics, monthly RevPAR for our portfolio increased 2.1% in January, declined 6% in February and decreased 4% in March. As a reminder, our Q1 RevPAR and hotel EBITDA results are same-property for our ownership period and include all the hotels we owned as of March 31, except for Hotel Zeppelin in San Francisco, since this hotel was closed for renovation during most of the first quarter in 2016.

Our hotels generated $53.5 million of same-property Hotel EBITDA for the quarter, which was $1 million above the top end of our outlook. This was due to higher food and beverage and other revenues than forecast and further progress creating efficiencies throughout the portfolio. Same-property hotel EBITDA margins declined 199 basis points, which was at the top end of our outlook. Overall, operating expenses declined 1.4% despite increasing wage-and-benefit pressures across our portfolio. Part of the lower expense growth is attributable to having 1 less day this year because of the prior year leap day. Margins would have been better but for the loss of very high rate of business from last year's Porter Ranch and Super Bowl events. The hotel EBITDA percentage growth leaders in the first quarter were: Union Station Nashville; Monaco DC; Hotel Vintage Seattle; and Sofitel Philadelphia.

Moving down the income statement, adjusted EBITDA was $49 million, which was $2.9 million above the upper range of our Q1 outlook. This was due to the hotel EBITDA being $1 million above our outlook combined with lower-than-expected G&A expenses, which are largely related to the timing of expenses such as preopening of legal fees, which we forecast will be pushed into the second quarter and therefore, are not a savings for the year.

Compared with the prior year, EBITDA declined $7.2 million. Approximately $3.4 million of this decline was due to the prior year EBITDA eliminated due to a hotel we sold and no longer owned, with $2.8 million attributable to the renovation activity in the current quarter as well as $2.6 million related to the negative impact from the difficult comparisons the last year from Porter Ranch and Super Bowl in Los Angeles and San Francisco. The combined impact of $8.8 million is greater than a $7.2 million decline in adjusted EBITDA. Adjusted FFO was $38.7 million or $0.54 per share, which exceeded the top end of our outlook by $0.05 per share. This resulted -- it was resulted from the hotel EBITDA and adjusted EBITDA beats as well as a lower share count because of the shares we repurchased during the quarter.

Speaking of share repurchases, during the first quarter, we repurchased 2.1 million shares at an average price of $28.22, representing a 26% discount to the middle of our NAV range of $36 to $40. These repurchases reduced our weighted average shares outstanding by 700,000 during the first quarter versus our outlook. During the first week of April, we purchased an additional 525,000 shares at an average price of $28.85 per share. Year-to-date, we have purchased $2.6 million shares at a weighted average price of $28.35, which comprises $75 million of total share repurchases. We have $75 million remaining in a $150 million share repurchase program that our board previously approved.

We are active -- repurchasing our shares during the quarter because of the upcoming sale of Dumont NYC, our last remaining hotel in New York, for a price of $118 million, which we disclosed in our earnings release last night. This sales price translate into a 23.9x EBITDA multiple and a 3.5% NOI cap rate based on the actual trailing 12-month financial results for period ending March 31, 2017. We expect the Dumont sale to be completed in late June. The buyer has a significant deposited risk and we are obligated to deliver the property close of the hotel, and all agreements of the Union were executed during the quarter. We recorded an additional $1 million impairment charge in the quarter in anticipation of the sale, due to higher employee severance and closing cost versus what we've previously forecasted. The proceeds of this sale will be used to reduce our outstanding balance in our credit facility, which is at current balance of $244 million as well as potentially repurchase additional shares. During the quarter, we also paid off the $44.1 million loan, secure in -- secured by the Sofitel Philadelphia. The only remaining debt obligation that we have maturing prior to 2020, is a $25.6 million mortgage secured by the Hotel Zelos, which matures in September. At quarter end, our debt-to-EBITDA ratio was 4.2x and our fixed charge ratio was 3.6x. That debt-to-EBITDA ratio was slightly higher than last quarter, and this is primarily due to the $59.9 million of common shares repurchased in the quarter with proceeds coming from our credit facility. You should view this as us prefunding the share repurchases with proceeds we expect to receive from the sale of Dumont in late June. As we've indicated to you previously, we are targeting to operate with a debt-to-EBITDA ratio below 4x.

And with that update, I would now like turn the call over to Jon to provide more insight on the quarter as well as our outlook for the remainder of 2017. Jon?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [3]

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Thanks, Ray. So the most interesting thing about the start of 2017 is that it's coming pretty much as expected. While there's been a great deal of enthusiasm about the prospects for a much better economic environment due to the changes in government, we've yet to see any benefits in the travel industry. Most economic statistics have been improving since last fall, such as employment growth, corporate profits and consumer confidence. But other ones that also correlate with the travel industry, such as business investment and airline employments have yet to improve. Assuming we see some improvements in these statistics, history tells us we should ultimately see improvements in travel demand, but nothing yet. For the quarter, industry demand was up 2.8%, a nice increase compared to Q4 and 2016's 1.7%. However, it was nothing to get excited about because the quarters number were enhanced by the inauguration and Women's March in D.C., and the movement in the holidays from March to April. Industry supply growth picked up to 1.9%, so with ADR increasing 2.5%, RevPAR grew 3.4%. If we remove Washington, D.C. from the industry numbers, RevPAR growth would have been 36 basis points less for the industry or around 3%. And the holiday shift also positively impacted Q1 and we'll see that with weaker April numbers for the industry. Leisure travel continued to see healthy growth and business travel continued to be soft, but seemingly stable. For Pebblebrook, we had numerous headwinds in the quarter, all of which we're -- were previously communicated in detail. Our RevPAR decline of 2.9% was in the upper end of our outlook range. It was negatively impacted by the tough comparisons to a strong Q1 last year, which benefited from Super Bowl at San Francisco and Porter Ranch in a L.A., 2 issues widely understood. Together, these 2 events combined to reduce this year's Q1 growth rate by 280 basis points.

Renovation impact in the quarter, particularly due to the major renovations at Palomar Beverly Hills, Revere Boston Common and Tuscan Fisherman's Wharf, cost significantly more impact in last year's first quarter. In total, it amounted to 340 basis points. This was also slightly more than we expected due to a greater impact at Revere, that was caused by some defective systems renovation work that needed to be corrected and that displaced many more rooms than forecast.

In the quarter, RevPAR Tuscan declined 44.6%, 31.2% at Revere and 26.6% at Palomar. These headwinds will turn into tailwinds next year. So in total, Pebblebrook-specific headwinds reduced our first quarter RevPAR performance by 620 basis points. While these major renovations represent the last of our planned redevelopments and repositionings, with the exception of the complete renovation of the golf tower at LaPlaya in Naples this summer, we will still see negative impact in Q2 from both Tuscan and Revere, as these projects get completed in Q2 and in L.A. in April from Porter Ranch. And of course, we'll see a significant impact in San Francisco this year due to Moscone renovation and expansion, which will primarily impact Q2 and Q3.

In the case of our same-property EBITDA margins, as Ray indicated, the decline of 199 basis points came in at the upper end of our range, but like RevPAR, they too suffered from losing the high-margin, high-rated ADRs from both Super Bowl and Porter Ranch. And the significant disruptive nature of the Tuscan and Revere redevelopments also hurt margins, as we ran occupancies in the 50% range at both properties in the quarter. This naturally puts a strain on margins due to fixed cost that can't be reduced with only so many variable costs that can be controlled. Nevertheless, we're very pleased with our margin performance overall. In the case of these transformative redevelopments, Palomar Beverly Hills was completed at the end of the first quarter on schedule and on budget. Property looks spectacular as I already got great reviews from our customers and should begin to see improvement in the second half of the year, as we reintroduce the property to the market.

In Boston, at the Revere Hotel Boston Common, we completed the new lobby and bar, all of the guestrooms, suites and quarters, pool and pool bar and a portion of the meeting space at the end of March, all on budget and on schedule. We're on track to complete the new meeting space and exterior entry way this month as originally planned. We'll be reintroducing the property to the market beginning in May, and should begin to see improvement in performance in the second half of this year.

In San Francisco at the Tuscan, we're in the heart of the redevelopment as we speak, with over half of the guestrooms out of service and all of the public areas, including the lobby and drive-in entrance under renovation. We've had schedule issues with the city of San Francisco that has significantly reduced our room availabilities, while waiting for inspections and for additional work requirements. Unfortunately, they're impacting our second quarter EBITDA to the tune of an additional $900,000, which we've accounted for in our revised second quarter and full year outlook. We brought in additional out-of-state workers in order to finish on our original schedule in late June, and in order to avoid further impacting our operating performance and reintroduction schedule.

In total, EBITDA of these 3 redevelopments declined by $5.0 million versus the first quarter of 2016, so obviously, a very substantial impact on our overall first quarter operating performance. When we look at the operating performance of the redevelopments completed last year, we're extremely pleased. These properties are ramping up in 2017 as expected. Zeppelin San Francisco, Union Station Nashville, Colonnade Coral Gables and Monaco D.C. combined to deliver $3 million of additional EBITDA in the first quarter as compared to first quarter last year. We're well on our way to delivering the $5.5 million of increased EBITDA for the year that was included and specified in our initial and current outlooks.

I'd also like to spend a few minutes discussing San Francisco, our performance there and how the year is shaping up. In the first quarter, our San Francisco hotels on a combined basis experienced a decline of 6.5% in RevPAR. Tuscan's renovation impacted that number by 475 basis points. And the benefit from Super Bowl, coincidently, also caused 475 basis point impact. Combined, that's 950 basis points. That compares to the San Francisco city tract overall, which experienced the 2.9% drop in RevPAR in the quarter. And that number would have been higher but for the impact from Super Bowl the previous year.

As we look at the rest of 2017, we continue to forecast RevPAR for the San Francisco city tract to decline in the 3% to 5% range for the year, with the most challenging quarter likely to be Q2. The tough months are May and June, when there is very little convention activity in the city due to the closure of 2 of the 3 convention buildings. Q3 shouldn't be quite as bad, since the summer months tend to be more dominated by leisure travelers, with fewer conventions traditionally in July and August. And Q4 should be better, since it has both the Salesforce and Oracle conventions versus just 1 of them in Q4 last year. And then, as we discussed in detail just 2 months ago, 2018 has more activity than 2017, and 2019 should be a big recovery year with the completely renovated and expanded convention center, and a record amount of city-wide business, already booked for the year.

Now turning to our strategic plan, we continue to make progress with dispositions. As we announced yesterday, we expect to close on the sale of our last property in New York in late June at a sales price of $118 million at a very attractive cap rate and EBITDA multiple. The New York market continues to be under stress from too much supply growth and relentless labor and real estate tax increases. And we'll look for a better opportunity to invest again in New York City whenever the new cycle begins. But for now, as our song for this quarter suggests, we're leaving New York. Assuming the Dumont sale is completed, we will have sold a total of $581.8 million of property at an average trailing 12-month NOI cap rate of 4.1%, and an average trailing 12-month EBITDA multiple of 19.7x. As Ray indicated, and consistent with our prior comments, we also repurchased $75 million of our common stock at a 25% plus discount to the midpoint of our estimated NAV range for our portfolio. We think that's a pretty good investment.

Finally, I'd like to take -- I'd like to make a few comments about our outlook. In our revised outlook, we've removed the Dumont from the same-property calculations, including the reduction of $5.5 million of EBITDA for Quarters 2 through 4, and added back our $900,000 estimate of EBITDA for Q2 for the period of our remaining expected ownership. This EBITDA number would otherwise be higher for Q2, but the buyer will be converting the property to apartment rentals and will be winding down operations in the quarter, in order to deliver the hotel completely closed. In addition, as mentioned earlier, due to additional renovation displacement at the Tuscan and San Francisco, we've reduced Q2 and full year EBITDA by $900,000. We've also slightly increased interest expense due to additional borrowings to fund the share repurchases made today, in advance of receiving the proceeds from the sales of Dumont in late June. For the year, after accounting for the reduced EBITDA from the sale of the Dumont, we've slightly increased the bottom of the range of our hotel and adjusted EBITDA, and increased the bottom end of our adjusted FFO per share range by $0.03 to $2.37. The top end of our AFFO per share outlook remains the same at $2.50. Our same-property RevPAR range of minus 1% to plus 1% for the year also remains unchanged. For Q2, we're forecasting a RevPAR range of minus 1.5% to minus 3.5%. The redevelopments at Tuscan and Revere, which will be completed in Q2, are forecasted to take 120 basis points of our RevPAR performance in the quarter. The Porter Ranch comparison has a 55 basis point drag. And we're estimating that the negative impact from Moscone in Q2 is roughly 250 basis points. So the transitory impact is 370 basis points with 425 basis points of total RevPAR headwinds.

So that completes our prepared remarks. We'd now be happy to answer your questions. Brock, you can proceed with the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Rich Hightower of Evercore.

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Richard Allen Hightower, Evercore ISI, Research Division - MD and Fundamental Research Analyst [2]

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So I want to talk about the share repurchases, I think, that's the biggest headline from the quarter. Jon, it sounds like, I mean, you guys have talked about this for several quarters. It sounds like you needed to see 2 things in order to execute on the repurchase authorization. You needed to see some stability in underlying trends as well as, of course, the large discount to NAV, your view of NAV and -- versus where the shares are traded. If you could talk about those 2 elements and which one played a bigger role in the decision to execute this quarter, I think that would be very interesting.

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [3]

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Sure. So I mean, we have talked about this previously. I'd say that, clearly, the first one plays the more important role, which is the discount between the stock price and our view of our NAV, which we continue to prove out through sales at or above the range that our NAV is been calculated on. I think the -- I don't think we would have executed had we been in a worsening environment, but I'm not sure I want to provide too much optimism that we saw some improvement in the operating environment. I think we didn't see it get worse, and we would view that as making us feel comfortable -- more comfortable with the repurchases, but I don't think it was a trigger factor, Rich.

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Richard Allen Hightower, Evercore ISI, Research Division - MD and Fundamental Research Analyst [4]

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Okay. And then, I guess a bigger point here is, you've also made reference in the past on the share repurchase decision to your view of the cycle and where things are in a broader sense. Did that play a role here at all? Or are we sort of putting aside what the next 3- to 5-year outlook sort of looks like and it's really just more of a point-in-time calculation, it sounds like?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [5]

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Well, I would say there is no doubt that our plan, which involves the disposition of somewhere between now almost $600 million and $1 billion as much precipitated by where we are in the cycle, and the fact that we are late -- later in the cycle, yes, we're now predicting the cycle ends tomorrow or this year or next year. But we're late, and therefore, when we look at risk and return, we feel much more comfortable in disposition mode taking advantage of what our continuing attractive valuations for our assets. And then, the added benefit is the ability to arbitrage the disconnect between the public markets, which don't want to give us credit, I'm sure for many different reasons the underlying value of the assets and so we're taking advantage of that by buying our stock back.

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Operator [6]

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The next question comes from Shaun Kelley of Bank of America.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [7]

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So, Jon, maybe to follow up on the M&A side a little bit and so what we've seen out there from some other people is in the lodging REIT spaces that they're starting to look more proactively at acquisitions. You on the other hand to the last point are actually looking at buybacks relative to kind of where you think your portfolio is worth. So can you just tell us about what you're seeing out there on the opportunity to purchase? And, I mean, yes, how those sort of -- it's kind of implied, but how those line up with the value that you're seeing in your own stock right now?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [8]

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Yes. So, I mean, we're not in the acquisition mode. We're not out there actively pursuing acquisitions. So we have a little less insight into what might be going on actively in the bid process for assets that are for sale. What I can tell you is if you look at assets that have traded, whether it's the W in Hollywood, the 2 properties in Seattle that LaSalle sold, the property that Hershey bought in Seattle. You are continuing to see in the major gateway markets strong demand from multiple bidders at low cap rates and high price per key and high EBITDA of multiple values. So that -- at this point in the cycle, that's why we find that attractive and on that basis, we've initiated sales. So I think compared to last year, Shaun, there is probably, I mean, what we've been told and what we see, there's probably more buyers both from private equity and as you mentioned the REITs as well as foreign capital that continues to acquire in the U.S. and values have held up. I think there are fewer good quality assets on the market, which is a positive for our efforts to sell, but there's plenty of commodity product out there. So those who are buying more typical-branded managed properties, I think, there's a lot of choices.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [9]

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Great. And then just as my follow-up on -- as we think a little bit about the RevPAR guidance, it's sticking with basically flat for the year. Obviously, we now know sort of the expectation for the first half, it's implying some sort of low single-digit growth in the second half. In your portfolio, can you help us just think through the plus and minuses in the second half? With San Fran still being a drag, is that going to be the tailwind from renovations at property-specific things? Or are there some markets that you're looking for an uptick in?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [10]

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Well. I mean, we have market share gains throughout the portfolio from the redevelopments that we've in prior years and we expect that to be somewhere in the 100 to 200 basis point range. That's, obviously, stunted initially in the first and second quarters, but the worst being the biggest headwinds by the renovation impact, which is minimal in the second half of the year for us and was more substantial last year, so the comparisons are a little easier. And then, of course, we don't have Super Bowl comparison. We don't have Porter Ranch comparisons to deal with in the second half of the year. And if you look at Q1 for us and you take out all of the headwinds, you got to plus 300 basis point RevPAR growth in terms of what the rest of the portfolio is doing. So I don't think we have a more positive view of the economy or the industry or -- built into our numbers in the second half of the year, I think, it's more a function of the math and the specific headwinds and/or tailwinds that we have through the portfolio. As it relates to San Francisco, it does get better, or less worse, after Q2, which we think will be the worst quarter with May and June being the worst months of the year. We expect those months are likely double-digit negative in the market.

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Operator [11]

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The next question is from Stephen Grambling of Goldman Sachs.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [12]

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Just on booking trends. I'd just love to get your thoughts on your group booking positions for the remainder of the year, how 2018 is shaping up? And maybe any color you have on cancelations, or in the quarter trends and how they evolve from 4Q to 1Q?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [13]

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Sure. So I'll take the really easy one first, which is cancellations. We haven't seen any change in cancellations or attrition in the portfolio. It continues to be pretty small and isolated to pharmaceuticals that don't have a drug, or somebody who just changes their mind. Maybe somebody's getting bothered with -- about whatever who cancels a meeting. So we haven't seen any change overall. No trend there that's negative, no trend that's positive. The second thing relates to our booking pace. We think it's really important to look at group and transient together, I'll give you both pieces, but we're obviously down in group, particularly driven by San Francisco, which is quarter of our portfolio. So for the remainder of the year, group room nights are down 6.5%, transient room nights are up 16.2%. And that -- some of that is strategy that's taking crew, which is where we put crew in transient, international crew or it's taking some tour groups like we did in San Francisco, or it's getting more transient on the books-to-bill-to-base, that would have otherwise been there had group been healthy in the market. So in total rooms are up 4.4%. ADR is down. So group ADR is down 2.5%. Transient ADR is down 5.1%. Again, that's influenced by the crew business that we've taken and some advanced transient that we put on the books at lower rates to get that base. Total ADR is down 3.5%. And then revenue in total is up 0.7% with group down 8.8% and transient up 10.3%.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [14]

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(inaudible)

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [15]

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Yes. So I was just going to say it. It's consistent with our outlook for the year of minus 1% to plus 1%.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [16]

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That's helpful. And then as a follow-up. Maybe, I think in the past you provided a supply outlook over the next couple of years. Looking at your markets, specifically, have you seen any change in that cadence or any other color you can provide there?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [17]

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Yes. So that's a good question. Because this does -- it does move primarily because opening dates get pushed back, which is the trend we continue to see, so for us, interestingly, on a weighted-market supply-growth basis, I think we have talked about expecting to be around 2.9% or 3%. We're now looking at 2.7% for our portfolio. We're looking at 2.1% to or 2.4% for the industry. So we're a little bit higher in '17, but not as much as we were before. Now that's pushing back some openings to later into '17 that impact '18. So right now, weighted market supply for us for '18 is at 4%, which is up a little bit from where we were before. And then, it comes down in '19, right now, we're looking for it to be somewhere between 2.5% and 3%. So it's pretty consistent with what we think now is going to happen, which is we think the industry is more likely to peak in the growth rate in '19. We think urban and our markets are likely to peak in '18.

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Operator [18]

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The next question comes from Wes Golladay of RBC Capital Markets.

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Wes Golladay, RBC Capital Markets, LLC, Research Division - Associate [19]

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Not sticking kind of with the pushout of hotel supply. And you already mentioned that you might -- you had to go out to other markets to get labor for the Tuscan. Is there any risk that the Moscone convention renovation will be shut down a little longer than anticipated?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [20]

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Well, there's always risk to that, Wes. I mean the original plans of completing it late in '18 did not involve closing 2 of the 3 buildings for 2 quarters. So they did that in reaction to the delays occurring in their construction work. Which I don't know how much of that was labor as much as it was that they -- because they kept interrupting work for the -- to accommodate the business. I think it had -- it was more difficult to get ramped up each time. And yes, maybe they lost crews to other properties, I'm sure that was the case. But as a big-public works project with probably the highest wages in the marketplace, I suspect they are one of the first choice for labor in the marketplace. So it certainly could be delayed again. I tend to think they've figured it out, but God knows we shouldn't -- we should never depend upon the public sector to deliver on time.

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Wes Golladay, RBC Capital Markets, LLC, Research Division - Associate [21]

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Got you. And then when we look at G&A for next year...

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [22]

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Wes.

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Wes Golladay, RBC Capital Markets, LLC, Research Division - Associate [23]

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Yes.

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [24]

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Just the -- and the thing I'd add. I mean, I -- we've seen that in the bookings in the fourth quarter of '18 where some groups like AGU, which comes -- typically comes every year but decided to leave for 2 years, '17 and '18. They didn't want to take the chance. So while the center is supposed to be done before the fourth quarter starts, they made a decision, as probably you would, to go somewhere else and come back in '19.

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Wes Golladay, RBC Capital Markets, LLC, Research Division - Associate [25]

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Okay. Yes, that makes sense, so probably not a big a deal. Now looking at G&A for your company, I know you might had some third-party cost associated with your large repositioning program. Can you comment on how much that could come down next year on G&A, not looking for a full year guidance, just for the stuff that's tied to your comprehensive renovation program, the cost of that?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [26]

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Preopening I guess.

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Raymond D. Martz, Pebblebrook Hotel Trust - CFO, EVP, Treasurer and Secretary [27]

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Yes, some of the preopening. I don't think it will be a significant number that just tend to pop around. We'll have more preopenings this year than -- because of the renovations than -- it will go down. But if you figure, I mean, it's less than $1 million. It's not a significant number. It's a pretty insignificant on an annual basis.

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Operator [28]

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The next question comes from Anthony Powell of Barclays.

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Anthony Franklin Powell, Barclays PLC, Research Division - Research Analyst [29]

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The bulk of the asset sales have been in New York so far. Now that you're done there, do you have any other geographic goals or asset sales program? Or do you expect the sales to be more opportunistic?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [30]

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Yes. So, I mean, if we had more assets in New York we'd be selling more, but we don't. I mean, we have sold in Miami, we've -- which was a great sale and frankly, it turns out in retrospect to be great timing. We sold in Hollywood as well. We sold a piece of land in Boston. I mean, that will continue to be driven by our views of markets, as well -- in the intermediate term as well as if that's different from our long-term view. And it will be opportunistic as well. So -- and I think as we've indicated before, there's -- again, there's assets we look at that are not hotel assets, that ultimately we'd like to split off from the portfolio and sell.

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Anthony Franklin Powell, Barclays PLC, Research Division - Research Analyst [31]

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Got it. And moving on to your customer mix. It seems that there is a growing mix of leisure in the hotels with corporate flat or down. Does that shift give you any cost-savings opportunities around your portfolio?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [32]

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Not really. I mean the business guest and the leisure guest, they cost about the same. And perhaps, there's some minor -- actually, if you go to leisure, it's likely your distribution costs are a little bit higher than what they are for the business customer. But otherwise -- I mean, I don't think that's immaterial -- as is the shift, Anthony, there isn't any big shift. Leisure is a little bit stronger. It's probably leading to a little higher occupancies on the weekends, which just overall is helpful.

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Operator [33]

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The next question is from Jeff Donnelly of Wells Fargo Securities.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [34]

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Just, Jon, in San Francisco as we've now kind of rolled into April and May, which were, I guess, considered to be some of the worst times, if you will, during the Moscone closing. I'm just curious, what you're seeing in the submarket performance within San Francisco, has that played out as you sort of thought?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [35]

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Well, it's a little a noisy right now, Jeff, because they're -- on a relative basis there's a greater percentage of assets under renovation in the Wharf versus Union Square. So occupancies are down a little bit more because of lack of availability. But otherwise, I'd tell you, the first quarter was -- but for Super Bowl a pretty decent quarter in San Francisco, while convention room nights were down what 65,000 room nights? Something like that...

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Raymond D. Martz, Pebblebrook Hotel Trust - CFO, EVP, Treasurer and Secretary [36]

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In Q1.

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [37]

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In Q1. A good bit of that was Super Bowl. So the market overall performed pretty much in line. And I think the submarkets performed in line with what we would expect. As we move into Q2 and Q3, where there is really a big difference on a year-over-year basis, we would expect the Wharf to do better than the Union Square properties that we have as an example and that's what we forecasted.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [38]

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And then your sense from the feedback, again, that market that -- those big group houses, which are probably the source of future pricing -- or called wars or competitiveness. Do you think they've generated enough in-house group to kind of release some of that pressure or is it too difficult to tell?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [39]

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I don't think they've generated enough, Jeff. So I think there will be pricing pressure and that's what we've been forecasting. And that's what we think we'll begin to see, particularly, in May and June.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [40]

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Okay. And...

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [41]

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And, Jeff, the one thing I'd say is, I mean, we're almost through April, I would say, April's played out pretty much per our forecast in San Francisco.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [42]

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That's useful. You've made several comments on this call about being a seller of assets. I'm just curious, how do you sort of weigh that decision of selling assets and repurchasing shares versus putting incremental spending into renovation programs? Do you see much spending on -- in your future beyond 2017? I know there's always something to be doing, but I guess I'm curious, do you think you'll undertake more optional programs as we go forward?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [43]

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Well, we -- with the programs this year, we're pretty much done with all the transformation and redevelopments envisioned when bought all of the assets in the portfolio. So we're really into the normal course of -- for the most part, most of what we'd be doing within the portfolio would be your typical 5 or 7 year soft-good modifications in your guestrooms and in your lobby, et cetera, which are pretty nondisruptive. And in our case, probably half or less the amount of capital going into the portfolio. So fairly minimal disruption on an ongoing basis. So none of it's being impacted by this environment. The redevelopments, as we've detailed in our presentation -- investor presentation and in prior calls, I mean, we're typically underwriting to 10% to 15% stabilized EBITDA yields. And we've -- as we have said before, we've continued to believe those are attractive, particularly considering the alternative of leaving properties in need of capital, losing share because of it and the alternative gap being quite large.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [44]

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And then just one last one. I'm curious because you do weigh the sort of whole sell analysis on your assets. How do you guys think about EBITDA growth or even its asset value growth in the coming years as an input to those analyses? I know every asset is different but I wasn't sure if there is some broad strokes that you can kind of share with us?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [45]

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Well. Theoretically, cap rates should go up and values should come down as cycle ages, particularly in the latter part. My experience has been we generally don't see that because of capital flows. Capital tends to get more generous as the cycle goes on. And so that's what's creating what we think is this attractive opportunities to sell assets at values that probably don't reflect asset performance over the following 5 years. Because I would have a hard time -- we would have a hard time underwriting acquisition and doing a 5-year IRR, Jeff, without putting a recession in there. And if you put a recession, you're not gonna buy anything, which is basically where we are. So as it relates to our portfolio, I mean, it will vary by market, but we have a lot tailwinds in the portfolio from the redevelopments, and the share that we're going to gain at -- throughout the portfolio with assets that have been redeveloped over the last few years, including this year, so that's clearly going to add to values as well as EBITDA growth within the portfolio.

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Operator [46]

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The next question is from Jim Sullivan of BTIG.

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James William Sullivan, BTIG, LLC, Research Division - Analyst [47]

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Jon, you gave us a great deal of granularity on the sources of comparative weakness in the portfolio in the first half of this year. Obviously, a lot of that will bounce back materially a year from today. And what I'd like you to go into a little more detail on, if you would. As you -- as the completion -- as the work is completed at Moscone and I know that we have to put quotation marks around that given the potential for delays and as we get near the end of that work. I'm just curious as you -- if you could walk through the maybe the progression by quarter in '18. And by that, I mean, in the San Francisco market, generally. In your portfolio, you're going to have significant upside as given the completion of renovations, and then the Moscone convention center I know doesn't come on until the very end of the year in full, and '19 looks great. But as you go through '18, it will be improving. So I wonder if you could just give us a little more detail as you think about that on a quarterly basis for '18?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [48]

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Well. I think the thing to focus on in particular is the negative impact this year from the items that are transitory and the numbers we're ascribing to that. So when you look at San Francisco, I mean, we've -- we provided the impact in the first quarter related to both Super Bowl, which was holding back us and the market as well as Tuscan, which had a very material impact overall in the portfolio. I mean, Tuscan was about 120 basis points for the whole portfolio. In Q2, it's another 100 basis points for the portfolio. And for Q2 for Moscone, we have ascribed about 250 basis points to the impact for us overall. And for Q3 we think it's in the same range, may be marginally less in Q3. So those are pretty big numbers. That's the impact on our portfolio, not on our San Francisco RevPAR. And when you add to that the ramp up of Zeppelin, the continuing ramp up of Zephyr, the ramp up of Tuscan that should -- those not only should get back to neutral, they should be additive overall for the portfolio.

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James William Sullivan, BTIG, LLC, Research Division - Analyst [49]

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Now in terms of the Moscone in 2018, you've talked about Q2 and Q3 '17 as being the worst quarters. And the work in full not being completed into Q4. But over the course of, say, Q2 and Q3 and '18, what details, if any, can you provide in terms of what part of a Moscone comes to back on and the impact it'll have on convention bookings, generally?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [50]

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Sure. So, I mean, when we look at the year which is -- I think it's up 75,000 rooms or something, it's actually down in the first quarter and slightly it's down 40,000 rooms. It's down or is that flat, Ray, in Q4?

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Raymond D. Martz, Pebblebrook Hotel Trust - CFO, EVP, Treasurer and Secretary [51]

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It was down a little in Q4.

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [52]

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Down a little bit in Q4. Up in 2 and 3 significantly. 50,000 plus in each of 2 and 3, which, obviously, aligns with the fact that those buildings while still being renovated, they will not be closed or at least that's the plan right now, they won't be closed. So Q1 is the more difficult comparison, although, I can tell you that JPMorgan Healthcare punches way above its weight. And right now, it looks like it's going to be even bigger with higher rates again in January of next year. So my sense is that the more challenging quarter of all is probably Q4. And maybe they can book into that if they really look like they're going to be down. I doubt it'll be anything from a city-wide perspective, but might be some small business.

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James William Sullivan, BTIG, LLC, Research Division - Analyst [53]

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Okay. Then final question for me. Just in terms of any additional dispositions, you've clearly been kind of doubling down on your bet on the West Coast. And I think it's fair to say you have a lot of confidence in those markets going forward on medium- to long-term basis. And can you tell us -- are you considering selling any assets on the West Coast?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [54]

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Yes. I mean, we would consider selling anything that we have, Jim, so certainly from an opportunistic perspective, everything is on the table. From a -- an actual voluntary initiative, I would say, what we would choose to sell would be -- would include some assets on the West Coast, but would be much more limited.

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Operator [55]

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The next question is from Bill Crow of Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [56]

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Wrapping a couple of topics together, Jon. You noted that you don't have any hotels left with the redevelopment opportunities. You've got a stabilized portfolio, which is kind of unlike you and your value-driven approach through the year. So I'm just curious whether that causes you to get more aggressive with asset sales. When do you stop selling assets? You talked about more buyers than sellers, few quality assets out there, the pricing is still high, you're still selling -- trading in a -- at a big discount to NAV. So where do you hit the stop button? And do you really want to manage your company with no big redevelopment opportunities left?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [57]

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Yes. So is -- as it relates to the redevelopment side. Yes, I mean, I've never had a problem, we've had plenty of periods during the cycle while I was at LaSalle, where we weren't buying and we weren't redeveloping within the portfolio. That's just part of the cyclical discipline that we've found to be helpful over the course of my career in a hotel business. And as it relates to the size, I mean, we've talked in the past about -- there is a size where we would get too small, both, frankly, for G&A load as well as, perhaps, from an investment perspective. I don't -- on an equity-market-value basis, I think, it has more to do with the equity market value than it does the enterprise value or the number of assets. So part of this plan is intended to create value for the shareholders that ultimately gets attributed into the stock price, which would maintain or increase the equity market value even to the extent that we sell assets. So I don't think we have any problem at part -- during parts of the cycle to be disciplined and patient and run the business for multiple cycles, which is what a public company is been created for.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [58]

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Okay. And finally for me, Jon. Is it fair to say that given your desire to get debt-to-EBITDA down below 4%, then any future share repurchases are going to be dependent upon additional asset dispositions. Is that fair?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [59]

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Yes, I think that's fair. We've said we don't -- we want to maintain debt-to-EBITDA below 4% and any stock repurchases would be out of proceeds and would be on a leverage-to-neutral basis..

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Operator [60]

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The next question is from Lukas Hartwich of Green Street Advisors.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [61]

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So corporate profits are growing again. I'm just curious if you're hearing anything different in terms of tone or conversations you're having with your corporate customers?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [62]

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Yes, not really. They seem a little happier, particularly, the financial services folks, the banks, but we haven't seen them traveling more and they certainly haven't changed policies at this point in time. So while everybody seems happier because their stock portfolios are doing better and their underlying companies are making more money, it hasn't translated into increased travel yet.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [63]

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That's helpful. And I guess, over your career, you've probably seen a handful of these kind of cyclical points in the cycle. And I'm just curious, is this normal? Do you expect a certain lag until you expect to see corporate customers start to translate that optimism into more booking activity?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [64]

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Yes. So historically, it's funny at different points of the cycle. We've been a lagging indicator and we're a leading indicator. I mean, I think coming out of a downturn, we tend to be a leading indicator, right? People get back on the road to generate activity when they feel a little more confidence, and then the actual improvement in the economy comes about. I think late in the cycle, we tend to be a follower and driven more by the ongoing economic trend. So historically, we'd say, there's a 2 to 3, may be 4 quarter lag, when you've gone through a profits recession, when -- but before businesses gain enough confidence to get more active in both travel and spending more money. And I think the business investment side is a good indicator of where -- of the lack of improvement in travel. We haven't seen an improvement in business investment. And if there was that increased confidence in growth, it'd be coming through there and it'd be coming through a business travel. So I think if we see an uptick in that, we'd even more encouraged, which is in accordance with the comments we made earlier.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [65]

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Great. And then RevPAR sounds like it would have been flattish without the renovations. Do you have with that number -- would be without the impact from a Super Bowl, Porter Ranch that kind of the one-time event?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [66]

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Yes, I think the total was 620 basis points.

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Raymond D. Martz, Pebblebrook Hotel Trust - CFO, EVP, Treasurer and Secretary [67]

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Yes. 620.

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Operator [68]

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(Operator Instructions) Our next question comes from Tyler Batory of Janney Capital Markets .

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP, Travel, Lodging and Leisure [69]

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It's a big picture, Jon. When you look at the underperformance of the urban markets, really the upper upscale hotels as well across the industry, obviously, there were variety of issues driving that. But have you noticed any shift of consumer preferences maybe towards flex service properties? Maybe away from the core downtown markets? And then when you look ahead, is your expectation that urban upper upscale will start to outperform again, once the supply peaks or may be not until after 2018?

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [70]

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Yes. So a good question, Tyler. There are a lot of variables. So it's hard to have an opinion about how they all come together. But these are the ones we'd be focused on and that would influence urban outperforming again: one is, clearly, business travel. It has a bigger impact on the major cities, the urban markets than it does on the suburban markets, which are more dominated by leisure travel, than the urban markets are; number two, the dollar, global travel -- global growth and -- we have to introduce a second variable here into the equation for international travel beyond the dollar and global growth, which is -- what are we doing here in the United States from a policy perspective on inbound travel of visas and immigration. And are we creating a positive environment, which was done in a last 10 years, to encourage and be welcoming? Are we creating a negative vibe and environment where since 80% of travel on a global basis is discretionary. People outside of U.S. can choose to go somewhere else, if they think it's a hassle to come to the United States so -- and if they think we don't want them. So that's additional variable into the equation and, obviously, international travel is a bigger impact on the urban and major gateway markets than it is on the suburban and the secondary markets. The other question -- and -- so those are the big variables for urban and outside of supply, which as I indicated and you repeated, we do believe that our urban supply on a relative basis becomes more positive in '19 versus '18 across the country, obviously, it's different by market. As it relates to consumer trends, we've always found that new. We'll displace some customers who've been going to old. Whether it's new full service or new select service. And I think the introduction of select service into the urban markets, which has accelerated over the last 5 years, gives customers more choices, we're full service in many cases, providing a restaurant isn't that important to the customer because there's 200 restaurants within the 5 blocks. So I don't think that negatively impacts the urban trend, I think, it will negatively impact the properties that don't maintain themselves in the market in order to compete with new product, whether it's select service or its full service. And I don't think we've seen any shift from the urban core to suburban markets. Any city will have movement within the urban market to cool neighborhoods, cities evolve, they get gentrified, and you get restaurants and retail and residential and in new neighborhoods and yes, there would be people if a hotel is built, that they would stay in those, like they would say in the urban core, if you will.

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Operator [71]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to Jon Bortz, for closing remarks.

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Jon E. Bortz, Pebblebrook Hotel Trust - Chairman, CEO and President [72]

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Thank you all for participating. We look forward in 90 days to give you an update and hopefully, some more positive news as it relates to trends. Thank you.

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Operator [73]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.