Raymond Martz - CFO Jon Bortz - Chairman and CEO.

Jeff Donnelly - Wells Fargo Rich Hightower - Evercore ISI Shaun Kelley - Bank of America Merrill Lynch David Loeb - Baird Financial Wes Golladay - RBC Capital Markets Bill Crow - Raymond James Jim Sullivan - Cowen Group Lukas Hartwich - Green Street Advisors Ian Weissman - Credit Suisse.

Good day, and welcome to the Pebblebrook Hotel Trust first-quarter earnings call. Today's conference is being recorded. At this time, I would like to turn the call over to Raymond Martz, Chief Financial Officer. Please go ahead, sir..

Thank you, Taylor. Good morning, everyone. Welcome to our first-quarter 2015 earnings call webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. Before we start, let me remind everyone that many of our comments today are considered forward-looking statements under federal securities laws.

These statements are subject to numerous risks and uncertainties, as described in our 10-K for 2014 and our other SEC filings, and could cause future results to differ materially from those expressed in or implied by our comments.

Forward-looking statements that we make today are effective only as of today, April 24, 2015, and we undertake no duty to update them later. You can find our SEC reports and our earnings release, which contain reconciliations of non-GAAP financial measures that we use throughout the call, on our website at PebblebrookHotels.com.

We are pleased to report that 2015 is off to a great start for us and the industry. Our first-quarter performance was better than we expected on all operating metrics. Same-property RevPAR growth for the total portfolio climbed 3.6%, despite several comprehensive renovations that were taking place in the quarter.

In addition, our East Coast hotels experienced significant weather-related travel disruptions throughout the quarter, most notably in Boston. This affected travel to and from these markets. RevPAR growth exceeded our outlook of 1% to 3%.

This was largely due to the continued strong performance from most of our West Coast hotels, which generated RevPAR growth of 4.9%, which is led by our hotels in San Francisco and Portland. Furthermore, our properties in Miami also delivered healthy results in the quarter.

This strength was offset – this strength helped to offset weaker performance from our hotels in Manhattan, which declined 9.6% in the quarter.

On top of the underperformance by the Manhattan Collection, we also experienced difficult year-over-year comparisons for the first quarter in New York due to the loss of [large citywide] [ph] in 2014 and the Super Bowl.

Our portfolio's quarterly RevPAR growth rate of 3.6% was below the industry's quarterly RevPAR growth of 7.9%, which was primarily attributable to the renovation projects underway throughout the quarter that negatively impacted our RevPAR growth rate by 300 basis points.

For our portfolio on a monthly basis, January RevPAR increased 2.4%, February was up 1.1%, and March climbed 6.7%, which we believe benefited from Easter occurring in early April, as some business travel was pulled forward into the second half of March, ahead of the Easter and Passover holidays.

We anticipate giving some of this benefit back in April. Our 3.6% RevPAR gain in the quarter was driven by a 6.3% increase in ADR, while occupancy declined 2.5%, to 78.5%, which is largely attributable to the renovation and reposition activities in the quarter.

Overall, transient revenues, which make up about 75% of the demand for our total portfolio, was up 2.3% compared to the prior year, with ADR up a healthy 6.4%.

Group revenues increased 10.8%, with ADR up 7.9%, which is encouraging and is a continuation of the positive trends we saw in 2014, but we do not expect this growth rate to sustain itself for the balance of 2015.

As a reminder, our Q1 RevPAR and same-property hotel EBITDA results are same-store for our ownership period, and include all the hotels we owned as of March 31, except for Vintage Portland, which was closed for renovation during most of the quarter.

Our other hotels under renovation are included in our stats because they remained open during their respective renovations. RevPAR growth in the quarter was led by Hotel Vintage Seattle, Hotel Zetta, Hotel Palomar San Francisco, and Hotel Modera. Food and beverage revenues for the portfolio increased 5.6% compared to last year.

This was attributable to the strong performance at Dirty Habit, our bar restaurant at Palomar San Francisco, which we launched last May. It continues to garner tremendous response throughout San Francisco. Our food and beverage outlets at The Nines, Urban Farmer, and Departure, also performed notably well during the quarter.

Overall, departmental profit margins increased 254 basis points versus the prior year. Part of this improvement is due to the conversion of the 11th Edition of the Uniform System of Accounts, which makes specific line-item comparisons difficult, both this quarter and this year.

The Uniform System of Accounts is the overall financial reporting standards followed by the hotel industry. As part of the 11th Edition changes, several expense categories were reclassified to other departments. For example, in rooms, the director of revenue position has been reclassified to sales and marketing.

In food and beverage, the catering manager and related positions have also been reclassed to sales and marketing.

In telephone, all telecom-related labor and administrative expenses have been reclassed to a new line item called information and telecommunication systems, which we include in administrative and general in our same-property operating statements this year but, in 2016, we'll break out this line item from A&G.

Taken together, our same-property hotel EBITDA margins will remain the same following the implementation of the 11th Edition, but some line items will change, particularly in the departmental expense line items.

For example, food and beverage departmental profits increased 538 basis points, compared with the prior-year period, of which about 200 basis points are attributable to the reclassification of catering salaries and other certain technology expenses due to 11th Edition changes, and the remaining improvement is due to solid expense management from our asset management efforts.

Overall, total expense growth in the quarter was limited to 1.4%, which is fantastic, considering that property taxes increased 7.2%, due to the automatic reassessment of our 2014 California acquisitions. Energy costs declined 6.1%, despite the cold weather in the East and Midwest.

So, with our 3.7% increase in hotel revenues, our same-property hotel EBITDA increased a strong 10.9%, with margins improving 168 basis points. Same-property hotel EBITDA percentage growth leaders in the first quarter were Hotel Vintage Seattle, Palomar San Francisco, W Boston, The Benjamin, and Prescott San Francisco.

Our same-property hotel EBITDA growth was broad, as 16 properties grew same-property hotel EBITDA by more than 20% in the quarter, compared to the same period last year. Moving down the income statement, let's now turn to our corporate G&A line item. We were about $300,000 over our first-quarter outlook.

This was due to better-than-expected 2014 year-end performance versus our peer group which increased to 2014 annual cash bonus expense that we reflected in the first quarter. This was partly offset by some renovation pre-opening expenses moving into the second quarter and lower-than-expected share-compensation expense.

Otherwise, our G&A was in line with our outlook. As a result of the solid hotel operating performance and a greater number of properties this year versus last, we generated adjusted EBITDA of $38.8 million for the quarter. That's an increase of $9.3 million, or 31.4% ahead of last year's first-quarter results.

Our adjusted FFO climbed to $24.4 million, versus $16.9 million in the same period last year, resulting in an AFFO per share of $0.34. That represents a 31% increase compared to Q1 last year. On the capital market side, in March, we repaid the $50.7 million of loans secured by The Nines in Portland.

In mid-April, we successfully completed a new seven-year term loan generating $100 million in proceeds. As part of this debt transaction, we entered into an interest rate swap agreement for the full seven-year term to lock in current interest rates. Based on our current leverage ratio, the fixed interest rate on this seven-year term loan is 3.46%.

Looking at our balance sheet, at the end of the first quarter, our net debt-to-EBITDA was at 4.3 times; our debt-to-total assets was at a low 32%; our fixed-charge coverage ratios remain well covered at 2.9 times; and, as of today, our $300-million unsecured credit facility has only $25 million outstanding, and we have no debt maturities until 2016.

I would now like to turn the call over to Jon to provide more insight on the recently completed quarter, as well as an update on our outlook for 2015.

Jon?.

at Palomar Beverly Hills, occupancy declined 12.9%, while we pushed ADR up 11.7%; at Union Station Nashville, occupancy declined 9.8%, while ADR rose 9.5%; and at the Revere Hotel Boston Common, occupancy declined 4.7%, while ADR climbed 14.1%.

As we have increasing success finding new business at each of the hotels, over time, we expect to be able to gradually drive ADR without losing significant occupancy. And, again, this is already built into our RevPAR outlook for the year. Now, let me turn to a quick update on that outlook for 2015.

We continue to expect 2015 to be a great year for both the industry and Pebblebrook. Our forecast for the industry remains 6% to 7% for the year, which suggests moderating performance following the first quarter's 7.9% growth.

For our portfolio, we are also maintaining our RevPAR outlook for the year, despite our better-than-expected first-quarter performance, though we are increasing the low and high ends of our range for forecasted same-property hotel EBITDA by $3.3 million and $1.8 million; adjusted EBITDA by $3.1 million and $1.6 million; and adjusted FFO by $3.9 million and $2.4 million, which is primarily due to the first quarter's $4.5 million and $2.5 million being the bottom and top ends of our same-property hotel EBITDA outlook.

Our forecast for our same-property RevPAR growth remains 50 basis points higher than our industry range, so we continue to forecast 6.5% to 7.5% for our portfolio.

That does mean as the industry RevPAR growth moderates over the second half of the year, we expect our portfolio RevPAR to increase over the second half of the year, primarily as a result of the benefits from our renovations, the group patterns, and some easier comparisons to last year's renovations in the fourth quarter.

For Q2, we are forecasting our same-property RevPAR to increase by 4% to 6%, which takes into account the negative impact from the ongoing renovation of the Radisson Fisherman's Wharf, as well as weak performance in New York.

Our same-property hotel EBITDA range for Q2 is $75 million to $77 million, with same-property hotel EBITDA increasing by 6.7% to 9.5%. In Q2, we expect performance that is weaker than the industry in San Francisco, San Diego, and Buckhead, all due to weaker convention calendars in the quarter.

And New York City, we expect to be weaker, but better, than the first quarter due to continuing pricing pressure. But we certainly expect New York's performance to be improved from the first quarter. We expect healthy market performance either at or above the industry in Miami, Boston, Washington DC, Philadelphia, Nashville, Portland, Seattle, and LA.

All other assumptions for our outlook remain unchanged, except we reduced our GDP forecast for the economy by 50 basis points, due to a weaker-than-expected first quarter, which we believe was primarily attributable to weather, trade headwinds from the climbing dollar, and the West Coast port issues.

Economic and travel trends remain supportive of our forecast of strong growth for 2015. On a trailing 12-month basis through March, industry occupancy tied the all-time high of 64.9%, and should exceed it next month and set records for at least the next couple of years, as demand is likely to exceed supply growth.

This, of course, bodes well for increasing pricing power and higher ADR growth over the next 2 years. For Pebblebrook, as of the end of March, total group and transient revenue on the books for the last 3quarters of this year was up 0.6% over same time last year, with ADR up 3.5%.

Group room nights were down 5.1%, with group ADR up 4.3%, and total revenue down 1%. Transient room nights on the books for quarters 2 through 4 were down 0.5%, with transient rate up 2.5%, and total transient revenue on the books up 2%.

Pace is being impacted by a few of our property-specific plans and strategies, including the renovation of Radisson Fisherman's Wharf, which is negatively impacting Q2, and our strategy to avoid taking a lot of low-rated tour and travel, group and leisure transient business that doesn't fit our higher-rated repositioning objectives.

At the Radisson, group and transient room nights are down 11,800 for Q2 through Q4. With our strategies to remix our business at Revere Boston Common and Palomar Beverly Hills in order to achieve higher rates and profitability, we also made decisions to avoid low-rated business that the hotels had taken in prior years.

As a result, group and transient room nights are down a combined 8,800 room nights for Q2 through Q4 at those 2 properties. If we looked at our pace without these 3properties, total revenue on the books, group and transient, is up 4.1% for the remaining 3quarters of the year.

As a result, we are not concerned about our overall pace numbers for the remainder of the year. To wrap up, we continue to expect 2015 to be another terrific year for the lodging industry and, just like in prior years, an even better year for Pebblebrook. Underlying industry fundamentals remain very healthy.

We have got tremendous opportunity in the existing portfolio to recapture significant RevPAR lost in prior years, as a result of renovations completed in previous years, as well as current and upcoming renovations and repositionings.

We also expect to continue to significantly improve margins as we make additional progress with the implementation of best practices and through lots of focus and hard work by our operators and our entire team. That completes our prepared remarks. Operator, we would be happy to take questions now..

Thank you. [Operator Instructions] We will take our first question from Jeff Donnelly with Wells Fargo..

Good morning. Ray, it was very kind of you to choose music from Jon's era this quarter.

Jon, the first question from you is, do you have an updated view on Kimpton and maybe IHG's plans there? I would say from the outside, it doesn't seem like anything has happened thus far, but I'm curious of what made Kimpton Kimpton you think stays intact, and how you are thinking about it?.

Sure. Jeff, the outside is the same as the inside, no changes at Kimpton. Everything is operating just as it did before, and we don't really expect anything to change in the first year. Then we will see what plans IHG has, if any, to make changes..

Okay. I know you covered it well on the call, but as it relates to New York and the weakness in the 3 hotels you mentioned, it doesn't sound like it's a sub market issue. Maybe it is a personnel or tools and training issue.

I just wanted to clarify whether or not you guys have factored something into the remainder of your 2015 guidance for the risk that it could a take a few months for that issue to be resolved..

Yes, we have, Jeff. The good news there is that in the last 30 days, we've had some great success with getting group on the books for particularly the second half of the year.

We think between that and the efforts going on with some retraining and some additional focus on revenue management that we think the second half will be much better, and hopefully, we won't have the same issues in the second half that we had in the first 4 months of this year..

It is possible that in Q2, we can have similar, not identical, but similar results out of those 3 hotels or the New York hotels, do you think?.

Yes, we expect based upon the group we had on the books that we are going to be an underperformer at those 3 properties in the second quarter, and that is factored into our numbers..

Then maybe another question to switch markets, on DC, about whether or not we might have reached a bottom, I know the comps on a year-over-year basis might continue to be weak and declining in 2015, but I'm curious of the level you think we have now fallen to, is the bottom for the DC market, particularly with a stronger group calendar, and the presidential ahead of us.

Beyond just fundamentals, do you think that even presents buying opportunities in DC, or is that maybe going too far?.

We do think the market has bottomed, and we are beginning to see more strength in transient in particular. As Congress becomes more active, they're actually legislating, and they're even considering other legislation.

There seems to be some kind of bipartisan middle ground on some issues where both parties hope to be effective in getting legislation passed and signed into law by the President. We are seeing that activity on ground.

Now, the second quarter is better because of the convention calendar start with, but it looks to us like DC, at least in the second quarter is likely to be at or above the industry average. The other thing we have been seeing is some continuing government recovery.

Interestingly, the performance in the suburbs, and you see it in the total MSA, even though the MSA is fairly broad for Washington.

But the suburban markets are performing better than the downtown market, and that is allowing the downtown market to push rates a little bit more as some of that lower rated business moves back to the suburbs where it started.

In terms of the acquisition market in DC, we continue to believe that DC is likely to be an underperformer over the next couple of years. We haven't seen much being put on the market in DC, I think, as a result of that. Perhaps that will change as maybe people become more optimistic over the next few years, but we haven't seen that yet, Jeff..

Okay. I will jump back in the queue. Thanks..

We will take our next question from Rich Hightower with Evercore ISI. .

Good morning, Jon. Good morning, Ray..

Morning, Rich..

Just one question from me this were morning, we have known for at least a quarter here that the growth this year is going to be back-end loaded, on a renovation tailwind.

Is there anything related to the second quarter, specifically now that we are getting guidance for 2Q that maybe has changed in the past 60 days since your last earnings call, maybe outside of what you have described in New York?.

Yes, outside of what we described in New York, no. For the markets we indicated would be weak in the second quarter, weaker than the industry like San Francisco and San Diego and Buckhead those were all known earlier in year based upon the convention calendars..

Okay. That's it for me. Thanks..

Thanks..

We will take our next question from Shaun Kelley with Bank of America Merrill Lynch..

Good morning. I just wanted to see if you guys could comment on the overall state of the M&A environment, given where we are in the cycle. It is a question that we pretty much have to ask every quarter at this point.

I just wanted to get your latest views, given that no deals were consummated in the first quarter, and how you are looking at those opportunities out there and the hotel valuations..

Sure.

When you say M&A, you're talking about acquisition of hotels?.

Exactly..

I think what we have seen, Shaun, is a continuation of what has been going on for the last probably 24 months, which is a fairly modest amount of assets available in the major markets that we have an interest in, and probably the only thing that has changed in the last 2 years is that we have seen more competition.

We've seen the competition broaden out to include some private equity folks as leverages become more available. We have seen some broadening in interest from our peers in certain types of products that they previously hadn't had an interest in, such as independent hotels.

Where it used to be us and LaSalle from the REIT land pursuing independent hotels, now it is us and 4 or 5 or 6 other lodging REITs, on individual transactions. That's probably the most notable change for us in terms of our view of the market.

The one other thing that has changed, although it is not a this year thing, it is really in the last maybe 18 to 24 months, is again more interest from others on the West Coast, whereas they had been maybe much more focused on other areas of the country or the East Coast.

As the West Coast has performed much better, there's more interest in those markets..

That's helpful. Copying is the best form of flattery in some regards. My second question would be on, you mentioned in the prepared remarks a possible moderation of inbound travel.

Is it explicitly related other to New York? Could you just elaborate on that a little bit? Are you seeing this? The question we get from investors over and over again, as the dollar has strengthened, so, your latest view on the impact of that to the hotel industry?.

Sure.

We talk about this last quarter, and what we indicated was our expectation was that coming off of a really heady growth in overseas, non-resident travel to the United States, of which obviously New York is a big participant in the receipt of that business that's coming here, that we thought that 8% growth from last year was unrealistic to expect, that level of growth to continue even with the structural enhancements that continue to go on with the visa program, with visa waiver program, with the Chinese change that took place; because of the headwinds related to currency changes and the strength of the dollar, the weakness in some of those foreign currencies, and also because of the weaker European, and in fact global including emerging markets, economies that was forecast for the year.

Commerce hasn't come out with the really fully vetted data that they print, that data that would be comparable to the 8%.

They're running seemingly about 4 months behind still, but when you look at some of the other data they have put out, it looks like in the first 2 months of the year that travel inbound, non-resident oversees meaning leaving Canada and Mexico out, it is running around 4% to 5%, and that seems consistent with what we have been seeing in New York and other gateway markets in the US.

It's consistent with our overall forecast for moderation in the industry demand levels from 4.5% down to 2.5% to 3% for our range, and our forecast for overall industry RevPAR to moderate from last year's level. What is happening is what we thought would happen. It doesn't seem to be any different.

You have continuing growth in other parts of the world, including China and other parts of Asia, and including some of the South American countries that are offsetting some of the weaker growth rates in perhaps a country like Brazil, which seems to be continuing to suffer economically.

From our perspective, so far, the year's playing out as we thought, and we are not bothered by anything that's happened so far..

To summarize, moderation but still positive on a year-on-year basis would be a fair thing to characterize it, yes?.

Yes, and in fact, I think 4% to 5% growth, if our forecast come out to be in or near the range is pretty healthy, and in fact higher than what the last decade was when we decided to close our borders to inbound travel..

Thank you very much. I really appreciate all the color..

Sure..

We will take our next question from David Loeb with Baird Financial..

Good morning, Jon.

Just to follow up on the market acquisition question, what do you think of New York hotel values now? Does that create an opportunity for you and Denihan to come to some kind of resolution about the ownership of that portfolio earlier than mid next year?.

A loaded question, obviously. I think what's going on in New York right now, we have seen this movie before. There are periods of time when foreign capital either for diversification reasons or for preservation reasons comes to some of the major markets in the US to buy assets, including real estate and including hotels.

That's what we are seeing today is that we are definitely seeing a fairly meaningful increase in foreign capital, particularly from Asia, including China, Korea, and some of parts of Asia that we haven't seen before. That is government sanctioned in many cases, and how long it will last is unknown at this point.

They, in many cases, for the assets that are trading they have been a greater percentage of the buyers in those portfolios. They seem to be buying off of longer-term periods than what more income-focused or domestic buyers might will looking for, from a return perspective.

Whether that continues and for how long would be difficult for us to guess, basically because some of those government sanctions can be unsanctioned on a moment's notice. For us, as we previously talked about in prior quarters, if there is a transaction, we'll let you know.

Obviously, from our perspective it's a seemingly attractive time to be a seller in New York versus being a buyer in New York..

That's helpful. I appreciate your candor on that. Thanks..

David, we want to thank you. I know each quarter we get hundreds, if not thousands, of song suggestions. I believe the Sonny and Cher song was one of the songs you suggested, I believe, recently. We do appreciate that this quarter..

That's because it is –.

It is just like our best practices. Most of them are somebody else's good ideas. We are just able to recognize them..

I just thought it was because you and I were old, Jon, relative to everybody else..

I think that might have been where Ray was coming from. Operator, next question..

We will take the next question from Wes Golladay with RBC Capital Markets..

Sticking with good ideas, looking at Dirty Habits, can you might remind me if you lease that restaurant? Do you get all of the income from it? Do you have any idea how many non-guests visit that restaurant?.

We own the restaurant. It is our economics that flows through the typical TRS structure just like all of our hotels. If you are asking is it leased, no, it is not a leased restaurant. We wouldn't have been able to get anybody to lease a restaurant on the fifth floor of a hotel building.

I would say the vast majority of the business there is non-hotel guests. That's typical at probably almost all of our hotels. They're really geared to the business and residential neighborhoods at that they're in, the communities that they're in. If you are successful attracting the locals, the hotel guests will stay.

We are on track this year in that fifth floor space to do somewhere, we believe, between $5.5 million to $6 million of revenue, and somewhere in the vicinity of a million dollars give or take in EBITDA all the way at the bottom line, so not departmental, but fully loaded..

Okay. You mentioned some increased competition for hotels that you are looking to acquire.

Are you seeing this in the value-add acquisitions?.

I would say yes, we see it in the assets that we pursue. Probably the difference is that some of the assets that we view as value-add, others may not see what we see.

They're pursuing them probably on a different basis in terms of what they think the future opportunity is of that hotel versus what we see, and the upside opportunity that we have identified when we pursue an asset..

Okay. That makes sense. That's all for me today..

Thanks, Wes..

We will take the next question from Bill Crow with Raymond James..

Good morning, Jon and Ray. Jon, with the second quarter guidance now, at least relative to our expectation, it places greater emphasis on outperformance in the second half of year. I am just trying to think about, obviously, the renovation disruption goes away. The weather issue hopefully goes away.

What does New York have to do in the back half of the year in order for you to hit your numbers, thinking about it like that? Maybe more broadly, what are your prospects for New York as a market, the balance of this year and into next year?.

First of all, as evidence by the first quarter, even if New York is below our expectations, we can still beat our numbers because we get better performance in other markets than we have allowed for in our own forecasts. That can go on all year. It is not unique to the first quarter, we don't think, per se.

It doesn't mean it is going to happen, but New York represents something like 9%, and declining as a percentage of the overall EBITDA in the portfolio, so it is increasingly less important to the overall performance of the Company.

With that said, we think the second half, and this is what's in our outlook, we think the second half performs better than the first quarter and the second quarter. We don't think it will be down in the second half of the year, which we think will be the case in the first half.

You don't have the difficult comparisons from Super Bowl, citywide in the early part of the year, weather. You don't have the weaker occupancy level of the overall market that allow for much more aggressive pricing competition as what occurs in the first part of the year. We are not an optimist about New York. We haven't been for 3years.

We think New York will continue to be a significant underperformer to the overall industry for the next few years, if not for the rest of the cycle. We don't think the first quarter is an indication of the way New York is going to run..

Jon, other than obviously the benefit from the Benjamin re-jiggering of the restaurant contract, what do you have to do in RevPAR growth in that Collection in order to offset higher operating costs? In other words, is it going take 4%, 5% to hold EBITDA flat? Where are we relative? We're hearing that operating expenses in New York are outpacing the rest of the country.

Is that fair, I guess, number one? How much RevPAR growth do you need in the market to maintain EBITDA?.

I think, Bill, that New York does run higher than most other parts of the country due to labor contract. You have got a labor contract that's 4% a year, all in. That is higher than most markets in the US. In fact, it's always been higher than most places in the US.

Other costs are not increasing at that same pace in New York, but labor is a bigger percentage in New York than it is in other markets. We think to be zero, to not go down, we think RevPAR has got to be in the 3% range, and keep in mind 3% in New York means it is pretty much all ADR.

It is not occupancy growth, because the market is not going to go up in any material way from its 86.5% or 87% current level. I would think, Bill, this year as an example that you'd probably have 50% to 70% or more of the hotels in the market that will have declining EBITDA as compared to last year..

That's interesting. Thank, Jon. One more question, if I could, on Manhattan..

Sure..

Can you tell us what your all-in price per key investment is in the portfolio, including the additional keys that you have added and the renovation costs that you have put in there?.

I'll give you a ball park number, but I think, and Ray, I don't know if you have it handy, I think it's around $530,000 a key..

Okay.

That would include all of the money you have put in since making your investment?.

Yes, the money above the normal reserve, yes..

Okay.

Based on current trades in the market, it seems that the valuation per key would be significantly higher than that today, is that fair?.

Yes, I think based upon the trades in the market, for sure. The other thing I'd say is interesting.

We had some meetings recently with a developer of full service hotels in the market, and his guess at this point, based up real activity on his part is that for a true four-diamond hotel in New York, in a decent location, you're looking at upwards of a million dollars a key for development costs.

At the luxury end, you're looking at $2 million to $3 million a key. Clearly, in a good location select service properties are probably running north of $400,000 a key, if you can decently-located land.

We've had some very significant increases in replacement costs in New York, and by some people's accounts, without residential in a project development, you obviously can't make $800,000 to $1 million work for a full service hotel in New York City..

That's helpful. Thank you..

Bill, I gave you some numbers on the price per key. When we acquired it, it was a little over $500,000 a key, but we've added keys at the Manhattan, as well as a meaningful amount at the 50. All in, we're looking at $475,000 to $485,000 a key when you get to those additional rooms. We also have a meaningful amount of retail space there, as well..

Very good. Thank you for the color..

We'll take our next question from Jim Sullivan with Cowen Group..

Thank you. Jon, I had a question for you about where you believe cap rates are today. You talked about increasing competition for the kind of independent product that you have typically focused on.

At the same time, of course in your prepared comments, you expressed probably increased confidence in the length of what we can characterized as a strong upcycle, in terms of relative demand versus relative supply. Of course finally, interest rates have stayed lower longer than most of the world has expected. I'm just curious.

When you factor all of that into you analysis of possible acquisitions, is your hurdle rate today in terms of cash-on-cash returns or cash-on-cost returns lower than it was a year ago?.

Yes, our hurdle rates for cash-on-cash fifth year, fifth year cash-on-cash, five-year average cash-on-cash, they've not changed, Jim. Unlevered IRI perspective hasn't changed.

We are still buying with the same assumptions for back end cap rates on presumed sales in the 7% to 7.5% range, so meaningfully higher than where those going in yields are today in the major gateway markets.

The major cities, particularly in the West Coast, but clearly in New York, Boston, Miami, you are look at well down into the 5%s I think for properties in the cities. If you get out of the cities, maybe you get to 6%, or a little better than that. Yes, I think they've probably come down another 25 basis points or more in the last year..

Okay. Interesting.

Then just, I think, probably relatively minor questions on your CapEx, have you refined the cost and the timing for the work you intend to do at the Union Station Hotel in Nashville?.

We are in the process, Jim, of refining the scope. We have not refined the cost at this point..

Okay. Then finally in terms of the West Coast, you have done a lot of work on the West Coast this year. You mentioned the port strike and the impact that had on business generally.

Did it have any material impact on the cost of the work that you have done there?.

It used up our contingency, particularly to air freight some things in that we would have otherwise shipped, and certain costs related to having to go back and install the things we purchased as opposed to putting back in place some things that we are already existing.

In terms of the overall costs, the project had been bought prior to these things happening. I think what we're continuing to see in that market is our public area permit review took 5 months, which is 4 months longer than it took when we did Zetta 2 years earlier..

That's with respect to the Radisson, presumably..

That's with respect to the Radisson. We haven't seen the same delays, either in permitting or inspections in the other West Coast markets at this point, but we would expect a market like Seattle.

We don't have anything going on, but what we hear from others that are buildings that it is overwhelming the city, and that those processes are stretching out now, as is actual construction. Our original schedule back when we bought the Radisson was to complete the work in January. Now we're completing it at the end of May.

That's a four-month delay from what our original schedule was 18 months ago, when we bought the property. We're seeing probably 7% to 10% annual increases in redeveloping costs.

In speaking to some developers recently, even from suburban select service properties, they're telling us they've seen anywhere from a 10% to 20% top in development costs in the last 6 to 12 months..

Jon, that increase presumably also reflect, or does it, the increase in land costs in those markets?.

It does, Jim..

It does. Okay. Very good. Thanks, Jon..

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

Thank you. Good morning. Jon, investor interest in resorts seems to be picking up continuously. I'm just curious what your thought on that type of hotel are..

It's interesting, Lukas. If you go back [indiscernible] our road show, we identified resorts along with hotels in the major cities, the major gateway cities, in the US as target markets.

We've been challenged over our existence so far in finding resorts that we can buy at values that appropriately reflect the typically additional risk involved with resorts that have a more limited set of segment demand, i.e., leisure, usually limited to leisure and group if a hotel has meaningful groups space.

They typically don't participate in convention because they're not typically not located near conventions, and oftentimes have golf courses and other expensive amenities.

On a risk return basis, we've struggled over the last 5 plus years to make sense out of buying resorts at pricing that properly reflects that risk and gives us the returns that we would like to get for taking that risk. Whether that changes in the future, we'll just have to see.

We continue to look at resorts as they become available, but we've not had any success to date, outside of the property in the Columbia River Gorge, which is more arguably a conference center resort than it is a pure resort..

Right. That's really interesting. My last question's on Miami. I know it's not a big market for you, but the supply pipeline is picking up there. It's about 8% of existing stock based on the numbers I've seen.

I'm just curious if you're worried about that, or if you think that the market can absorb that amount of supply?.

First, we think the supply pipeline is like a lot of pipelines, a little bit overstated, in terms of what's actually under construction, and think that maybe don't have financing. There is more supply in South Florida here.

It is spread out, and in many cases, at least in terms of what's under construction, the hotels tend to be pretty small and less impactful on the market. We're continuing to see demand be very healthy in terms of its growth in the market.

Based up on what we see right now, in terms of new supply and when it's going to get added, we think it's likely to be well absorbed in the market, and not stunt pricing growth..

Great. That's helpful. Thank you..

We'll take our next question from Ian Weissman from Credit Suisse..

Good morning. Just a quick question on rate, I just want to get your perspective on where you think we are in the rate recovery. We seem to be continuing to hover around this 4%, 4.5%, maybe even less than that in some cases. Call the industry about 4% rate growth, in spite of the fact that occupancies are 500 plus basis points above prior peak.

What's your view on accelerated rate growth at this point in the cycle? Are there mitigating factors that would push things higher into the 6% plus range?.

I think there's a couple of things going on that are interesting, and in some cases, maybe obfuscating stronger growth. If you go out to the West Coast, you're talking about in many markets upper-single digits, lower-double digit increases in ADR that are going on right now.

The business is a local market, and what we're seeing is a few markets on the East Coast where the occupancies are higher, but yet there's still a lot of competition, like in the New York market where pricing power is weak. First of all, the industry's running in the mid- to upper-4% right now in ADR growth, and it is increasing.

I think first quarter for the industry, it was about 100 basis points higher than the first quarter of last year, and we expect the trend to continue to go up. There are some things impacting it. New York is one of them statistically. DC is another one statistically.

These are fairly good sized markets with high revenue numbers that impact the overall industry numbers more substantially. I think you have to look at it market by market. A market like Nashville, Miami, Boston, all the West Coast markets all have very strong upper-single digit, low-double digit ADR growth going on at this point in time.

I think it's your suburban markets. It's a few of the major markets I mentioned that are weaker. It's some of the lower end, which has been slower to recover. We think ADR will continue to escalate in terms of the growth levels.

We've heard some theories that this whole idea of the RevPAR second derivative, and when it turns over the business turns over. We had this discussion 24 months ago, when people thought we were in to the quote, second derivative, meaning RevPAR growth in the next year is going to be lower than the year before.

I don't think that's an indication of a long-term trend. I think it's an indication of some short-term trends going on in the industry, whether it's government getting in the way, or some particular markets that are impacting the overall numbers. We don't see a reason at this point why ADR growth isn't going to continue to accelerate for the upside.

As an industry, we think industry occupancies are going to continue to go up. There's more compression nights. There's more ADR pricing power. There's more remixing of business. There's less discounting. That will continue to drive ADR growth higher.

And it certainly wouldn't surprise us that even if this year is a modest decline in RevPAR growth from last year. We do think ADR growth is going to be higher this year than last year.

We wouldn't be surprised to see RevPAR growth accelerate up again in the following year, particularly as convention calendars look to be a little better next year than they do this year..

Right. That's helpful. Then just last question, not to knock your 100 to 150 basis points margin growth, I think that's very good.

Just given your portfolio concentration on the West Coast, your comments about rate specifically, especially across your markets and obviously your outperformance on the margin side this past quarter, what's holding you back from being a little more aggressive on you margin expansion? How should we think about that..

We have negative margins in New York, so that's the biggest thing that's holding us back, along with the renovations that occurred in the first 4 months of the year. We can only grow. If we stunt revenue from 7% to 3.7% which is what this quarter was, Ian, we float 70%. That's 70% of the revenue growth to the bottom line at a relatively low growth.

That would have been higher but for renovations. Not the 70% would have been higher but the total EBITDA growth would have been higher. The margin growth would have been higher with higher levels of growth than the 3.7% that we had in the first quarter..

If we had to think about ex-renovations and ex-New York, what do you think the run rate would have been?.

Ray, I don't know if you have that information. We have the non-New York numbers. They were up 230, I think..

Right..

Which is a pretty healthy number, particularly given 5.4% RevPAR growth in the wholly owned portfolio..

Right. Okay. Thank you very much..

Sure..

We will take our next question from Jeff Donnelly with Wells Fargo..

I just wanted to circle back a question or two. Jon, there's some questions about the acquisition market. I was curious.

What do you feel Pebblebrook is most competitive, and maybe conversely, are there segments where you are not competitive on acquisitions?.

We are most competitive on the things that fit our criteria, and least competitive on the ones that don't. I know that's not really your question. I think we continue to be most competitive in maybe 3different areas. One is where there is, I think Wes asked the question earlier, but more clear, deeper redevelopment opportunities.

Properties that are well located, but more rundown are particular areas where we have been more competitive, properties that require some vision in order to reach the most value out of them. I think that the second area has been complicated structures, whether it be tax structure, ownership structure, loan situation, and deals that can take longer.

They need somebody who's going to hang in there, has a reputation for hanging in there, and being relentless, if you will until a deal closes.

Then the third, I think the third area, continue to represent opportunities operators and brands bring us deals off-market, and view us as the owner they want to have to take best care of their asset that they continue to care about.

Or in the case of operators for them to continue to be able to operate the hotel, and maybe do it with somebody who is more likely a very long-term owner versus a private equity group that trades these assets on a two-, three-, four-, five-year basis. I think those areas are where we've had our greatest success, Jeff, and I think that continues..

At least in the first 2 cases, is that simply because the nature of the buyer and returns that they're seeking? It's a financing issue for them, because a lot of those more troubled or renovation assets usually don't have a lot of cash flow right off the bat to get the returns they need? It just doesn't work with the leverage they can access?.

I think that some of that is, yes, a lot of the buyers are more near-term yield-oriented. We are not. I do think that is part of it, yes..

Just a question or 2 on 2 market, on Boston, do you have any further details on plans at the Revere? I think there was some discussion around maybe changing, what you called, the sense of arrival at that particular property.

I wasn't sure if you have had any thoughts on monetizing the garage of the adjacent land now that that has moved ahead a little bit..

I will give you a couple of thoughts. First, you might have missed this in a prior call, but we talked about the work for the Revere likely to be a 2016-2017 winter timeframe..

Right..

We are really just beginning to vision and determine what we want to do there. We are also looking to get a little more experience with the property to make sure we understand where the best opportunity is there.

On the parking garage, we actually have significant efforts working with our operator meaningfully improving the performance of that garage, taking advantage of the strength in the market and the opportunities in market. It's also a fairly integral part of the structure, as well as the use of the event space and the hotel.

I think it is more likely than not that we're going to continue to own that parking garage. We think it's a great long-term investment in a market where you can't build parking garages. As it relates to the piece of land, that's a much longer term opportunity. We actually have gotten an offer or 2 in the $5 million range for the piece of land.

We are studying that as well as trying to understand who the best players might be to get the most value out of it from a local development perspective. That's a much longer-term opportunity, I think, and we are not going to be the developer..

Just one last question, I know all development ideas don't come to a reality, but I saw that a private group, I think it was Stanford Hotels in Seattle, was looking to build a 50-story hotel and residential tower that's on Fifth Avenue, somewhat close to some of your hotels.

Any color on that project, or whether or not you think it is going to come to reality? I don't know if you have picked up on that..

There are a few of those Seattle. They're not the only 50-story building that has residential and small hotel or medium sized hotel or residential office and hotel. There's 60-story proposal, 40-story proposal, 50-story proposal. These are big projects with big financing requirements. They're very slow in getting financing in the market.

There's a lot under construction right now, and it has a couple of hundred room hotel in it ultimately. It is a three-year delivery from now. If you think about how long it takes to build and finish a 60-story building or 50-story building, you are easily talking about 3years from shovel in the ground.

From somebody announcing a deal to get through Seattle's review and approvals and getting plans completed and planning, you have got to add at least another year on top of that..

Okay..

I think we are a ways off for having to be concerned about those announced projects..

Okay. Great. Thank..

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

Hi.

A quick question on the Hotel Zephyr, are you doing much to the street retail over there right now, or would that be a future opportunity?.

I'm sorry.

Are with we doing what?.

Are you doing much with the street retail at the Hotel Zephyr, or is that going to be a long-term opportunity, the 44,000 square feet you have there?.

Yes, it is a longer-term opportunity. There's minimal vacancy there. What we can do is generally subject to the expirations of those leases, and we don't really get materially into those until 2017 and beyond.

We have eliminated some public space that split some of the retail from the courtyard, and eliminated that exit, and moved it to a side street to pick up another, I don't know 500 or 700 square feet, which will get added to the one small vacant space on Jefferson that we have right now.

We are out in the market looking to lease that, but outside of that it's longer term. Actually, it is on the back side of the hotel. It really doesn't have a whole lot to do with the operation of the hotel..

Okay. Thank you for taking the follow-up..

We have no further questions. I would like to the turn conference back to our speakers for any additional or closing remarks..

Jon, I just want to provide a clarification to Bill Crow's earlier question on Manhattan. Bill, I apologize. I pulled the wrong number. Regarding the Manhattan Collection, total capital invested including the Dumont expansion, which we're underway now, would be about $970 million, and we have our pro rata at 49% interest in that.

We'll have about 1,787 guest rooms. That would be an implied per room value today at around $545,000. That does not factor or take into consideration we have a little over 33,000 square feet of retail space also in the overall valuation..

Great. Thank you all for participating, and we look forward to updating you 90 days from now..

This concludes today's conference. Thank you for your participation..