Jon Bortz - Chairman & CEO Raymond Martz - CFO.

Rich Hightower - Evercore Partners Anthony Powell - Barclays Jeff Donnelly - Wells Fargo Michael Bellisario - Robert W. Baird Bill Crow - Raymond James Wes Golladay - RBC Capital Markets Jim Sullivan - BTIG Tyler Batory - Janney Montgomery Scott Lukas Hartwich - Green Street Advisors.

Greetings and welcome to Pebblebrook Hotel Trust Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Raymond Martz, Chief Financial Officer for Pebblebrook. Thank you, sir. You may begin..

Thank you, Michelle. Good morning, everyone. Welcome to our third quarter 2017 earnings call and webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer. Before we start, a quick reminder that many of our comments today are considered forward-looking statements under federal securities laws.

These statements are subject to numerous risks and uncertainties, as described in our 10-K for 2016 and our other SEC filings, and future results could differ materially from those implied by our comments. Forward-looking statements that we make today are effective only as of today, October 24, 2017, and we undertake no duty to update them later.

You can find our SEC reports and our earnings release, which contain reconciliations of the non-GAAP financial measures we use, on our website at pebblebrookhotels.com. Okay. So we have a lot to cover this morning. So let's first review the highlights from our third quarter financial results.

Our overall third quarter financial performance exceeded our expectations. Same property hotel EBITDA was $74.7 million, which was $0.8 million above the upper end of our Q3 outlook.

This was due to better than expected non-revenue - non-room revenue growth, the benefit of a property tax true-up at one of our San Francisco hotels, as well as limited expense growth.

Adjusted EBITDA was $3.5 million above the upper end of our outlook due to the same property hotel EBITDA beat, combined with lower than expected G&A expenses, which are largely related to savings and incentive compensation, pre-opening and legal fees.

Adjusted FFO per share was $0.80 per share, which exceeded the upper end of our outlook by $0.06 per share and the bottom of our range by $0.10. This resulted from the same property and adjusted EBITDA beep in addition to a lower TRS tax expense.

On the hotel operating side, same property RevPAR declined 3.1%, which was in the upper end of our outlook range of minus 2.5% to minus 4.5%. Our RevPAR decline was driven by a 3% decrease in ADR and a 0.2% decline in occupancy.

The decline was primarily a result of the disruption in San Francisco from the Moscone Center renovation and expansion, a difficult prior year comparison in Philadelphia from the Democratic National Convention last July, and the negative impact from the shift of the Jewish holidays into September from October last year.

Excluding our San Francisco properties, same property RevPAR for the rest of the portfolio decreased 2.2%, which implies that San Francisco had a 94 basic point drag on the portfolio RevPAR growth. Our hotels in San Francisco experienced a 5.6% decline in RevPAR during the quarter.

If we exclude Hotel Zoe, our other six San Francisco properties experienced a RevPAR decline of 3.4%.

Our one property in Philadelphia, Sofitel, had a 86 basis point negative impact on our RevPAR and 61 basis points on ADR, with its RevPAR declining 22.7% in the quarter, primarily due to the comparisons to last year when Philadelphia hosted the Democratic National Convention.

This compares pretty evenly to the Philadelphia CBD’s performance, which suffered a 22% decline in RevPAR this year in the third quarter. Our performance in the quarter was led by Union Station Nashville, Hotel Colonnade Coral Gables, and Hotel Zeppelin San Francisco.

All three of these hotels continued to ramp up following our recent transformation of these hotels. Other strong performers included Skamania Lodge and Hotel Zelos, San Francisco. Our Q3 RevPAR and hotel EBITDA results are same property for our ownership period and include all the hotels we own as of September 30.

Our numbers do not exclude any hotels under renovation, unless they were closed during the renovation. We did exclude LaPlaya Naples since the hotel was closed on September 9 following a mandatory evacuation order due to hurricane Irma and a subsequent cleanup and rebuilding efforts. I’ll provide an update on LaPlaya later in this morning's call.

On a monthly basis, RevPAR for our portfolio decreased 2.3% in July, 1.6% in August and 5.5% in September. Transient revenue, which makes up about 76% of the room night demand for our total portfolio, was down 2.1% compared to the prior year, with demand up 2%, while ADR declined 4%.

Group revenues decreased 10.8%, with ADR down 3.7% and group room nights declining 7.4%. Over 70% of the decline in group room nights and group revenues in the quarter occurred in San Francisco. During the quarter, total revenues declined by just 0.3%, better than our 3.1% RevPAR decline.

This was primarily due to a solid increase in food and beverage revenues in the quarter, growing 4.7% or $1.9 million. The increases in F&B were driven by the continued ramp up of Dirty Habit at Hotel Monaco, Washington DC, as well as solid growth in banquet and catering revenue at Intercontinental Buckhead and Union Station National.

Rental and other revenues also grew at a healthy rate in the third quarter, increasing 19.3% or $2.1 million versus the prior year. Same property EBITDA declined $3.5 million during the quarter to $74.7 million, which was $0.8 million above our outlook.

Our same property EBITDA margin declined 164 basis points, which is better than our outlook of a 200 to 250 basis point decline in the quarter. Despite the margin decline, operating expenses were well controlled, increasing only 2.4%.

However, part of this limited expense growth comes from the benefit of a one-time $1.2 million true up of real estate taxes at one of our San Francisco properties following the finalization of our initial post-acquisition assessment value.

Notwithstanding this benefit, overall our hotel teams and our asset managers continue to implement our best practices, as well as find new ways to operate more efficiently.

The hotel EBITDA percentage growth leaders in the third quarter were Hotel Colonnade Coral Gables; Union Station Nashville, Hotel Zoe San Francisco and Hotel Zeppelin San Francisco. Year to date same property RevPAR has increased 2.8%.

Same property total revenues have declined 1.5% and same property expenses have increased just 1% despite the above inflationary pressures on wages and benefits that we are seeing across our markets.

We estimate the disruptions from renovations negatively impacted our year to date RevPAR growth by 180 basis points and one time market specific issues such as the Moscone Center expansion, negatively impacted portfolio wide RevPAR growth by an additional 280 basis points for a total of 460 basis points.

Same property EBITDA has declined 5.9% or $12.5 million, with our hotels in San Francisco accounting for $7.4 million or about 60% of this decline. Now let’s shift our focus to our capital market activities since we last updated you during our second quarter call.

After the end of the third quarter on October 13, we successfully refinanced and extended our $450 million unsecured credit facility, as well as our unsecured term loans comprising $625 million.

As part of this refinancing, we extended the maturity of our credit facility and $300 million of term loans out to 2023, as well as extending a portion of one of our existing term loans out to 2024.

As part of this refinancing, we achieved a reduction in our overall interest rates, which we estimate will reduce our annual interest cost by between $500,000 and $1 million. We also now have greater flexibility under several of our financial and operating covenants.

We’re pleased with the outcome of this financing and appreciate the strong support we continue to receive from our banker. As of September 30, we had $30 million outstanding on our $450 million unsecured credit facility. Our fixed charge ratio is 3.6 times. Our debt to EBITDA was 3.6 times and we have no debt maturities until 2020.

Our current outstanding debt, 87% is at fixed rates and the remaining 13% is floating.

Focusing now on our capital reinvestment projects, during the third quarter, we invested $16.2 million and year to date, we have invested $63.5 million in our portfolio, with much of the capital related to the renovation and repositioning projects at Hotel Zoe San Francisco, Revere Hotel Boston Common, Hotel Palomar Los Angeles Beverly Hills, and the Gulf Tower renovation at LaPlaya.

Relating to LaPlaya, we want to provide you with an update on the restoration and reopening of the resort following Hurricane Irma.

Although the overall damage sustained at the resort was not meaningful, the water infiltration was significant and LaPlaya remains largely closed now as we conduct repair and remediation work, in addition to completing the renovation of the Gulf Tower that we started this summer.

We are currently striving to reopen this resort in mid to late November, with the public areas repaired and renovated.

We expect to have most of the rooms in the beach house and Bay Tower completed and available at that time, with the rooms in the Gulf Tower that were being renovated before the storm completed in phases between late December and early Q1 2018.

The biggest challenges continue to be the availability of materials, contractors, FF&E and the timeliness of county inspectors and permits.

Based on our comprehensive review of the resort with our property adjusters and property - physical property experts, we currently estimate that the cost to remediate, repair, replace and clean up at LaPlaya will be between $12 million and $15 million. This estimate could increase as we progress through the remediation program.

In the third quarter, we had property losses of $10 million at LaPlaya. However, we believe we will largely recover this loss through our property insurance program after our $2.8 million property insurance deductible. In addition, we incurred approximately $400,000 of additional costs relating to the closure of LaPlaya following the hurricane.

Together, we reflected this combined $3.2 million in our impairment and other losses line item on our income statement. We added back this $3.2 million adjusted EBITDA to adjusted EBITDA and adjusted FFO in Q3. In addition, we tend to add back the amounts that we estimate won't be collected under our BI program to adjusted EBITDA and FFO in Q4.

When we do receive our proceeds from our interruption insurance, which is not likely be finalized until 2018, we will similarly reflect this amount in our financial statements. And as a point of reference, we have more than $50 million of flood insurance coverage and $250 million of windstorm coverage.

In addition, we also have $50 million of business interruption insurance coverage, with an approximate $1.1 million deductible for business interruption losses. So we don't have any concern about the adequacy of our overall insurance coverage.

So with that update on our financials and operating results, I would now like to turn the call over to Jon to provide more color on the recently completed quarter, as well as our outlook for the remainder of 2017.

Jon?.

Thanks, Ray. So let me begin with the macro. Most economic statistics continue to improve and have been improving since last fall. These include employment growth, corporate profits and consumer confidence, among others.

GDP growth estimates for the world have also increased for 2017 and 2018, supported by stronger synchronized growth in most regions around the world. This year, business investment, which had been a lagger, has also begun to show better growth again.

Despite these stronger economic statistics, our quandary is that our industry is yet to see any meaningful improvements in demand despite historical correlations, suggesting we would have benefited by now.

Nevertheless, the economy continues to maintain modest annual growth, with healthy employment gains and our industry continues to experience modest growth in overall demand.

On an equally positive note for the intermediate term future, though not a benefit for next year, construction starts in the US have slowed due to a combination of a more challenging environment for obtaining construction financing, significant increases in construction and development costs, and certainly an overall softening in the underlying operating business as RevPAR gains have moderated across the industry to roughly inflationary gains.

And a growing number of major metropolitan markets are experiencing RevPAR declines. In fact, nine of the top 25 markets as defined by Smith Travel, suffered RevPAR declines year to date, with 13 of the top 25 markets declining in the third quarter.

As it relates to supply growth, we currently expect the rate of supply growth to top out in the urban markets in 2018 in general. And for the industry, we expect supply growth to peak in 2019.

One other positive that's occurred, which if it continues should help our industry and our business, is that the dollar is falling significantly from its peak earlier this year following the election. The dollar is currently down a little over 8% this year.

This should lead, all things being equal, to more international inbound travel in the future, as we saw declines in international inbound travel last year as a result of the dollar's previous run up.

Unfortunately, while we continue to see increased global travel due to stronger economies around the world, all things aren't equal and the US has not been participating as much as it should be, due to non-economic political factors that are acting as headwinds to increased international inbound travel. We hope these abate.

As for our industries performance in the quarter, it was mostly as expected, but for the pluses and minuses from the hurricanes in Texas and Florida. Industry demand was better than supply growth in Q3, primarily due to a better than expected September, which was likely a result of the benefits in Houston and Texas following the hurricane.

In fact, Houston's robust growth following Hurricane Harvey added over 60 basis points to the industry's 3.3% demand growth for September. For the quarter, demand was up 2.4%, a deceleration compared to Q1’s 2.8%, but up slightly to Q2’s 2.3%, even with the shift of the Jewish holidays into September this year from October last year.

Industry supply growth in the third quarter ticked up marginally to 1.9% as compared to the first half’s 1.8%.

This roughly flat trend of industry supply growth continues to surprise us and is likely a result of construction schedules stretching out even more due to both shortages of construction labor and overwhelmed city building and inspection departments.

And as a result of the two major hurricanes, we expect that demand for construction labor will increase further and exacerbate the already longer construction schedules. With occupancy increasing 0.5% and ADR rising 1.4%, RevPAR for the industry increased 1.9% in the quarter, down from the first half’s 3% growth and last quarter's 2.7%.

The other notable observations from the quarter were that business demand growth remained modest, but relatively stable, though slightly lower due to the holiday shift in September. And leisure travel remained healthy in the quarter.

Transient outperformed group overall for the industry in the third quarter and has outperformed for the whole year so far. For Pebblebrook, the trends were similar. So we had some additional headwinds in the quarter, most but not all of which were previously communicated in detail.

What was unexpected in the quarter were the hurricanes, wildfires and even a hepatitis outbreak that all had a negative impact on our demand, not only in the directly affected markets like South Florida, the Columbia River Gorge and San Diego, but throughout the country at our properties due to cancellations and no shows from people and businesses directly affected by the events, including as a result of their inability to travel out of their affected regions.

In total, we estimate that we lost $900,000 in room revenues or roughly 30 basis points in same property hotel RevPAR growth in the quarter, another $800,000 in other revenues, including food and beverage and just shy of $1 million in EBITDA. As expected, our performance in San Francisco in Q3 was not as bad as Q2, as was also the case for the city.

The biggest negative impact came from the slow ramp up of Hotel Zoe due to the delays in the completion of the renovation late last quarter. Hotel Zoe’s RevPAR in Q3 declined 21.6%, with the majority of it coming from declines in occupancy.

The hotel has been very well received by our customers, so we fully expect to see significant improvement next year. We also had significant under-performance at Sir Francis Drake and (Oregon) Fisherman's Wharf, though we expected these challenges and took them into account in our outlook.

Both properties suffered from an inability to build a group base further out, and therefore they underperformed their concepting in the market. We're working hard at both properties with our operators to right these ships.

In general, the San Francisco market performed a little better than we thought, as the strength of the underlying economy locally helped offset the negative effect of the Moscone closures.

The good news about the impact from Moscone this year, as well as our renovations, particularly at Hotel Zoe, is that they make for much easier comparisons next year and in 2019. And citywide bookings in San Francisco are positive for 2018.

While still way down from 2016 due to the ongoing renovation and expansion that is scheduled to be completed at the end of next year, they're up roughly 20% in room nights, along with 11 more compression days with 5,000 or more citywide room nights on the books.

In 2019, citywide room nights on the books are up another 62% from what's currently on the books for 2018. With compression days of 5,000 or more room nights up by a whopping 102% were up from n41 days in 2018 to 83 days in 2019. These are all record numbers and materially surpass the strongest prior years in San Francisco's history.

For Pebblebrook, we should also see continued market share gains due to recent renovations in San Francisco at Hotel Zoe, Hotel Zeppelin and Hotel Zephyr, as well as improved relative performance at Hotel Zelos due to better management.

In addition to the recently transformed hotels Zoe, Zeppelin and Zephyr in San Francisco, the completion of our other transformations at Hotel Revere Boston Common and Hotel Palomar Beverly Hills and the upcoming completion of the renovation of the Gulf Tower at LaPlaya in Naples early next year, should drive significant upside and relative performance over the next few years.

Continuing ramp up from the completion of similar renovations and transformations at W Los Angeles West Beverly Hills, Vintage Portland, Union Station Nashville, Monaco DC and Hotel Colonnade Coral Gables, should also enhance our performance in the next couple of years.

At the four transformational redevelopments completed in 2016, Hotel Zeppelin San Francisco, Union Station Nashville, Monaco DC, including Dirty Habit, and Hotel Colonnade Coral Gables, EBITDA rose by $2 million in the third quarter.

That brings the total EBITDA increase for 2016 redevelopments to $5.7 million, already above our outlook provided at the beginning of the year of $5.5 million. While these are very encouraging numbers, there is more to come.

When we look at the portfolio by coast, RevPAR at our West Coast hotels experienced a RevPAR decline of 3.6%, while RevPAR at our East Coast hotels, excluding LaPlaya in Naples, declined by 5%. We outperformed in five of our markets when comparing to the urban RevPAR performance of each particular market, and underperformed in seven markets.

Notable outperformance was in Portland, Coral Gables, Nashville and Boston.

Notable under-performance occurred in San Francisco as described, Seattle where our Kimptons are struggling, Washington DC also at Kimpton, West LA, particularly the Palomar and the Mondrian and in Buckhead at our Intercontinental where we've recently changed out the key leadership at the hotel.

As of the Intercon, we have made changes or are in the process of making leadership changes at many of our hotels that have been underperforming.

The industry's third quarter RevPAR performance does not change our industry RevPAR growth forecast of 2.3 - 2% to 3% for the year and we continue to believe it will likely end the year towards the middle of the range.

RevPAR growth for the urban markets has underperformed the industry year to date by 150 basis points and it underperformed in Q3 by 230 basis points, all as we expected. Interestingly, if you remove both San Francisco urban and Manhattan from the third quarter numbers, urban would have been almost 53 basis points better.

So you can see that those two markets, because of their large sizes and high octane season rates, have a disproportionate impact on the overall urban statistics reported by Smith Travel.

The difficult comparisons in Cleveland and Philadelphia in the third quarter due to the political conventions last year, also worsened the performance of the star urban markets.

For Pebblebrook, our outlook for same hotel RevPAR and EBITDA, takes into account the removal of LaPlaya from both Q3 and Q4 due to the hotel's closure beginning in early September due to hurricane Irma. LaPlaya’s operating numbers are now taken into account in the overall corporate performance.

Our adjusted EBITDA and adjusted FFO numbers, reflect the company's performance without the negative impact to the balance sheet and without the loss from the deductible related to the physical property, but do include the decline in EBITDA due to LaPlaya being closed during the quarter.

Accounting for the exclusion of LaPlaya from our outlook, for our same hotel EBITDA numbers, our outlook range for Q4 remains the same as our previous implied outlook, and the upper end of our outlook for the entire year increases by the amount of the beat in Q3, which equaled $800,000 and the lower end increases by $3.8 million.

Then taking into account the reduction of $5 million EBITDA in Q4 at LaPlaya due to the property’s closure and delay in the completion of the renovation and reopening of the Gulf Tower rooms due to the hurricane, our outlook range for adjusted EBITDA is reduced by the $5 million impact at LaPlaya in Q4, then partially offset by the Q3 beat of $3.5 million at the top of the range, and more than offset by the $6.5 million Q3 beat at the bottom of the range.

Our outlook for adjusted FFO goes through the same machinations, with the upper end of the range increasing by the amount of the $0.06 beat in the third quarter, subsequently reduced by $0.07 for the fourth quarter impact at LaPlaya. Our outlook range for same hotel RevPAR for the year remains the same at minus 1% to minus 2%.

However, we now expect to be at the bottom of the range.

This is due to the negative impact of the lost revenues due to the various natural disasters, including the ongoing wildfires outside of San Francisco in October, as well as the removal of LaPlaya from the comparable numbers where we've been forecasting strong RevPAR growth in Q4 following the originally planned completion of LaPlaya’s renovation at the end of the third quarter and the easy comparison to last year's fourth quarter when the resort was also under renovation.

For Q4, our RevPAR range is now minus 0.5% to growth of 1.5%.

Before we complete our prepared remarks, I'd like to make a special mention of our operating teams at both LaPlaya in Naples and Hotel Colonnade in Coral Gables and the incredible efforts they made beyond the call of duty, to ensure the safety of our guests and our associates, protect the value of our hotels and get back up and running as quickly as possible.

So again, thank you. Finally, despite all of the natural disasters we've been facing recently, as the R.E.M. song says, we still feel fine. That completes our prepared remarks. We’d now be happy to answer whatever questions you may have. Michelle, please proceed with the Q&A..

[Operator Instructions] Our first question comes from the line of Rich Hightower with Evercore. Please proceed with question. .

Good morning guys. Jon, I wanted to go back to part of your prepared remarks where you ran through the list of underperforming hotels in the portfolio. And there seems to be a fairly consistent theme there with respect to the managers at several of those hotels.

Can you talk about what's going on with Kimpton right now and then maybe how the combination with IHG is going from your perspective? And then also, while we're on that topic, talk about Starwood and Marriott with respect to Pebblebrook as well. .

Sure. So of our seven Kimpton hotels, we've been losing share at five of them this year. Now, some of that has been impacted as an example by the renovation we had at Palomar, but we've been losing share since the renovation. And we believe at this point we should be gaining share. So I do think in many cases, it's a coincidence.

We had - we have different kinds of leadership issues at various properties, including issues with some folks who've been very successful in the past, but perhaps it's time for new scenery. And so we've been working closely with Kimpton to make those changes. We’ve made most of them at this point. There are still a couple under evaluation.

But I also think that there probably is some distraction from this integration that they're working on, as well as we've had struggles in Buckhead for over a year now where we've also made changes with the performance of that property compared to its competition in the marketplace.

So I don't know if there's something going on overall with IHG or more likely it's just a set of coincidences within the portfolio. I think as it relates to the Starwood Marriott merger, as the most recent winner of the Partnership Hall of Fame for Pebblebrook, we feel fine as our song said.

But that's probably not what you're getting at with your question. So I would say specifically related to the integration, again I think it's still fairly early in the integration at the property level. I think from a relationship standpoint, it's been going very well. Marriott’s been very responsive.

They’ve been very flexible as appropriate, and we've been working very closely with them on issues whenever they might come up within the portfolio, as well as the broader industry issues. So we haven't seen much benefit from the integration in terms of cost savings. We’ve been told that they're coming, but again we haven't seen them yet. .

All right. That's very helpful color. Second and final question here, just with respect to your outlook for supply for Pebblebrook’s portfolio, it sounds like you guys are maybe a little bit more bullish than your competitor that reported earlier I guess last week.

Just talk about your forecast for ’18 and maybe ’19 and maybe a little more color than you gave in the prepared comments. And also talk about the methodology that Pebblebrook uses to come up with some of those forecasts, if you don't mind..

Sure. Well, we don’t - we obviously don't have a forecast for either the industry or Pebblebrook in terms of RevPAR growth for next year yet. We haven't even gotten our first proposed budget for next year. Those will begin to come in early November.

But when we look at the supply issue, as we've stated in the past, we think urban supply growth is going to peak in 2018. I would say that our numbers have historically come down from our early forecasts, and even our supply growth for the urban markets for this year have come down from where we started the year.

But for us, in terms of the weighted market average as an example, I think we - the beginning of the year we were talking about 2017 being upwards of 2.8% or 2.9%. Our current forecast is 2.4% for the year. So marginally higher than the industry, but certainly with healthy demand those markets are still okay in general.

When we look at weighted market supply growth for us for next year, our current forecast is in the upper threes, about 3.7% or 3.8%.

Again, I would expect those will come down a little bit from delays in deliveries throughout 2018, which has been the trend, but even in the mid-threes, obviously that's a meaningful increase from where we expect the industry to be in the low twos. So the differential gets a little wider in ’18 with the urban markets.

It is driven by increases in a few markets like Portland, which we have forecasted up 10%, Nashville which is up 13%. At least our forecast is Seattle, which is up 7% and Hollywood Beverly Hills up 4.8%, DC at 4.1%.

But we have some much healthier markets with Buckhead at 1.5, Boston at 2.5, Minneapolis at 2.3, San Diego at one, San Francisco at 2.4, Santa Monica at 1.2. So there's obviously a fairly large variance by market. These are our own forecasts. We walk every market throughout the year.

We estimate the completions based upon our understanding of construction schedules. We do talk to the developers, but I would tell you, we generally dismiss what they tell us, as well as the brands because they tend to be overly optimistic about the time of deliveries. And we look at what the market experiences on the deliveries.

And our numbers are based upon the way they will show up in Smith Travel. So we're not talking about 1,000 rooms will open in a market in ’18. It really depends upon when they come in the market. So a property that comes in on January 1 will be 100% for the year. A property that comes in on July 1 is going to be half as much of an addition to supply.

And obviously something that comes in in December is little to no impact on the market. And that's the way the Smith Travel numbers work obviously because it's based upon daily availability. So we do think urban peaks in ’18. We think it peaks in our markets in ’18. Our weighted average market supply growth for ‘19 right now is a little under 2.5%.

So in all likelihood, we think the industry is going to be there or higher in ’19..

That's great. Thanks, Jon..

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question. .

Good morning guys. You’ve done a good job growing food and beverage revenues across the portfolio.

Are there additional opportunities for you to start new restaurants or do lease transactions to grow that, widen that even further next year?.

Yes, good question, Anthony. F&B in our case is a little more sophisticated and complicated then maybe for others, and certainly for the more commodity products. We have a lot more going on within the portfolio.

Yes, we do have some re-concepting being done and we’ll be lapping some re-openings such as Outlier at the Monaco in Seattle, which opened in the first quarter and is in ramp up. We’re redoing the restaurant at Vintage Portland this winter. And so we should lap and get better results in the rest of 2018.

But the other thing that we've been doing primarily with these re-conceptings is we're creating restaurants that have great event spaces, that are easily sub dividable, where we're doing a lot of private dining and more importantly, private events within the spaces, most of which are paying room rentals.

So we've really converted our space in our restaurants into multi-purpose spaces where we can drive more revenue and even more importantly, much more profitable revenue, because as you can imagine, if we make $400,000 in room rental in a little game room above the lobby at Hotel Zetta in San Francisco, there are very few expenses that go against that room rental.

And so it's highly profitable and those should continue to help our margins. The other thing I would say is that it's an off year for us from a group perspective, particularly at our group houses like the Intercontinental, the Westin Gaslamp and the Sir Francis Drake.

And we would expect that group would be a bigger portion of our overall segmentation next year as a company. And as a result of that, we would expect that to enhance food and beverage revenues. .

What's your group pace up for next year?.

So I'd love to tell you it's up, but it's down currently. So group is down about 15,000 room nights or 8% for us. Rate is up 5.7%, which is the most encouraging aspect of it. And total group revenue is down 2.9%.

Got it. And just one more for me.

As the (Starwood) gets closer to your NAV estimate, does buying assets become more interesting to you are we too late in the cycle for that?.

Well, I think it would take more than just being in our NAV range. I think we really need a premium currency to offset the additional risk involved in buying assets this late in the cycle.

Now, we don't know when the cycle is going to end, but we do know we're eight and a half years into the recovery cycle and we much rather be a buyer in the first five years of a recovery cycle. So it would take more than just being in the range, Anthony.

And as you know, I mean we have been buying assets, but we've been buying our own assets when the opportunity presents itself in the public market..

That’s it for me. Thank you. .

Thank you. Our next question comes from the line of Jeff Donnelly with Wells Fargo. Please proceed with your question..

Good morning guys. Jon, just want to build on Rich's earlier question. I was just trying to figure out how you think about, I guess I would say the 2018 urban RevPAR potential. I think this year you have it around a 0.5% to 1.5%. As you think about ‘18 in just broad strokes, I'm curious what you think the major sort of puts and takes are to that range. .

Well, let's see. Supply and demand would be the biggest puts and takes. And I know you're looking for something deeper than that, Jeff. But when we think about supply, obviously it's going to be up in the urban markets. And when we think about demand, two things generally happen.

One is, you do tend to generate the demand with the additional supply in the urban markets as you can draw folks into the city from the suburban markets, but it tends to be at the expense of rate. And so we would expect, I don't know, that ‘18 in the urban markets is probably not likely to be better on average.

However, you do have a much better situation in San Francisco. And so in San Francisco, our guess right now, and again it's very early.

As I said, we don't have budgets, but we would think, just with the citywide business and the strength of the underlying economy, that we'd be looking at 2% to 3% or 2% to 4% RevPAR growth next year, including ADR growth in the market. So I would say in general, we're hopeful that demand will pick up the slack next year.

And while we think the urban markets are likely to underperform the industry next year, hopefully it'll be by less..

Do you think the comparison for the inauguration in DC is going to offset, if you will, some of the benefits that you see in San Francisco? And how do you think about the, I guess we'll say, hurricane impacted markets? Certainly in 2018 there will be maybe more room nights open producing revenue, but at the same time, there's certainly some disruptive.

Are there some gains also had this year too of hotels that sort of absorbed some extra business? Just curious if you kind of think they're a net positive next year..

Yes. I mean that's a hard one to figure, Jeff. I think one of the struggles, at least for the urban markets is that New York has more supply next year than it had this year. So we think New York's probably going to be more challenging and it has a heavier weight overall on the urban market.

But it's - and inauguration, you're right, has some negative impact. But as an example, Super Bowl in Minneapolis is probably a little better than Super Bowl down in the Southwest where it was this year..

And you mentioned repurchases of shares. I'm just curious, you weren’t as active this most recent quarter.

Is that just strictly driven by the price approaching maybe your sort of threshold where you’d be a buyer or are there other factors in that?.

Well, there could be other factors. We’re not going to comment on those, but we do, like every company, we have blackout periods that we have to abide by that are typical. And then yes, price - as we've said, price is a factor. We're not a buyer of our stock at any price.

We’re a buyer of our stock at a discount and this is an annual cash flow being generated. This is one time disposition proceeds that we're generating at certain pricing. And so the arbitrage opportunity would continue to be if the stock is attractive at a discount, versus it trading higher. If it trades higher, great.

That's good for our shareholders and over the long term, that's what we're trying to achieve. But we're - we look at buying a stock back as an opportunity play as opposed to an ongoing capital allocation decision. .

And just one last one concerning dispositions really, but debt markets feel a little looser and friendlier I guess of late, certainly compared to a year ago. And I'm just curious if you feel that if there's been a discernible change in the quality of disposition market.

I mean are there sort of broader, deeper buyer market? Is that - is I guess my instinct right? Is that maybe a little easier to come by at better terms? Just curious if you think that's been helping pricing or transaction activity?.

Yes. I do think it's been helping when you compare to a year ago. I mean the markets have been pretty good for the last six or nine months for most of this year. But they're definitely better this year than they were last year. And the buyer pool is deeper because of that.

And the biggest impact on the buyer pool, beyond just availability of debt, which is readily available from all of the traditional sources is, what’s the leverage level? And you're right, leverage has improved over the last year in terms of availability.

And of course, if you really want to lever up, there's plenty of mezzanine capital available today. It is less available however for new construction. .

Okay. Yes, thanks guys. .

Thank you. Our next question comes from the line of Michael Bellisario with Robert W. Baird Please proceed with your question. .

Good morning guys.

Jon, is it fair to assume that that NAV range you gave 90 days ago is unchanged today?.

Correct..

And then maybe the opposite. We would talk a little bit about selling assets, just focus on the sell side. I mean are you a little less motivated to sell hotels today now that your stock is higher? I know your view of the cycle hasn't changed too, too much, but obviously things change when your stock goes from 31 to 37 pretty quickly. .

Yes. I mean I think that's a fair assumption that where the stock is, is a factor of the consideration, one of the considerations that we think about when we decide when to sell. And so yes, if the stock's a lot higher, that's one consideration, maybe one less in the - on the side of selling.

But there are other considerations late in the cycle opportunity, continued disconnect in some cases with the private value versus the public value. It could be intermediate term view of a particular market that would cause us to be more motivated regardless of perhaps where the stock is. So it's one of a number of factors we use.

It's not the only one, but of course it does have some impact..

Got you.

And then just circling back to the group page comments, how do those numbers look excluding San Francisco for 2018?.

Well, they look better. Well, I take it back. They're worse without San Francisco.

Do we have those?.

Maybe while you're looking for those numbers, maybe just qualitatively, at San Francisco, is pace in line with your expectations or are you a little disappointed with where things are shaping up so far looking out to ’18?.

Yes. We’re - so I don't - we don't have the calculation. We can get that to you. San Francisco for us for ‘18 for group is up 5.5%. It’s about 1,600 room nights. Rate is up almost $40. A good piece of that is J.P.

Morgan Healthcare in January where we believed that we have underperformed based on our pricing, and we've gotten more aggressive this year with our pricing so far with good success. So our group revenue in San Francisco is up 19% for next year. In terms of overall yes, we're a little disappointed.

I think that the issue for us is we have a couple of properties like the Intercontinental, like the Drake where we’re in the process of solving group sales issues through leadership changes and changes at the sales person level. And we would hope those will kick in. I know at the Intercon.

Things are beginning to get better and we're beginning to narrow the pace deficit that we have there. With a small portfolio like we have and with so much of it being booked in the year for the year, I mean I don't think we go into the year with even half of the rooms on the books typically for group in our portfolio. So much of it is short term.

So I would say frankly the thing most encouraging is that rate is up 5.7%, because rates hard to make up for if you lay your base at weak rates. .

Got it. So it sounds like the disappointment is more kind of asset specific than anything on the underlying fundamental side of the business.

Is that fair?.

Yes. .

Got it. That's all for me. Thanks..

Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question..

Good morning folks.

Jon, on the Intercon on Kimpton news out there, have they integrated the Kimpton in the Intercon to the point where they’ve negotiated new take rates for the OTAs or they’re still up in the high teens, low 20s?.

Some of it we're getting the Intercon rates that are lower and some of it, we’re not. .

Will you ultimately capture it on all the hotels?.

We need to integrate the systems, we're told in order to do that, and we're in the process of those discussions..

Got you. On San Francisco, can you just A - two part question. Any delays you’re aware of in the construction activities going on at Moscone? And then B, how do you see the ramp of group business in San Francisco over the course of the year? I assume there are more bigger group of insulator in the year than earlier in the year.

Just help us understand how that lays out..

Sure. So we - as far as we are aware of, the latest reports, which we get monthly from the authority, that they've informed us of no delays in the completion of the renovation and expansion. So, so far so good and they've been very open in the past.

So when there were issues, they don't mess around because they’ve got to talk to the clients as well, both the hotel clients as well as the - those who are putting on the conventions.

As it relates to how it lays out quarterly, the best quarters on a year over year basis are two and three and that's not surprising because two of the three buildings were closed for Q2 and Q3. And so they are able to accommodate three buildings citywide and work the renovation and expansion around those next year.

And I believe that sales force moves back into the third quarter next year, works in the fourth quarter this year. So the fourth quarter is a little bit weaker. The first quarter is a little weaker because there was some accommodation of second quarter business in Q1 this year, and perhaps J.P. Morgan will make up for it from a rate perspective.

But Q1's probably the weakest quarter of the four. .

Okay. That’s helpful..

Two and two on a year over year basis are the strongest..

That's helpful, Jon. Final question for me. You started your commentary talking about expense growth, hotel expense growth and cost containment.

As you look ahead to next year, are we in a 2.5% percent environment, 3% environment? And how does things like insurance costs and real estate taxes impact that?.

Sure. So when you think about the biggest component, which is wages and benefits, we're probably in a 3% plus world next year in our markets. That doesn't take into account changing the way we do business, whether it's in the food and beverage area or in the way we operate the hotels.

So it doesn't take into account new ways of operating more efficiently, which we continue to pursue. We think most of the other costs are generally well below that. Our effort is focused on trying to keep those down to 1% increase or less. And then when you get to real estate taxes, keep in mind half of our portfolio is in California.

So for properties that have been reassessed, you're looking at a maximum 2% increase in those. And in most of our markets, we've gotten out of the most aggressive tax growth markets, New York for one where taxes have been growing much, much faster than inflation.

And we're not in Chicago, which everybody knows is financially stressed as a city and been raising taxes pretty aggressively.

So I think from a tax perspective, we don't have an unusual amount of pressure, nor frankly do we have values going up and therefore we don't have - we don't think in many cases, we don't have the assessment pressure that you’d have in a market where values are going up.

And then as it relates to insurance, we're not up until what?.

April, May time we go through our negotiations. So Bill, I think obviously we don't want to negotiate against ourselves or our expectations, but I think if you're a property owner and you weren’t impacted by any of these storms or fires, the environment is probably zero to 5%. If you were impacted by storms, it’s 5% or more.

And clearly, if you're a big owner in markets like Houston, the Keys, Caribbean or even northern California, that could be certainly double digit rates. So we'll continue working that process. As you know, last several years we've had actually declines in insurance. Our insurance costs this year declined about 5%.

So we've had a very good environment and insurance companies are healthy. So we'll do our best as we renegotiate that in the spring.

Yes. I mean and I think, Bill, those numbers may even come down as we get further away from these disasters. The amount of capital available in the insurance sector is still very high and as we all know, global markets are up strongly. And so the insurance companies are doing very well from their balance sheets. .

Right. Appreciate the comments. Thank you..

Thank you. Our next question comes from the line of Wes Golladay with RBC Capital Markets Please proceed with your question..

Good morning guys.

With all the initiatives on the non-room revenue efforts, do you expect that to grow faster than room revenue next year?.

Yes..

Okay.

And then looking at the supply you gave the markets, Portland obviously has a lot of supply, but is there any particular market where you see more disruptive supply of large projects or just the type of owner might be more aggressive?.

That's an interesting question. I'm not sure who's the most aggressive in a market. We typically prefer to see big properties and properties that have meeting space come into a market. Those bring more demand on a per room basis then select service, which tends to be more parasitical in a market as opposed to bringing demand into the market.

So I think for most of our markets, unfortunately a lot of the supply growth is of that sort of parasitical nature of smaller hotels, maybe with the exception of a Nashville interestingly where they have a couple of larger hotels with significant meeting space because of the success of the convention authority there.

But no markets jump out at us as being unique, Wes..

Okay. And then lastly, for the business traveler, still that low growth mode, but if you drill down a little bit deeper, are you seeing much variance in type of category maybe as the retailer exposed names versus the defense names.

Are they traveling more? Any extra granular detail you have there?.

Well, yes. I mean it's what you would expect, that the industries that are weaker or suffering like general retail, fashion in general, financial services, your industry, those tend to be softer and more focused on cost controls, particularly if not limiting travel. And I don't think in general there are hard limits on travel.

There are suggestions for thoughtful travel, but probably the biggest issue continues to be the enforcement of the - many of the corporations who will say to their people, you can't buy up when the standard room of our contract is not available. You’ve got to go to a different hotel.

And so that's how corporate rates contracted at 3% or 4% increases can turn into negative average rates because we're not generating as many premium rooms out of our corporate accounts as we were in prior years. I mean obviously, you could also be losing business with higher rates and picking up business with lower rates.

I think there's less of that, Wes because frankly a lot of your better rates, your lower rates, better for the customer, not as good for us. But many of those tend to be in the financial services industry and those are our softer accounts.

So it has a lot more to do with the unwillingness or it being unallowed - not allowed to trade up when the standard rooms at the base rate are closed down..

Okay.

And lastly just from a geographical perspective, are you seeing more demand from the business travel on the West Coast versus your East Coast properties?.

Oh yes. Much stronger demand on the West Coast, much healthier overall industry, set of industries out there, versus on the East Coast..

Okay. Thanks a lot. .

Thank you. Our next question comes from the line of Jim Sullivan with BTIG. Please proceed with your question. .

Thank you. Two questions, Jon. You've talked in the past about the potential sale of the retail space at the Zephyr when you will complete the work there and lease it up. But I wonder if you could just remind us what kind of investment spend you're undertaking there and when you think you're probably going to be complete there..

Yes. so the investment spend is about $10 million between the fully renovated frontage for all of the retail space on the three sides of the building, and including tenant improvements, expected tenant improvements and commissions for leasing up that retail space.

We are - between letters of intent and signed leases, we are about two thirds of the way through the available space, which is about 18,000, 19,000 feet in total that we’re releasing. And we expect the renovation to be completed in the first quarter as all the space becomes available.

And we hope that we will be fully leased up or pretty close to being fully leased at that point and probably not fully occupied and rent paying for another four months or so. .

Okay. And then secondly for me, when you think about the comparison upcoming in San Francisco versus prior peak, I wonder if you could just touch on and update us on what I'll call kind of Airbnb capture.

And by that I mean that a couple of years ago when the regulations either didn't exist or weren’t enforced in San Francisco, there was concern about the amount of business that was lost to Airbnb.

And I'm just curious if you can update us if you have any data or a sense with how that capture rate is today and so that if we think about sizing and comparing future rebound versus prior peak, we can - that should be a factor we should also take into account. .

So we don't have any Airbnb data on capture. I don't - I'm not sure what the good sources are out there. There’s a lot of different sources. I don't know how good they actually are, but we don't have any here.

Anecdotally, I would tell you that as far as we know, the deal - the settlement deal between Airbnb and the city doesn't kick in until the beginning of next year when supposedly by settlement, they can only lease folks who have been registered with the city. The only way to get registered is for the unit to be legal.

And I'm sure there will be people who misrepresent the situation in terms of legal or not. But we would expect that to bring down the number of listings in the market, both from Airbnb and other short term online rental management companies..

And just by extension, if you think of some of the other markets, in the past you've touched on those markets where regulation efforts were ramping up or being more aggressive.

Are there any markets that you can cite where the imposition of tougher regulations has clearly slowed or reversed some of the Airbnb capture?.

Yes. I mean again I don't - we don't have the data. What’s been reported for New York has been that the number of listings and capture has gone down in the city, but I don't know how reliable that information is. .

Okay, great. Thanks. .

Thank you. Our next question comes from the line of Tyler Batory with Janney Montgomery Scott. Please proceed with your question..

Thanks. Good morning. Just a few follow up questions on the international business. Can you just remind us what percentage of your mix is international and what the booking window looks like for those customers? Then also, I don't know if there’s any specific markets you can call out as being especially weak on the international front. .

Sure. So for our portfolio, on average we think it's somewhere between 10% and 12% across the portfolio. It was higher when we owned in New York because New York probably runs closer to 35% or 40% international business, but we're not there any longer. So that number has come down within our portfolio.

Interestingly, if you look at the commerce data which is now out through May, overseas international travel is down 5%. The worst regions are the Middle East, which shouldn't be a surprise to anyone, both because of the - or our public rhetoric and efforts on restricting travel from various countries in the Middle East.

While the travel may not be coming from those countries, it has an overall impact seemingly on travel to the US. Travel - about, I think 80% of travel is fully discretionary, primarily leisure.

And so if we're making it more difficult for folks to come to the US, which we are both from a rhetoric perspective, as well as we believe from Visa processing, the number of agents available, how long it takes, the number of rejections, the number of requests for additional answers or additional information, we believe that it's gotten much more challenging, and we think that's coming through in that information and in the number of people coming here.

So I'll give you one good example. LA in the summertime draws a lot of folks from the Middle East, very high end folks who come for three or four weeks at a time, spend a lot of money in the market and the benefits to Beverly Hills and even West Hollywood from those customers permeates the whole market and gives a great base.

The estimates are that that business was down over 25% in the summer, and that's a big part of the softness that we saw in the LA market. So that's just one example. But when you look at the data that our government’s providing through the Department of Commerce, there's weakness in the Middle East. There’s weakness in Africa.

There’s weakness in Eastern Europe, significant weakness in South America. And one of the strength originating countries, which was China, which was running at a 15% to 20% annual increase, is now negative.

And so we believe that’s visa processing and we're trying to get the data from the State Department through the industry, but we don't have it yet. .

Okay, great. That's all for me. Thank you..

Thank you. [Operator Instructions] Our final question comes from the line of Lukas Hartwich with Green Street Advisors. Please proceed with your question..

Thanks. Hey guys. Just one more on Moscone.

Do you expect different performance across some markets, so for example in your case, Fisherman's Wharf versus Union Square? Or do you kind of expect all the sub markets to benefit equally?.

Yes. It’s pretty hard to make that differentiation. Interestingly, if you look at this year, they're fairly similar in terms of overall performance in the market. A little bit more renovation down in Fisherman's Wharf as a percentage of the stock versus Union Square. But by and large, the markets have been performing very similarly.

We don't participate in anywhere near the number of conventions down at the Wharf that we do in the city, but filling up the city eliminates a lot of competition for international travel and other leisure travel into the market by having those rooms fill up with group business..

Great. Very helpful. Thank you. .

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Bortz for any closing remarks. .

Thank you, operator. Thanks everyone for your participation. We look forward to updating you early next year..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..