Pebblebrook Hotel Trust

Thank you, Jennifer. Good morning, everyone.

Welcome to our first quarter 2012 Earnings Call and Webcast. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer.

But before we start, let me remind everyone that many of our comments today are considered forward-looking statements under the Federal Securities laws. These statements are subject to numerous risks and uncertainties, as described in our 10-K for 2011 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 27, 2012, and we take no duty to update them later. You can find our SEC reports and our earnings release, which contains reconciliations of non-GAAP financial measures we use on our website at www.pebblebrookhotels.com.

Okay. So, 2012 is off to a great start.

The first quarter performance is better than we expected on all operating metrics. Pro forma RevPAR for the total portfolio climbed 8.4% to $142.34.

This exceeded our outlook for RevPAR growth of 5% to 7% primarily due to better-than-expected performance at many of our recently-renovated hotels. This occurred despite being greater than the anticipated disruptions and lost revenues and our properties under renovation in the quarter.

Quarter portfolio on a monthly basis generated RevPAR increase of 7.5%, February was up 6.8%, and March climbed 10.5%.

Our overall RevPAR gains in the quarter were driven by healthy increases in occupancy, which rose 6% over the prior year to 74.2% with ADR of 2.3%. Occupancy gains outpaced rate gains in the quarter due to the seasonally lower overall occupancy levels and less compression in pricing power that was typical in the first quarter.

As a reminder, our RevPAR in hotel EBITDA results include all of the hotels we owned as of March 31, including 49% of the results in the Manhattan Collection. RevPAR growth in the quarter was led by our properties benefiting from their prior or current renovations, including the Grand Minneapolis, Sir Francis Drake, Affinia Manhattan, Westin Gaslamp, as well as Viceroy Miami.

During the first quarter, we invested approximately $17.4 million into our hotels as part of our capital reinvestment program. This included $5.5 million of Westin Gaslamp, $2.7 million of Sheraton Delfina and $1.9 million at Seattle.

With our healthy RevPAR growth of 8.4% in the quarter, our hotel portfolio generated $17.1 million of pro forma hotel EBITDA and extremely strong 29% increase over the prior year period.

Room revenues increased 10.4% greater than our RevPAR growth due to the added rooms for the Affinia Manhattan reconfiguration and the extra day from leap year. Total revenues increased 7% with expense growth limit of 3.1%.

Our hotel EBITDA margin climbed to robust 314 basis points. The hotel EBITDA growth meters in the first quarter where [indiscernible] has led the pact, followed by Sir Francis Drake, Affinia Manhattan, and Westin Gaslamp.

Turning to our corporate G&A line, we incurred several higher-than-expected charges that reflected in our Q1 results, as well as our revised G&A outlook for the year. Between legal costs related to a new suite of one of our hotels and non-capitalized expenses relating to re-concepting, re-launching initiatives at several of our recently renovated hotels and restaurants, we're looking on additional $1 million in the G&A line item.

Much of this should be onetime and a little over half these expenses were booked in Q1 for the balance to be incurred in Q2 and Q3.

Finally, we expect to incur a onetime termination and transition cost of approximately of $1.1 million in the second quarter related to the change in the hotel manager at the DoubleTree Bethesda. We expect that this change will benefit the hotel's long-term performance.

For adjusted EBITDA purposes, we're adding back this onetime expense to be -- so because of the strong performance of our portfolio and greater than the number of properties this year versus last, we generated adjusted EBITDA of $14 million for the quarter, an increase of $7.6 million or 118% versus last year’s first quarter.

Our adjusted FFO was $5.5 million or $0.11 per share compared with just $3.4 million in the first quarter of 2011 or $0.08 per share. While we made no acquisitions in Q1, a week in the Q2, we were very excited to purchase a 108-room Milano Hotel in San Francisco for a net price of $29.8 million.

This hotel is extremely well located convention center in South of Market submarket, and we're planning a transformational $8 million to $10 million renovation and repositioning of this hotel, which is expected to start in fourth quarter and to be completed by the second quarter of next year.

We brought Viceroy Hotel group to manage the hotel and its repositioning, and we plan to market it under their urban collection label. The hotel will be geared to the 25- to 45-year-old traveler, and we expect the design to be pretty funky and unique in San Francisco.

Given the current condition of the hotel and the pending renovation, we don’t expect the hotel to have any meaningful EBITDA in 2012. However, we do expect the hotel to ramp up fairly dramatically upon the completion of the renovation and repositioning.

Now let’s shift our focus to the capital market activities in first quarter. In mid-January, we successfully refinanced the $35 million CMBS loan secured by the Monaco DC with a new $46 million non-recourse loan at a fixed interest rate of 4.36% for 5 years.

In mid-February, we successfully refinanced the $42 million CMBS loan secured by the Argonaut in San Francisco with a new $47 million non-recourse loan at a fixed interest rate of 4.25% for 5 years.

Also in February, we paid off the $56.1 million loan secured by the Sofitel Philadelphia with proceeds from our credit facility. Since then, we received a claimant for a $50 million loan on a 5 basis non-recourse fixed rate basis.

The loan's fixed interest rate is 3.9% and we expect it to close by the end of May.

We've reflected interest expense associated with this financing in our 2012 revised outlook contained in the yesterday's press release. If this financing doesn’t occur, we will update our outlook accordingly.

As a result of these such transactions, we have no further [indiscernible] in 2012.

During the quarter, we generated $31.9 million in equity during -- through the ATM program, which has utilized an average net price of $23.04 per share. Presently, we have $236 million of consolidated debt on our balance sheet, which includes $25 million outstanding on our $200 million credit facility.

In addition, we have $280.6 million in our consolidated debt, which represents our 49% pro rata interest in the Manhattan Collection.

We currently have cash, cash equivalent and restricted cash of approximately $35.2 million plus another $17.3 million in unconsolidated cash, cash equivalents and restricted cash from our 49% interest in the Manhattan Collection.

Our net debt-to-EBITDA ratio as of March 31 was 4.7x, and our fixed charge ratio is 2.1x. As a reminder, for GAAP purposes, our 49% interest in the $908 million Manhattan Collection joint venture is now consolidated in our financial statements.

However, we believe it's useful to provide highlights of the balance sheet and income statement impact to our company from Manhattan Collection since this is, in fact, how we approach the joint venture, as well as how we manage our overall balance sheet.

I’d now like to turn the call over to Jon to provide a little color on the recently completed quarter. Jon?

Thanks, Ray. So as Ray said, 2012 is off to a very strong start for both the lodging industry and for Pebblebrook.

When we look at the first quarter's overall industry trends, performance continues to be driven by strength in both business transient and leisure travel.

Demand in the U.S. rose a very healthy 4.1% in the quarter, and with little supply growth, occupancy grew 3.8%.

This provided the foundation for ADR to grow a similarly healthy 4% resulting in an increase in industry RevPAR of 7.9% in the first quarter. While transient demand growth was strong, group travel also continued to recover, though at a more modest pace than transient.

Supply increased to 0.3% in the quarter, and we expect it to remain at sub-1% levels through at least 2014. This is a key part of the strong industry fundamentals we expect for at least the next several years.

At Pebblebrook, we had another terrific quarter, even though we had a greater-than-expected impact from the renovations at a number of our hotels. RevPAR was up 8.4%.

But without the negative impact of our renovations at Sheraton Delfina Santa Monica, Seattle Monaco, Westin Gaslamp San Diego, Mondrian LA and the Argonaut in San Francisco, RevPAR would have been 4.5% higher or at almost 13%.

We benefited significantly from the properties we renovated last year, but strong RevPAR growth was wide spread in our portfolio. We had 10 properties that grew RevPAR above 6.5%.

We gained significant RevPAR share in all 3 months of the quarter as we began to recapture competitive share loss during prior ownership periods, which suffered from the lack of both capital investment and third party asset management.

The CBD markets in which our hotels are located were also generally strong. RevPAR in San Francisco’s Fisherman's Wharf Nob Hill sub market was up a robust 19.1%.

New York’s lower Manhattan was up 13.3%. Boston rose 12.8%.

Down Town Seattle climbed 11.9%. Down Town Miami increased 8.9%, San Francisco’s Market Street area increased 8.5%.

Philadelphia rose 7.8%. Buckhead was up 7.6%, and Minneapolis was up 7.4%.

Our hotels in these markets all benefited from this ongoing strength.

Our mix of business at our hotels bucked the overall industry trends. Group revenue growth actually outpaced transient revenue growth in the quarter.

Group revenue increases 11.8% with room nights up 6% and ADR up 5.5%. Transient revenue increased 10.2%, mostly in occupancy.

Room nights rose 8.7%, while ADR increased 1.4%. Group represented 28% of our room nights in the quarter.

Transient was at 72%.

Group was up due to better in-house and convention-related group business than in last year’s first quarter, particularly in the association segment. With the strong group pace on the books for the balance of the year, which I will discuss in a minute, and the attractive convention calendars in most of our markets, we expect to continue to outperform the industries' more modest group growth trend.

Now let me talk a little bit about EBITDA margins and provide some highlights. As we reported, EBITDA grew 29% on a 7% growth in total revenues.

As is always the case with our reporting, these are comparable comparisons, in other words, same-store whether we own them last year or not and whether they were being renovated or not in either year. Many of our hotels benefited significantly from the implementation of our best practices.

They also benefited from the very successful efforts of our asset managers and our hotel operating partners, who together managed to hold expense growth in our portfolio to just 3.1% in the quarter.

I know that may not sound that great in a world of 2.5% inflation, but consider that we have more rooms with the expansion of Affinia Manhattan. We had an extra day this year due to leap year, and most importantly, our occupancy rate grew 6%, so that means we have 7.9% more occupied rooms in the quarter.

Undistributed expenses played a big role. They actually declined 1.2%.

Energy led the way with the decline of 11.3% or $400,000 as we began to see substantial returns from our energy-saving capital investments, particularly at many of our 2010 acquisitions. As a result, our hotel portfolio EBITDA margin rose 314 basis points.

This occurred despite a 22.1% increase in property taxes in the quarter, which increased so much primarily because of automatic assessment increases related to our California acquisitions that happened at the time of the transaction.

If our property taxes had increased at a rate more representative of the rest of the portfolio such as 5%, portfolio EBITDA margin would have grown an additional 73 basis points. We expect these increases in property taxes to moderate substantially over the course of the remainder of the year as we annualize our acquisition dates.

The Minneapolis Grand, Viceroy Miami, Affinia Manhattan and The Benjamin in New York City. The 6 property Manhattan Collection increased EBITDA margin by 639 basis points.

Well let me provide a quick update on our property renovations. During the quarter, 5 properties were undergoing significant renovations that had a big negative impact on their performance.

The largest of them all, the comprehensive renovation of the Westin Gaslamp San Diego, which began in November 2010 suffered significantly from the work in the last phase that involved the total demolition, reconfiguration and rebuilding of the entire ground floor, both inside and outside. This work should finally be complete next month.

Our Starwood property team can’t wait. It's been a long and difficult 19 months, but the new product is truly transformational.

With the Argonaut in San Francisco, we completed the rooms, lobby and meeting space renovation in early February. At the Seattle Monaco, we completed the rooms, lobby and meeting space portion of the renovation earlier this month, and we expect to complete the exterior work next month.

At Sheraton Delfina, we also completed the rooms portion of the complete renovation of the hotel earlier this month. We expect to complete the meeting space, lobby, exterior and pool area next month.

Finally, the renovation of the pool, pool deck and outdoor restaurant and lounge areas at the Mondrian started in March and should be complete in mid-May.

Unfortunately, we had to close SkyBar and the outdoor seating areas of Asia to Cuba during all this work. And that’s had a big impact on both our food and beverage revenue and our group and transient bookings.

Both of those facilities are an integral part of the success of that property.

With the completion of all of these renovations, we expect significant improvement in performance throughout the remainder of 2012 and for 2013 and 2014, as we recapture a RevPAR that was lost in prior years. In addition, we expect to see a continuing lift in performance from our recently completed renovations and repositionings, including Minneapolis Grand, DoubleTree Bethesda, InterContinental Buckhead, Affinia Manhattan, and Sir Francis Drake.

Now let me turn to a quick update on our outlook for 2012. We continue to expect 2012 to be a great year for both the industry and Pebblebrook.

For the industry, our outlook remains unchanged. We expect industry RevPAR to increase by 6% to 8%, based on an increase in overall industry demand of between 2% and 3% and an increase in industry ADR of 4.5% to 5.5%.

And we continue to expect the RevPAR growth rate to be relatively even throughout the year. For our portfolio, we're maintaining our outlook for RevPAR growth of 8% to 10% for the year.

The second quarter looks to be very strong based on current trends and business on the books. So we're forecasting RevPAR to increase by 10% to 12% in Q2.

And as a result of strong revenue growth and progress on the implementation of our best practices program, we expect EBITDA margins to increase a robust 300 to 350 basis points in the quarter.

For the year, we expect EBITDA margin growth of 250 to 300 basis points. That’s the same as we provided two months ago.

Based on these strong underlying fundamentals, we expect to deliver a comparable hotel EBITDA increase of a very strong 20% to 23% for the existing portfolio for 2012. This represents an increase in hotel EBITDA of $2 million at the low end of our previous outlook, and a $1 million at the top of the range.

Our adjusted EBITDA and adjusted FFO were up a $1 million at the low end and flat at the top due to the increased G&A of $1 million that Ray discussed earlier. Per share numbers are down slightly due to the 1.4 million additional share issued under our ATM.

Economic trends, travel trends and business on our books continue to support our forecast of strong growth for 2012. As of the end of March, total group and transient revenue on the books for the last 3 quarters of this year was up 15.8% over the same time last year.

A couple percent of this improvement is a result of the increased room count at the Affinia Manhattan. Portfolio wise, for the remaining 9 months of 2012, group room nights were up 6.9%, while group ADR is up 3.8% for a total of 11%.

For the second quarter, group space was up 13.6%, again indicating it should be a strong quarter. Transient room nights on the books per quarter is 2 through 4, were up 13.9% with transient rate up 6.3% and total transient revenues on the books up 21.1%.

Again the transient numbers are partially skewed by the additional Affinia rooms. We continue to expect this space advantage to moderate throughout the year in order to come in line with our forecast at RevPAR growth of 8% to 10% for the year.

Wrapping up our comments, we continue to expect 2012 to be another terrific year for the lodging industry and an even better year for our company. We've got tremendous opportunity in the existing portfolio to recapture significant RevPAR lost in prior years and to dramatically improve margins through the implementation of best practices and lots of focus and hard work for our operators and our team.

While our forecast doesn’t include any additional acquisitions, we do expect to be active as the year goes on, as the transaction market picks up, and quality properties in our targeted gateway cities become available, either on or off the market.

So that completes our prepared remarks, we'd now be happy to answer whatever questions you might have. Operator?

I just actually had a quick question about the state of the transaction market. Beginning of the year, there to be a fairly wide spread between buyer and seller expectations.

I’m curious, Jon, if you feel that -- what's happened with that? I mean, have seen sellers maybe moderate a little bit in their expectations, or is it really been driven by the sort of recovery and equity prices and maybe lending is getting a little bit better over the course of the year?

Just curious if you sense this.

Yes, Jeff, I think it's probably all of the above. I think we've seen seller expectations moderate a little bit.

We've seen buyer expectations increase. We've seen a little bit of improvement in the financing markets that probably helps out the private equity buyers, and we've certainly seen a improvement in the equity capital markets for the REIT.

So I think it's really a combination of those, as well as the fact that industry fundamentals continue to be very healthy, and we have seen nominal increases in bottom lines that certainly have an impact on overall valuations.

Just one last question is, on the negotiated rate business front, do you guys have a sense of how companies are tracking versus what their expectations were for consumption? Are they sort of on pace of what they thought they were going to consume in terms of volume?

Yes, we haven’t really seen any change in expectation in performance related to the expectations we had going into the year for corporate account. This business travel continues to be healthy and certainly to the extent we can, we were happy to close out their corporate accounts and push them into bar and higher-rated segments.

We will go next to Andrew Didora from Bank of America.

First question, I guess bigger picture here, Jon, portfolio has obviously have been putting up some pretty impressive growth numbers both relative to your peers in the industry. Just wanted to get your thoughts on how long you think this out sized growth could last?

It seems to me that with the renovation work you're doing it should continue through next year. But I was just interested in getting your thought in terms of the duration of this outperformance.

Yes, thanks, Andrew. I think our view right now is that outperform probably continues well through 2014.

It takes time to recapture lost RevPAR from prior years. The renovation is obviously our huge help to providing the opportunity to do that, yet it takes time after those renovations for us to be able to find new business and build and re-price our product.

And most of what was lost in the portfolio over the prior 5 years was lost in the rate category, not in the occupancy category. So we think that will run through 2014, it's been -- it's about 850 basis points of RevPAR lost over the last 5 years in the portfolio, and we do think that will take really 3 years to recover that.

On the margin side, again, we think it's about a 3 year process running as well through 2014. I think we've noted previously that there was about a 600 or -- after last year, about 580 basis point differential between our EBITDA margins and those of La Salle, which has a very similar portfolio, and we're quite familiar with how we got there at La Salle and so we think it will take significant time to make up a meaningful portion of that differential.

And then just second question, can you may talk a little bit more about your decision to switch the managers at the DoubleTree Bethesda, was this a plan change post the renovation? And do you see any other opportunities like this in the portfolio?

Yes, I think the change there relates to being able to bring in a manager who has a lot of experience, a lot of properties under management, who has significant number of properties in the Washington area, and who likely will give us an opportunity to improve group sales and improve the quality of our overall management effort and leadership team and be able to retain them a little better than the what we were experiencing previously. So, we made the decision to make that change, it obviously we feel that it's pretty important to do what we are doing, because we are paying, it's going to cost us over about $1 million to make that change.

We don’t see that as an opportunity anywhere else in the portfolio at this time. But that is always something that we are monitoring.

We need to be able to hire and retain good quality people and that’s a critical function at our properties.

Two quick questions. The first one concerns the occupancy and rate mix in the first quarter.

I know it was more heavily skewed towards occupancy. And I wonder as the year sort of plays out how you see that shift, if at all?

And then second question concerns Buckhead specifically. I just wanted to know what was driving strength there considering that their land [ph] has been kind of a weak market for quite a while now.

Thank you.

Sure, thanks, Rich. As it relates to the occupancy and rate mix, we do expect that mix to change fairly meaningfully and totally reverse in Q2 through Q4.

It really relates to the seasonality of the business in the first quarter. It's easier to pickup occupancy than rate, and we also had some positive comparisons of properties that have been under renovation in the first quarter last year.

So we were recovering occupancy where we were unable to have the same occupancy levels as the market set we're in. As the quarter and the year goes on, we expect ADR to be the predominant portion of our RevPAR growth.

We have a lot of properties running, occupancy levels in the upper 80s in New York into the low to mid-90s, and that’s about all there is in those markets. So the growth is really going to be driven by ADR throughout the bulk of the rest of the year.

As it relates to Buckhead, Rich, the -- we saw at the beginning of the year, we talked about this 60 days ago, Atlanta has a very good convention year in place. We're seeing healthy base of business as a result of that and a lot of very good group business that we put on our books this second half of last year for this year.

So we have a great group pace. The market, we think, is healthy.

Business travel continues to improve, and so we think Buckhead is going to have a good year. It's different than the rest of Atlanta, albeit I think Atlanta, overall, will have a better year this year than it did last year.

But Buckhead certainly benefits from its position as being the premier hotel retail office and residential market in the Atlanta area.

I guess judging by the theme, are you and Ray in white suits and pastel shifts?

That's our little secret, Don. But I guess you've figured out the theme of Miami Vice.

So the Viceroy in Miami had a great quarter, and we wanted to sort of honor them with the theme song.

I guess first question, just curious if it's a little too early to start thinking about capital recycling with the portfolio?

Yes, Don. I think it's a little early for us, I mean, we obviously have just acquired these properties.

There are likely some markets that we'll will look to dispose off assets some time over the next few years. But I don’t think it's this year.

And I -- we think it's unlikely to be next year unless we see an even greater acceleration in underlying performance. I mean, we're still, as we indicated, we think we're still in a very low growth supply environment through at least 2014.

And we want to be able to take advantage of that in some of the more cyclical maybe less barrier-to-entry markets that we have where replacement costs are still significantly above where existing values would be.

And then I might have missed this is your prepared remarks, but is there an update on the 8.7 million of asset management expense reduction opportunities that you identified in the year-end press release?

Yes, we're -- at this point, we're over 10 million in what we have identified, and that continues to increase. And we think that will continue to increase whatever the course for the year.

Okay. And then I guess there's been a lot of talk about the growth in incentive management fees from the major brands.

I think the major brands operate around 20% of your EBITDA. Just curious how incentive management fees from your smaller third party operators compared to kind of the major brands as you look out over the next few years?

Well, incentive fees in our portfolio, the participation on the part of operators tends to be more in the 10% to 15% range. And because we just bought everything, and I think pretty much everything that we have in the portfolio we either put a new management agreement in place with new incentive thresholds, which would be pretty far out in terms of number of years to when there would be participation or in a couple of cases where we acquired assets and had existing management agreements in place like the Sofitel or a couple at Kimpton's, the incentive thresholds were reset at the time those management agreements were -- so, in our case, whether branded or independent or a small brand, we don’t really see much participation on the part of our operators in the near to intermediate term growth in our bottom lines.

We really need to get to fairly a healthy 9%, 10%, 11% returns on our capital investments before there is any kind of participation. And then it tends to be at a much lower level than the more generic and older brand management agreements that tend to be anywhere in that 20%, 25% or 30% range.

Okay. And then just lastly, just kind of curious where you think your acquisition capacity is at the current moment?

Well, our philosophy is to maintain anywhere between $250 million to $300 million of buying power on our balance sheet and/or with our line or with financeable assets. And we feel comfortable that we're in that range, and so at this point, we think we have pretty healthy buying power.

But again keep in mind, we do want to retain that. So, to the extent we're -- our pipeline becomes active, we will continue to access both equity and debt capital markets to raise the capital for those future acquisitions.

Jon and Ray, question on the Milano. You have talked about planned transformation for the asset unlikely to contribute very much to EBITDA this year.

I’m just curious whether there's any scope here to capitalize with respect to your investment in that asset, capitalize interest expense?

Sure, James. We are going to first going to evaluate when we're going to commence that, whether it all be in the fourth quarter and when -- if that's a complete closure of the property or in the timing but, yes, the process would be we would -- if we do close the hotel, that will be capitalizable except for any of the management team that is focused on, say, developing sales leads and relationships, or anything that’s focused non-constructionally would still be expensed on our income statement.

But anything such as property insurance, taxes, energy, those items will be capitalized. We don’t expect that to be really that meaningful in the fourth quarter.

Again, we talking about Milano will be negligible for the impact this year, and when you're factoring in a small 108 room property, is that there'll be a pretty quick turnaround we expect for that process, the impact this year on capitalized interest or if like that will be limited.

Jim, the other thing is, we haven’t made a decision yet whether we're going to close it. If we do, it would likely not be until around November.

And so it probably split years as well, would be partially this year and partially at the beginning of next year. And we think it's probably only at most 3 to 4 months.

Okay, very good. Jon, looking at the demand variables here, we've talked about -- you have talked about before the unusual strength in international and [indiscernible] bound travel in this cycle, and we've heard people talk about group becoming a more important factor in demand this year.

So I’m just curious, across your portfolio, you did talk earlier about the recovery here being pretty well spread evenly across the portfolio. I’m just wondering if in your portfolio you're seeing unusually strong group demand or international inbound travel demand in some segments of the portfolio versus others?

While we definitely are seeing healthy group demand. And we mentioned that in our remarks earlier in the year, back in February.

Our pace -- our group pace has been very strong. We have great convention months, great convention calendars in a lot of our markets this year and our hotels are benefiting and participating.

So we're probably not the best measure for the trend on group, probably comments made by some of the other companies like Host were probably a better indication of improving trends in that area because we already had improved within our portfolio. As it relates to international inbound travel, again I think we mentioned it is hard to measure and we're still working on trying to make our systems provide us some relevant information in that regard, but we would say anecdotally we have seen very healthy inbound travel in markets like New York, in LA and San Francisco, in Seattle, and in Miami.

And while the U.S. data tends to be a bit lagged the most recent data in January indicated a 6% increase in inbound international travel to the U.S.

So all of that seems to bode well. And clearly where the increases are primarily are in the developing countries in the world, where travel is becoming much broader in the population.

And just to be clear, when we look at that balance between supply and demand with the supply variable looking to be pretty benign for -- as far as we can see at the moment, and unusual strength in international inbound and good recovery and group. I'm just wondering whether you are finding that when you are pushing your rate, you are not getting the reaction on the demand on the occupancy side, i.e -- and I heard you say that you expect the growth to be primarily rate-driven over the balance of the year.

But in some of these markets, are you finding that you're pushing rate, and you're not saying occupancy come down the way it was still, the way you might have expected or maybe you see continued strength in occupancy or is it playing out the way it usually does?

Yes, I think it varies by market a little bit. We probably see all of the above there.

There's some markets where if we're pushing rate and others aren’t, it's not going to work particularly well. And rate increases, in general, are about attitude.

So, their markets that are at similar occupancy levels can take you see a great example which is that of really strong historically occupancy level or just under right now record recent overall occupancy levels and yet there is no confidence in raising rates in the market. So you can go to another market where overall occupancy levels are lower like in Minneapolis and still well under the long-term record occupancy levels but because of the pace of demand improvement, there is a lot more confidence in raising rates, and we're getting them.

So, it really varies by market, what we are seeing Jim is an ability to continue to remix the business, as business travel and upper-end leisure travel continue to grow and reduce our discount business and reduce the promotions and that’s probably more so than just increasing rates.

I have a question on SMB growth, are surprised that the by the lack of it being able to keep up with occupancy? And can you give us some color on that trend, or was that a function of renovation in SkyBar?

Yes, it was partially based upon an impact from renovations at SkyBar. It was also partially the fact that we had probably a greater mix of our group.

Business was convention related and not in-house group related and therefore, a little less growth on that group [indiscernible] side. And then we actually had to displace a significant amount of already sold group business at Westin Gaslamp in the quarter because of noise and disruption from both the inside and outside construction work in the quarter and while we were able to replace it with transient, it didn’t replace the food and beverage business.

So it was really a combination of all of that. It looks to be significantly better for most of the rest of the year, Enrique.

Can you guys give guidance on your second half renovation plans? Can we look at additional room configurations at any of the Manhattan Collection assets?

The renovations for the second half of the year will be relatively minimal outside of the Milano, which again is not likely to start until in the last quarter of the year. You are talking about 2012, right?

Yes, second half of 2012.

Yes. And we will be redoing the meeting space at the InterCon some time in July, but we're are to schedule at around the group business that we have.

So again really no impact. And then we'll likely start a renovation of the rooms at the Sofitel in Philadelphia, and we don’t expect that to have a material -- any kind of material impact due to the time of year and the fact that it will really be after Thanksgiving and run into probably January and February of the following year.

So, pretty minimal impact in the second half of this year.

Okay. Now going to the cost savings, you guys have identified a substantial savings of late last year.

How much of that is flowing through the numbers currently, and how much should we look to, I guess, flow through in the second half?

Well, we definitely are seeing over 10 million now that we have identified represents a little over 200 basis points. You're clearly seeing a meaningful portion of that flow through this year, but there is still a significant number of properties where we are just getting started on implementation of these best practices including the New York portfolio as an example.

And of course properties like the Milano where we are just getting the energy program in place so Sir Francis Drake where we're just about to start a steam-to-natural gas conversion for our heating system and, of course, the Gaslamp, which is really just completing its renovation. And many of the energy capital savings and other best practice implementations.

So, we won’t be annualizing anywhere near that full 10 million plus this year it will be fairly extensive, improvement in margins next year and as I mentioned as well into 2014 and when you put that in perspective we are talking about 250 and 300 basis point increase in EBITDA margins this year, which obviously is significantly above what they would otherwise be based upon an 8% to 10% increase in RevPAR.

Okay. And lastly guys on your acquisition pipeline, can you give, I guess, a little bit more color there as far as what you see now as far as size of your pipeline, and possibly time when you are going to close, and should we just assume maybe 50% debt, 50% equity with this -- in the acquisitions?

Yes, I think first of all, as it relates to pipeline, we don’t talk about it specifically. So, I think what we can tell you, Wes, is that the -- there is more activity in the market.

We're seeing an increase from 60 and 90 days ago in the number of quality assets available in the major gateway cities, they are tending to be a little smaller than they were a year ago last year and we are certainly nowhere near the level of activity we were a year ago. But we do expect the market to pickup over the course of the year and we do expect to participate in that.

In terms of how we would finance, it will really depend upon the capital markets at the time. But I think we're nowhere near a utilizer of 50% debt.

We're much more targeted at about a 30% debt participation as it relates to the overall portfolio.

Jon, just to drill down a little deeper into acquisitions, I know you don’t want to talk specifically about the pipeline. But generally, in the market, where do you see those opportunities come from?

In the past, you've assembled your portfolio by buying from brands, buying from PE funds and even buying from vendors. Where do you see the bulk of your buying coming from over the next 9 to 12 months?

We really see it coming from all of the same places as it did in the last wave, David. I think it's -- we're going to see acquisitions from the lender community, we're going to see some bankruptcy, receivership or foreclosure acquisitions, we're going to see some acquisition from the brands and other owner operators who are looking to go asset like.

I think we will see acquisition from PE firms both from funds that are liquidating or need to raise capital to solve other debt maturity issue or from PE firms that actually may already have played in the cycle where they bought debt and has converted their positions in the equity and are looking to recycle that capital. So, we think it's really going to come from all of the above and in a pretty broad mix like it did in the last wave.

Okay, that makes sense. Sort of to combine that then with Jeff’s question, let me ask a different question as you look at the debt related stuff, do you think we are late in the game or pass the extended time period.

Do you think that there will be more activity from lenders or debt-related transactions than there have been in previous years?

Yes, I think the participation by lenders in the disposition market will continue to increase, albeit continuing at a modest pace. So you are still seeing jostling in capital stacks.

You're still seeing the CMBS lenders hold on for fees or for other equity reasons. And so I think this is going to continue to play out over the next few years.

It's probably being stretched out even more than what we thought 2 years ago when we became active in the market.

So do you think the set of opportunities in the next 6 to 9 months is larger than it was this time last year?

I don’t think -- well, I don't think the set of opportunities that will be available will be larger. We don’t think it will be as large.

We think the activity will increase over the course of the year, but we don’t think it's likely to get to the same level of activity that it was a year ago at this time.

Okay, and one final question just in terms of acquisition funding. I heard you that capital structure -- at rate, capital structure and things like that and availability.

Is the current stock price and where you have been selling in the ATM, is that a good indication of kind of where you see your willingness to sell equity?

It's a funny question because we voluntarily did it. So, clearly, we were comfortable at the time in raising that equity through our ATM at north of $23 a share on a net basis.

And we have a pretty fast-growing bottom line in the portfolio, and you should expect that our willingness will -- as to rate is going to increase fairly rapidly just like at the bottom line of the company’s performance.

Well, you're kind of getting to where I was going. And it obviously, cost of capital is a complex question.

And the contribution that an acquisition makes me relates inversely to the stock price you'd be willing to sell that. But it sounds like generally for the opportunities you're seeing, you're at a price that is you're willing to sell at, as you said, as indicated by your recent behavior.

Is that fair?

Yes, that was the case at the time that we issued those shares.

I'm not going to get you to say anything about booking ahead then. But...

I mean, you're right in pointing out, it's a very complex issue and I think as what we've said in the past is we were generally a match under -- there's a number of different sources of capital that we can tap into. And as good capital managers, we want to tap into those pieces of our balance sheet that we think are the most attractive on a relative basis at the time, and we're not going to make an acquisition if it doesn't add value for the shareholders on a marginal basis.

Now that doesn't mean it's accretive in the short term. Clearly, the Milano's a good example of an acquisition that is clearly dilutive on a short-term basis.

So we think it will be substantially accretive on a value basis over the long term and that's our focus, it's creation of long term value on a per share basis for the shareholders.

And also, as well as a reminder, we'll be generating similarly close on this loan at the Sofitel in May. That's generating about $50 million of debt proceeds.

We only have $25 million outstanding on our credit facility currently. So now we would have some cash to pay that down and other uses.

So also we will factor that into the sources and uses, [indiscernible] that.

Thank you, Jennifer, and thank you all for participating this quarter, we continue to be extremely excited about the remainder of the year and we look forward to talking to you about it 90 days from now.