Raymond Martz – EVP and CFO Jon Bortz – Chairman, President and CEO.

Richard Hightower – ISI Group Jeffrey Donnelly – Wells Fargo & Company James Sullivan – Cowen Group Wes Golladay – RBC Capital Markets Lukas Hartwich – Green Street Advisors.

Good day and welcome to the Pebblebrook Hotel Trust’s Third Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Raymond Martz, Chief Financial Officer. Please go ahead, sir..

Thank you, David. Good morning, everyone. Welcome to our third quarter 2014 earnings call webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. But before we start, let me remind everyone that many of our comments today are considered forward-looking statements under federal securities laws.

These statements are subject to numerous risk and uncertainties as described in our 10-K for 2013, and our other SEC filings, and could cause future results to differ materially from those expressed in, or implied by our comments.

The forward-looking statements that we make today are effective only as of today, October 24, 2014 and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain the reconciliations of the non-GAAP financial measures we use on our website at pebblebrookhotels.com.

Okay, so we have another terrific quarter to talk to you about. Our third quarter performance was much better than we expected on all operating metrics. Same property RevPAR for the total portfolio climbed 11.4% to $225.

This exceeded our outlook for RevPAR growth of 7% to 8% due to strong demand across all of our market segments, including group and transient, business and leisure and all across the country throughout the portfolio.

Our RevPAR growth was driven by both our West Coast properties, which rose 11.2% as well as our East Coast properties which increased 11%.

In addition to the healthy gains in group and transient demand, we continue to see steady growth from inbound international travel, which benefits many of our hotels as a result of our significant concentrations of high quality hotels in major urban gateway locations.

Our overall same property RevPAR gains in the quarter came primarily from growth in rate, which increased 8.5%, while occupancy climbed 2.6% to a very robust 90.2%.

This mix demonstrates the pricing power throughout our portfolio and the very high occupancy levels we have already achieved with a majority of our urban markets exceeding our prior peak occupancy levels. Eighteen of our 31 hotels achieved double-digit RevPAR gains with 13 of those hotels rising double-digit ADR gains in the quarter.

As a reminder, our Q3 RevPAR and hotel EBITDA results are same store for our ownership period and include all the hotels we own as of September 30th. Our numbers do not exclude hotels under renovation.

For our portfolio on a monthly basis, July RevPAR increased 9.7%, August was up 12% and September climbed 12.5% reflecting the accelerating demand growth throughout the third quarter.

RevPAR growth in the quarter was led by the Viceroy Miami and Affinia 50, as both hotels had easy comparisons due to the prior year renovations and the repairs at these properties. Affinia 50 is performing well with the RevPAR increasing 30.3% in the quarter as it ramps up from its comprehensive renovation and rendition.

Affinia 50’s RevPAR performance added 35 basis points to our third quarter RevPAR growth rate. Other strong performers included the Grand Minneapolis, Hotel Zetta, Hotel Modera in Portland, Sir Francis Drake in San Francisco, Mondrian L.A. and W Boston.

But compared to last year, third quarter same property total revenues increased 9.2% and third quarter same property expense growth was limited to 3.6% resulting in a same property EBITDA growth of 21%, with our EBITDA margin growth climbing 350 basis points.

Food and beverage revenues increased 3%, but food and beverage expenses declined by 1.9%, as we continue to make strides retooling and reconcepting our food and beverage operations across the portfolio.

In Q3, food and beverage departmental profit margin improved by 359 basis points and year-to-date, food and beverage margins were up 276 basis points. Food and beverage departmental profit improved by $1.7 million in Q3 or over 18% from last year, representing terrific progress in our focused asset management efforts.

The hotel EBITDA growth leaders in the third quarter were Sir Francis Drake, Mondrian L.A., Hotel Palomar San Francisco and Le Meridien Delfina Santa Monica. Our EBITDA growth was broad, as 16 properties, which is about half of our portfolio, grew EBITDA by more than 20% in the quarter compared to the same period last year.

Because of the exceptional performance generated by our portfolio during the third quarter and the benefit of a select number of acquisitions in the last year, our adjusted EBITDA increased 43.1% and adjusted FFO per share climbed 47.6% compared with last year’s third quarter.

Non-cash G&A expenses increased in the quarter due to increased accruals relating to our long term performance shares which reflects the better than expected improvement in our hotel EBITDA margins.

As you may recall, one of the drivers of our performance share awards is the improvement in our hotel margins versus LaSalle, we consider one of the best asset managers in the business. At the end of 2011, our hotel margins were more than 600 basis points before LaSalle’s.

Based on our current 2014 outlook, we anticipate this difference to be 225 basis points or less by the end of this year. We have expected to narrow the gap by almost 400 basis points over four years, which represents an improvement of roughly $17.5 million of additional EBITDA.

Business performance criteria seem to be non-market based measures in terms of accounting terms were required to mark-to-market and performance measurement related to this increase in our margin improvement in our non-cash G&A which is different than the majority portion of our performance share criteria which are marked based on the value when issued and accrued viably over a three-year investment period or measuring period.

It’s also worth noting that the performance shares earned based on a three-year measuring period and the shares earned and expense occurred is one-time in nature, whereas the improvement in hotel EBITDA achieved through the efforts of our asset managers and corporate team should be a long-lasting improvement resulting in significant increases in cash flow and overall valuation of our portfolio.

Switching now to our year-to-date results, same property RevPAR has increased 9.8%, same property ADR is up 7.8%, same property EBITDA has climbed 17.5%, EBITDA margin is up 265 basis points and adjusted EBITDA is up 34% or more than $37 million versus last year.

Now, let’s focus on our acquisition and capital market reinvestment activities in the quarter.

On July 17th, we’ve acquired The Nines which is a 331-room luxury hotel located at Pioneer Square in downtown Portland for $127 million, marking our third acquisition in the attractive downtown Portland market which, next to San Francisco, has been one of our best performing markets during the last couple of years.

During the quarter, we invested $16.1 million into our hotels as part of our capital reinvestment program. And year-to-date, we have invested $34.3 million into our portfolio.

These investments, though disruptive to performance in the near term, are expected to lead an outperformance in 2014 and beyond which is consistent with the improved performance we’ve regularly seen following our previously completed capital reinvestment programs. On the capital market side of our business, we’re also active during the third quarter.

On September 9th, we completed a common equity offering issuing $3.45 million common shares at a net price of $38.15 per share resulting in net proceeds of $131.4 million.

On September 30th, we completed a preferred equity offering, reopening our 6.5% Series C preferreds by issuing 1 million additional shares at a net price of $25 and generating $24.5 million of net proceeds.

And during the third quarter, we sold 400,000 common shares under our ATM program at an average price of $38.9 per share for a total net proceeds of $15 million.

The common equity we raised during the quarter increased our diluted weighted average shares outstanding by $1.1 million in the quarter and negatively impacted our FFO per share by $0.12 per share.

The dividends in the quarter on the newly issued preferred shares added about $330,000 of dividend expenses and reduced our FFO per share by $0.005 in the quarter. For our 2014 full-year outlook, the combination of additional preferred dividends and additional common shares negatively impacted our FFO per share outlook by $0.05 per share.

To be clear, the dilution from the additional common shares and additional preferred dividends assume no future acquisitions or other capital investments to offset the impact of raising this capital in the third quarter.

On the debt side, last week you probably saw that we successfully amended and restated our existing unsecured revolving credit facility in term loans. We increased our overall facility up to $6 million, $7 million which is comprised of a $300 million revolving line which has no outstanding balance currently.

And up to $300 million of term loans which includes a $100 million term loan previously and currently outstanding. The pricing on our amended credit facility improved by 25 basis points across the pricing grid. We extended our overall maturities to January 2020 and we approved our flexibility with some of our overall terms and covenants.

We’re really pleased with the new line and thank our lenders for their strong support. Finally, on our balance sheet.

As of September 30th, we had consolidated cash, cash equivalents and restricted cash of $137.2 million plus another $17.1 million in non-consolidated cash, cash equivalents and restricted cash from our 49% pro rata interest in the Manhattan collection.

I’d now like to turn the call over to Jon to provide a little color on the recently completed quarter, our outlook for the balance of the year and some thoughts on what to expect for the remainder of 2014.

Jon?.

Thanks, Ray. As Ray said, Q3 was another very strong quarter for both the lodging industry and for Pebblebrook. In fact, performance in the third quarter, when looking at just about all fundamental variables, improved again from the first and second quarters.

Industry demand growth, which had increased to 3.8% in the first quarter and 4.5% in the second, accelerated to a very strong 4.8% in the third with demand growth year-to-date at 4.3%.

With supply growth again subdued in Q3 at just 0.9%, occupancy rose 3.8% in Q3 and ADR growth picked up significantly more stream in Q3 with year-over-year growth of 5.2%, versus 4.4% in Q2 and 3.8% in Q1. As a result, industry RevPAR grew an exceptionally strong 9.2% in Q3, the strongest quarterly growth since before the last downturn.

This acceleration in demand is a result of numerous positive factors coming together at the same time. Domestic leisure and business transient travel remain strong. We finally began to see a very healthy recovery in demand from group customers.

Overseas inbound travel not only remained strong, but it’s gotten even stronger this year with growth in the first half of the year of 8%, roughly twice the growth estimates going into the year. Demand socioeconomically has also expanded to the middle class as the economic recovery advances and broadens out.

And finally, it seems a greater percentage of increasing discretionary income is being spent for travel and collect experiences. We believe all of these positive trends should continue over the coming years, though we wouldn’t expect demand growth to remain at the current level.

So strong third quarter industry performance was broader and more inclusive than any other quarter to date and clearly stronger than we were forecasting. At Pebblebrook, like the industry, we had another great quarter. Our RevPAR growth of 11.4% outpaced the U.S. industry by 220 basis points and was driven by a very strong 8.5% increase in rate.

With our occupancies running high at 90.2% in Q3, we have plenty of opportunity to increase pricing and continue to revenue manage out lower priced and discounted business and then replace those customers with better priced customers.

As has been the case in prior quarters, positive performance was widespread throughout the portfolio, yet unlike prior quarters, both our West Coast and East Coast hotels were equally strong as Ray discussed earlier.

And while our portfolio of properties outperformed the industry, they also picked up significant share overall as they continue to benefit from the renovations, repositionings and our asset management and revenue management efforts.

Amazingly, 21 of our hotels ran occupancies of 90% or higher in the quarter, in many cases providing significant pricing power.

And as a further indication of the strength of the urban markets we’re in, just about every one of those markets are now running at overall trailing 12-month occupancies that are above prior peak levels, starting with Manhattan at an incredible 87.1% followed by San Francisco at 84.8%, Hollywood, Beverly Hills at 82.3%, Santa Monica at 81.9%, downtown Boston at 81.5%, Seattle downtown at 81.3%, Portland downtown 79.2%, Miami downtown 78.7%, San Diego downtown 78%, Washington, D.C.

CBD at 76.6%, Philadelphia Center City at 74.7%, Buckhead at 74.5% and even Minneapolis has passed prior peak at 72.3%. And the industry’s occupancy of 63.8% on a trailing 12-month basis is now also ahead of last cycle’s peak occupancy of 63.6% and should surpass the all-time record of 64.9% sometime next year.

And why does that matter? Because as demand growth continues to surpass supply growth, occupancies climb higher and we get more compression nights, more opportunity to raise prices, more opportunity to remix our business to yield higher average rates with all of it leading to the likelihood of higher annual ADR growth so long as occupancies continue to grow.

And this should happen even if the gap between demand and supply growth narrows. As a result, provided the economic recovery continues, we currently believe it’s likely that very healthy RevPAR growth will run through at least 2017. Sorry, let me come back to some Q3 performance highlights.

On the East Coast, downtown Miami led the way with RevPAR increasing an exceptional 16.7%. Boston also had a great quarter with RevPAR growing an equally exceptional 16.6% as the city benefited from a very favorable convention calendar and strong underlying transient demand.

Washington, D.C.’s CBD improved greatly with RevPAR increasing 11.4% in Q3, principally as a result of a great convention calendar compared to last year and strong overall business and leisure travel trends. Philadelphia also had similar benefits to D.C. as RevPAR grew 10.9%. Buckhead increased 11.3%.

And finally, New York City and Manhattan continued to absorb all of the new supply as trailing 12-month occupancy in Manhattan again hit an all-time record high. Demand in Manhattan increased an impressive 6.7% in the quarter and RevPAR grew 4.3%.

On the West Coast, downtown Seattle led the way with RevPAR growth of 17.4% in the quarter, followed by Portland downtown of 15.1%, San Francisco at 11.5%, West L.A. at 11.1% and downtown San Diego underperforming at 5.1% due to a less favorable convention calendar compared to last year.

As a reminder, all of the numbers I just provided are performance numbers for the urban markets, not our properties in those markets. So our hotels generally followed pretty closely those market numbers. As examples, our hotels in Boston, Minneapolis and Miami were all up more than 16%. Our Portland properties grew RevPAR by 15.4%.

Our Seattle properties were up 14.7%, Our West L.A. hotels climbed 11.6%. Our D.C. properties grew RevPAR 12.5%. Our San Francisco hotels were up 10.8% and our Manhattan collection achieved 7.8% RevPAR growth and 5.4% without including Affinia 50. Now let me turn to our revised outlook for the year.

2014 just keeps getting better for both the industry and Pebblebrook. For the industry, due to better than expected performance last quarter, we’re again increasing our RevPAR forecast for the year from a range of 6% to 7% to a range of 7.5% to 8%.

Our increase comes primarily from stronger demand growth, leading to higher occupancies as opposed to any increase in our prior ADR growth range of 4% to 5%. Before we turn to our corporate outlook, let me make a few comments about our coming renovation projects.

Next month, we expect to commence the comprehensive renovation and repositioning of W L.A., including all public areas and guest rooms as well as the addition of 39 keys. In November, we’ll also commence the renovation of a lobby and atrium of the Embassy Suites in downtown San Diego.

Then in December, we expect to begin the complete renovation of the Radisson Fisherman’s Wharf which will become the Hotel Zephyr Fisherman’s Wharf in the second quarter of next year. Finally, we’re planning to begin the comprehensive renovation of Vintage Portland in January of next year when we expect to close the hotel for some 8 to 10 weeks.

In 2014, renovations that occurred earlier this year in the first quarter plus those to take place in Q4 are impacting overall same property RevPAR growth on a combined basis for the year by approximately 50 to 75 basis points with the majority of it impacting Q4.

Based upon the projects just discussed and those planned for next year, we currently don’t expect the impact next year to be materially greater than this year with the biggest difference being the majority of the disruption will impact Q1 next year versus Q4 this year.

These major renovation and repositioning projects will play a material role along with all of our prior projects in driving better than industry performance in 2015 and beyond. For our portfolio, we’re again increasing our RevPAR outlook for the year.

Our forecast for our same property RevPAR growth goes from a prior range of 7.25% to 8% to a range of 8.25% to 8.75%. We continue to expect the vast majority of our RevPAR increase to come through as growth in ADR. We’re also raising our same property EBITDA and EBITDA margin growth forecast for the full year.

Our forecast for same property hotel EBITDA increased by $6 million at the low end and $4 million at the high end. This is a result of our increased RevPAR expectations and improved same property EBITDA margins which are now forecasted to increase between 225 and 250 basis points over last year.

Flowthrough of increased same property revenues to increased same property EBITDA is now forecasted at approximately 68% to 69% for the full year. Same property EBITDA for 2014 is now forecasted to increase between 13.5% and 14.5%.

Same property NOI after an assumed 4% capital maintenance reserve is forecasted to grow another 140 to 150 basis points higher than same property EBITDA growth or roughly 15% to 16% over last year. The last quarter of 2014 continues to look positive based on current trends and business on the books.

For Q4, we’re forecasting our same property RevPAR to increase by 5% to 6% with the vast majority of the increase coming from ADR growth. Q4 RevPAR growth will be lower than the increases in the previous three quarters due primarily to the negative impact of the Q4 renovations I discussed earlier which we estimate at 200 basis points.

Margin growth will also be much lower for the same reason. Our forecast for same property hotel EBITDA for Q4 is $50.8 million to $52.8 million, with same property EBITDA margins increasing by 100 to 150 basis points. For our full-year outlook for adjusted FFO and adjusted corporate EBITDA, we’re also increasing the prior ranges.

Again, the increases are due to our increased outlook for same property RevPAR growth and EBITDA margin from Q3’s outperformance and slightly better performance forecasted for Q4 partially offset by an increase primarily in non-cash G&A expense due to an accrual for potential additional performance share compensation that Ray described in detail earlier.

Adjusted corporate EBITDA is now forecasted between $191.6 million and $193.6 million, an increase of $4.4 million at the low end and $2.4 million at the high end.

Our outlook for adjusted FFO per share goes from a previous range of $1.87 to $1.93 to our current forecast of $1.87 to $1.90 with a lack of increase at the lower end and a decline at the upper end, all due to the negative effects of the additional common shares outstanding from our ATM and overnight offerings in Q3, the additional preferred dividends from the additional Series C shares also issued in Q3 and the additional non-cash G&A, all as described in detail by Ray earlier.

Our outlook does not include any additional EBITDA from potential acquisitions which may or may not occur in Q4. Economic trends, travel trends and business on our books all remain supportive of our forecast of strong growth for the rest of 2014.

As of the end of September, total group and transient revenue on the books for the fourth quarter of this year was up 8.8% over the same time last year with ADR up a healthy 5.5%. Group room night pace is up 3.7% with group ADR on the books higher by an impressive 8.2% for a total group pace advantage of 12.2% in group revenues.

Our portfolio wide transient room nights on the books for the last quarter of 2014 are up 2.8%, while rate for transient on the books is up 3.8%. To wrap up, 2014 is turning out to be another strong year for the lodging industry and an even better year for Pebblebrook.

Underlying fundamentals remain extremely healthy and have improved from last year as well as from just three months ago.

We’ve got tremendous opportunity in the existing portfolio to recapture significant RevPAR lost in prior years and we continue to significantly improve margins through the implementation of best practices and lots of focus and hard work by our operators and our team.

Assuming industry RevPAR grows by 5% to 7% a year for the next three years and we outperform by 100 basis points a year on average, with continuing improvement in relative margins as we drive to catch up to LaSalle’s superb margins, we should be able to grow same store EBITDA by 10% or more on average and FFO per share by 15% to 20% a year on average, all without any additional acquisitions.

We believe our industry’s prospects are bright and our prospects are even brighter. That completes our prepared remarks. David, we’d be happy to take questions now..

Thank you. The question-and-answer is conducted electronically. (Operator instructions) And we’ll go first to Rich Hightower with ISI Group..

Hey, good morning guys. Excellent quarter of course, which means that people will start to worry about tough comps for next year I think. And I know that we’ve talked about this previously. But there seems to be an impression that I think citywide calendars and several key markets are a little bit softer next year.

And I’m just wondering if you could give a little more color on your take specifically on a few of the key market there and how that impacts Pebblebrook’s portfolio specifically..

Sure, Rich. I’m happy to do that. So let’s start on the West Coast where I think the calendars for next year are a little better comparatively than those on the East Coast. I think San Diego is basically flat next year, though, the ups and downs are different by quarter compared to this year.

We do think the overall quality of the conventions is a little better meaning we think rates growth is a little better on the convention calendar, but otherwise pretty static with this year. L.A.’s kind of a non-event since it’s not really an impact, and I’d say, we see from one to two citywides a year that actually worked their way out to West L.A.

and that isn’t any different next year. In San Francisco, total room nights on the convention calendar are down slightly to this year. But the large citywides are actually up next year.

And given the overall strength of San Francisco and in fact the convention calendar this year that we’re comparing it to, we don’t really see any impact on next year other than again, we have these month-to-month and occasionally quarter-to-quarter shift particularly of some of the big ones like Dreamforce or Oracle as they move back and forth across the third and fourth quarters.

Portland and Seattle are actually up next year. It’s a little more of an impact in Portland because it’s a good size convention center, in fact, bigger than Seattle. And it’s a little bigger impact on the market. But they’re both up next year. So the West Coast looks as good or better than this year from a convention calendar perspective.

On the East Coast, Boston next year is as strong as this year which is a super year. And where we see a little bit of weakness continues to be in Philly and D.C. which are both down slightly, though, again, because they’re running at lower levels, a bit less of an impact on the overall market. Atlanta downtown is down a little bit.

But like L.A., doesn’t have much of an impact on Buckhead. Not many of those conventions actually push out that way. Miami is down a little bit next year. Again, not the big factor in the market in terms of percentage of demand. And then I can’t speak to Chicago because we don’t own anything there. I honestly don’t know whether it’s up or down.

But that kind of covers the major markets from our perspective..

Okay, that’ really helpful, Jon. Thanks. And then for me, just a couple of quick modeling questions. And this is question for Ray, I suppose.

On the $200 million option to draw down on the term loan, should we assume that that’s only drawn if and when the Boston acquisition closes?.

Yes, I think it’s safe to say we have an option, so if we have needs to draw on the line the term loan now is due despite their lower rate and we should anticipate as we use the term loan, we’ll use those opportunities to swap rates on a fixed rate basis.

So when you’re modeling whenever you’re assuming if there are acquisitions, assume it’s going to be any debt that’s required through the line of the term loan..

Okay. That’s helpful. And then finally, just on the mechanics going forward of the long-term performance share payments that hit this quarter. I know you said you’re about 225 basis points off of LaSalle’s margins.

Can you just talk about how that’s going to work going forward and maybe what we should think as far as the run rate and when maybe those one timers are going to hit in the future if that’s even possible?.

It’s a hard thing to forecast because we know our side of what our margins are forecasted improved to a relative range. And we don’t know LaSalle. So if we ultimately have to wait and ultimately determine in the end of each year and we update our estimates as forecast is changing.

Currently, the increased accrual just because our margins, at least we know, our portfolio is improving for the year versus what we thought 90 days ago which is why accrual went up. As we look into 2015 and beyond, we’ll evaluate that. We’ll do our best to estimate it.

But again, we only have half the equations so it’s hard to understand where LaSalle will be or not be. We’ll try to do the best of communicating that out to best that we can for our forecasting..

Okay. That’s all for me. Thanks, guys..

Thank you..

Thank you. We’ll take our next question from Jeff Donnelly with Wells Fargo..

Hi, good morning guys. Actually, just building on the modeling question quickly. Jon, you mentioned the 2015 renovation benefits and disruptions.

Just to clarify, the majority that would have fallen to Q2 of 2015, is that of a similar scale to the amount of disruption you’re thinking about for Q4 or 2014?.

Yes. Yes, right now, we think it’s very similar to this year except just flip-flopping Q1 and Q4..

Got you. And considering the purchases in the Boston region, are you able to give us maybe just a sense of scale with the adjacent commercial property in land represents maybe as a percentage of the total perspective investment? And secondarily, I think you referenced that there was a land component.

Is that land something that’s instrumental to the execution of that investment or that’s just sort of ancillary to the property?.

So Jeff, unfortunately we’re bound by a confidentially agreement with the seller. And we only filed with the SEC due to the SEC requirements related to percentage of income of the property related to the portfolio for the prior year. And so outside of that, I can’t really give you any information about it.

And I would caution everyone to continue to understand that it’s only a potential acquisition. As stated in the K, it’s a contract signed, but it doesn’t mean it will an acquisition made..

Okay. And maybe just a last question or tow then is that, is you look across your target market and you’re finding yourself consistently uncompetitive for acquisition? I guess to the flip side, are there markets where you think there’s going to be some opportunity for being a contrarian that maybe pricing is moved to a point let’s say Washington D.C.

where it’s proving it more attractive to enter?.

Yes. I don’t think we’ve really seen that opportunity come about yet. I think the pricing we’ve seen in markets like D.C. from our view point of underwriting, they don’t seem to work at the current values because we don’t think they’ve adjusted for the lower growth that we think will occur over the next several years in D.C.

Now again, that’s just view point of the market. It may turn out to be very different than that. But no, we really haven’t seen a lot of the contrarian opportunities yet, meaning we really haven’t seen the markets adjust for these weaker markets.

And New York is a good example with a really flood of foreign capital and private equity capital coming in to New York as a global investment market. We’ve actually seen going in yields continued to come down and actually just as we’ve seen in some of the West Coast markets like San Francisco..

Okay. And do you have any change in your view on New York City maybe being able to absorb the supply that you’ve been talking about coming into the market? Thus far, it seems you’ve done a pretty good job handling it. [Indiscernible]..

Yes. So we never had a view on the absorption in the market. What we’ve always said is there’s a lot more supply coming into the market than in other markets. And that creates more risk from an ownership and investment perspective because we don’t know whether it will all get absorbed or not. But in either case, and as we’ve seen, it has been absorbed.

But it does continue to keep pressure on the market in terms of ability to raise average rates in the marketplace. And so New York continues to underperform on a RevPAR basis albeit at low to mid-single digit RevPARs but of course that’s well below the 8% or so that the industry is running and obviously well below all the West Coast markets.

So we don’t have an opinion about whether it’s all going to get absorbed or not. It’s obviously very encouraging that it is getting absorbed and it’s keeping the markets from being worse. We think it is likely to continue to be absorbed and we think supply next year will be at a lower rate slightly than it is this year.

It looks like we’ll be in the upper fives this year which is a little bit lower than the mid-6, midpoint of our range for this year. Next year, it looks like it’s going to be somewhere between 4% and 5%. Again, all of these numbers are as calculated by Smith Travel and how those numbers will come out when they report their statistics.

So we think if the demand growth continues, Jeff. There is potential opportunity.

Certainly, better likelihood than there was six months ago to look at New York and say, it should do a little better next year perhaps than it’s doing this year, not just in absorbing the supply but perhaps being able to remix and get a little bit more pricing power and a few more compression nights to drive potentially a solid mid-single digit RevPAR growth in the market..

And one last question I’ll yield the floor is that, a couple of folks who own hotels in New York have contemplated selling off ground leases under their hotels like let’s say sort of a financing transaction ultimately as a way to maybe monetize the land without potentially impacting the way the public market views the value of the hotel.

What’s your thought on that approach or strategy? Is that something you guys do contemplate for your New York investments?.

Yes. I mean it’s just totally a financing structure and not something we have an interest in..

Okay. Thanks guys..

Our next question comes from Jim Sullivan with Cowen Group..

Thank you. Jon, a couple questions on margin and penetration. In the presentation that you guys have been using for a while, you provide the RevPAR penetration prior peak, what you’ve achieved through the middle of the year and then kind of I guess the potential target to get back and then you put a dollar value on that.

Can you give us an update? I don’t know if you have that data through the end of the third quarter in terms of where you think you’ve come back to monitor the RevPAR penetration?.

Yes. So year-to-date through Q3, let’s see here, we are up about 200 basis points in RevPAR..

You’re up 200 basis point, you mean for the year? Okay..

Yes, year-to-date. Yes, through the third quarter, we’re up about 200 basis points. And we were up about 170 basis points in the third quarter..

And then in terms of the asset management initiatives that they have been pursuing for a while, again, going back to that presentation, of the biggest individual item there was changes in terms of how you manage the SNB business at the assets. And you’ve made some changes of course already that you’ve talked about in prior calls.

I’m wondering if you can give us an update if you look forward for the next 12 months about any initiatives that are underway of you expect further gains in terms of returns from SNB revisions..

Sure. We have actually quite a number of projects underway at various points of the process. And at the WLA, we’ve leased – we signed a lease in September with the one group which owns STK, the steak restaurant and other restaurants and bars. I think they also operate all the food and beverage at Gansevoort and New York, the midtown one.

And they will be taking over – in fact, they’ve already taken over the existing operations, October 1st at the WLA, the restaurants and the bars. And they will be building out a new restaurant in a reconfigured lobby and bar area inside and then they’ll be doing a new bar and restaurant outside by the pool.

And those should both be open and full ramping sometime no later than in the second quarter. We think that will not just add, again, not just add to margins, but will add to overall profitability for that operation by shifting that business to a party who is an expert and provide new energy overall to the property.

We’re at various stages of doing similar outsourcing, if you will, of internally managed restaurants at several of our other properties in the portfolio particularly on the West Coast. As you know in Boston, we closed the money losing Jean-Georges Restaurant market.

And we moved our food and beverage operations into a lounge and serving all three meals there. And we are working with the local union to see if we can come with an arrangement that would allow us to lease to a third party who could actually lease the space and make money under new arrangements.

And so that is – those discussions are underway and I don’t know whether we’ll have success there or not. But in either case, we’ve eliminated a restaurant that was losing $0.75 million a year. So there are a number of these throughout the portfolio. You do know that we reconcepted the bar restaurant at Palomar in San Francisco.

It was previously called the Fifth Floor which was a bit of a hoity-toity restaurant in a very obviously unleasable location on the fifth floor. We reconcepted it as a bar restaurant called Dirty Habit. But we think it could be perhaps the greatest name for a bar conceived. And it’s doing fantastically.

We’re running somewhere between $450,000 and $500,000 a month right now of which there’s a very healthy split between room rental, events and the bar and restaurant operations. So early in the process, but a great success so far. We’ll see what the longevity is over the next several years.

But a lot’s going on Jim and I think we’ll continue to make a lot of progress not just in those major efforts, but in when we buy properties, changing out the way purchasing is done, working with the operators on menus, on pricing, et cetera, the methods or operations, staffing levels, et cetera, in order to improve overall profitability performance.

Okay then, final question for me is a modeling question. On the Q4 guide, share count over $60 million shares.

And besides the equity assurance in the third quarter, is there any other assumption that’s in there that we should know about?.

No. No, that’s reflective of the correct count based upon the issuances already done..

Already done in Q3?.

Correct..

Great. Okay. Thank you..

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

Good morning guys.

If we estimate a similar renovation disruption next year, does this include the price cut in the second half?.

Now the price cut is not likely to start until the end of next year. And it’s likely to be closed for renovation. So it will impact our overall profitability slightly probably in the fourth quarter. We don’t have a firm schedule yet, Wes, because we don’t even have the full scope yet. We’re just early in the process.

But it would be in the fourth quarter impact. And it’s likely to be very limited..

Okay.

And then as you look to next year, which markets do you want to aggressively hold back the pace and switch the mix?.

Well, we don’t really approach it that way. We look at each property individually. We have some hotels where we’re increasing group because it’s a better mix for the hotel.

And an example to that would be the intercom in Buckhead would include the Westin Gaslamp in San Diego would include not only the Affinia Manhattan but some of the other Manhattan collection properties.

It would include the Sir Francis Drake where by adding better priced group with food and beverage, it’s actually more attractive than the lower end of the transient that were otherwise taking at those properties. So it really varies by property. There are some properties where we’re seeking to do less prime day of the week group.

So prime month, prime Tuesdays and Wednesdays. Our first objective in many cases would be to move that group business if we can to shoulder nights with Sunday check-ins versus Monday or Tuesday check-ins with Thursday shoulders or potentially even Friday shoulders. So it’s not an approach to hold back and wait till the last minute.

Although, I would tell you, there are times during the year at various properties where it’s not just group. It’s really all business where we might believe that if we hold back inventory in what we perceive to be a high compression week that we’d rather be a last to fill than an early to fill. So it really varies totally throughout the portfolio..

Okay. Thanks a lot and good quarter..

Thank you..

(Operator instructions) We’ll take our next question from Lukas Hartwich with Green Street Advisors..

Great. Thank you. Good morning guys..

Hey, Luke..

Jon, can you talk a bit about the acquisition pipeline? Do you still expect 2014 to be the last year of acquisitions..

Yes, good question Lukas. I think what we’ve been saying is because we’ve seen supply gets stretched out a least a year, the micro cycle, i.e, the supply and demand for customers and supply of rooms, looks to be more favorable for a longer period of time.

And the macro cycle also seems to be stretched out, although we claim far less expertise in forecasting economic cycles versus the micro cycle. So this point in time, I’d say we’re going to – we’ll continue to look and potentially be active into at least the first half of next year.

But we are highly sensitive to changes in the starts in various markets in terms of new supply and when that supply might ultimately come in to those markets. So as the cycle is going on, we’ve tended to be less competitive in markets. We get more and more conservative about in terms of the ongoing outlook.

And so while we may be continuing to look and acquire in general, our markets get narrower – our focus gets narrower and narrower. And we get pickier and pickier..

All right. That’s helpful. Another question, the Denihan JV loan. The coupon on that is almost 10%. I’m just curious whether you expect that loan to be prepaid given that there’s no prepayment penalty..

There have been no discussion about that, Lukas..

Okay.

And then lastly, did you guys talk about your 15Ks at all?.

We did not. I’m happy to do that..

That would be nice..

Sure. So overall, pays from a revenue perspective is up 7.2% at the end of the third quarter. That’s 3.1% in room nights and 4% in ADR. Those numbers are combined group and transient. On a group basis, room nights are up 0.6%, ADR is up 3.2% and revenue is up 3.8%. One observation – a couple of observations about the numbers.

One is keep in mind that growth and rate for both transient and group tends to be more short-term meaning the business you put on further out and for us, further out is not that long, but it seems long when we have corporations booking 30 days in advance.

But the rate growth is much more aggressive and higher for the shorter-term booking than it is for the further out booking. The second thing is as it relates to overall pays, we’re really in a position running the portfolio at 85% this year, give or take.

That focus continues to be on growing rate and much less so in terms of overall room nights for the portfolio. So when we are ahead on room nights, it’s giving you an indication that we have pricing power by getting that base on the books ahead of time.

And there should be an acceleration in the ADR growth from what’s on the books to where we ultimately end up..

Great. That’s it for me. Thank you..

(Operation instructions) I guess we have no further questions in the queue at this time. I’d like to turn the conference back over to our speakers for any additional or concluding remarks..

Thanks, David, and thank you all for participating in the call and your support and your confidence in us. And we look forward to reporting to you early next year with our final 2014 results and our outlook for 2015. Thank you..

Thank you. That does conclude today’s conference. We thank you for your participation..