What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-23 compared with 2020-02-20 · 184 added, 103 removed, 181 unchanged (61% of the section changed)

5 unchanged sentences

In this report, we use the terms "the Company", "we" or "our", to refer to Pebblebrook Hotel Trust and its subsidiaries, unless the context indicates otherwise.

Our operating results for the fourth quarter of 2019 exceeded our outlook primarily due to unexpected increases in hotel demand during November and December throughout many of our markets, including San Francisco, Los Angeles, South Florida and Boston.

We also made great progress in transforming our Company for stronger growth in future years.

We completed $1.3 billion in hotel sales, with another $331.0 million of sales expected in the near term, 12 successful operator or brand transitions, including 2 in early 2020, and we completed or commenced 8 major redevelopment and repositioning projects.

Up until the emergence of the coronavirus in China, we were encouraged with the improvements in near term business and leisure booking trends that we experienced from November through January.

However, we are concerned about the potential negative impact of coronavirus on travel.

While we expect some reduced demand outside of what we have already experienced and incorporated, our outlook does not reflect any impact since it is not knowable or able to be forecasted due to the unique evolving nature of the situation.

During the year ended December 31, 2019 , we sold seven hotel properties for aggregate sales price of $481.9 million , repaid $450.0 million of our term loans, consisting of the full repayment of $200.0 million of the third term loan and the $250.0 million tranche maturing in 2020 of our sixth term loan, and we repaid the $65.4 million mortgage loan on The Westin San Diego Gaslamp Quarter .

In addition, we acquired the ground lease underlying the land of the Solamar Hotel .

On January 9, 2020 , we entered into an agreement to sell InterContinental Buckhead Atlanta and Sofitel Washington DC Lafayette Square to an unaffiliated third-party for an aggregate sales price of $331.0 million .

We expect the sale of these hotel properties to be completed during the first quarter of 2020, subject to customary closing conditions, although no assurances can be given that the sales will be completed on these terms, or at all.

In March 2020, the World Health Organization declared the novel coronavirus ("COVID-19") to be a global pandemic and the virus has continued to spread throughout the United States and the world.

As a result of this pandemic and subsequent government mandates, health official recommendations, corporate travel policy changes and individual responses, hotel demand was dramatically reduced.

Following government mandates and health official recommendations, we temporarily suspended operations at 47 of our hotels and resorts and dramatically reduced staffing and expenses at the hotels that remained operational.

Throughout the summer months, hotel industry demand improved from its historical lows seen in the second quarter, particularly as leisure customers sought to travel to drive-to hotels and resorts that could offer more space and outdoor experiences.

Our monthly revenue increased slowly through October as we reopened several of our hotels and resorts between May and October.

November and December had declining revenue at most of our opened hotels, except our South Florida properties, as leisure demand declined and business travel did not return in a meaningful manner.

Our South Florida properties experienced slightly increasing revenue late in the year which is consistent with the seasonal pattern for these warm weather resort properties.

We anticipate leisure travel will return as vaccine distribution becomes more widely available, followed by business travel.

We still anticipate group demand will be the slowest to return until there is more certainty around the health and immunity solution for the country.

As of December 31, 2020, 37 of our hotels and resorts were open with operations of the remaining 16 hotels still temporarily suspended.

We anticipate reopening additional hotels as demand returns and we determine that we would lose less money with the hotels open versus remaining closed.

The COVID-19 pandemic has had a significant negative impact on our operations and financial results to date and we expect that it will continue to have a significant negative impact on our results of operations, financial position and cash flow in 2021.

We cannot estimate when travel demand will recover.

As a result of uncertainty at the beginning of the pandemic, in March 2020, we fully drew down on our $650.0 million unsecured revolving credit facility, reduced the quarterly cash dividend on our common shares to one penny per share, reduced planned capital expenditures, reduced the compensation of our executive officers, trustees and employees, and, working closely with our hotel operating partners, significantly reduced our hotels' operating expenses.

On June 29, 2020, we amended the agreements governing our existing credit facilities, term loan facilities and senior notes.

Among other things, the amendments extended the maturity of a significant portion of our term loan due in November 2021 to November 2022, waived existing financial covenants through the end of the first quarter of 2021 and provided substantially less restrictive financial covenants through the end of the second quarter of 2022.

In addition, we repaid approximately $250.0 million on our unsecured revolving credit facility.

In December 2020, we issued $500.0 million of convertible notes and used the proceeds to repay an additional $250.0 million of our unsecured revolving credit facility and $200.0 million of our unsecured term loans.

As of December 31, 2020, we had $40.0 million of outstanding borrowings $6.8 million of outstanding letters of credit and borrowing capacity of $603.2 million remaining on our senior unsecured credit facility.

During the year ended December 31, 2020, other significant transactions included:

• Sold three hotel properties for an aggregate sales price of $387.0 million and recognized a gain of $117.4 million;

• Recognized an impairment loss of $74.6 million related to two hotels and the retail component of a hotel;

• Cancelled LTIP Class B units and time-based service condition awards granted in February 2020 and incurred full compensation expense of $16.0 million.

In February 2021, we issued an additional $250.0 million of convertible notes under the same terms as the December 2020 offering.

The notes were sold at a 5.5% premium to par.

In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with certain of the underwriters, their respective affiliates and/or other counterparties.

We used the net proceeds to reduce amounts outstanding under our senior unsecured revolving credit facility, unsecured term loans, and for general corporate purposes.

In February 2021, we further amended the agreements governing our existing credit facilities, term loan facilities and senior notes to, among other items, increase the interest rate spread and waive financial covenants through the end of the first quarter of 2022 except for the minimum fixed charge coverage and minimum unsecured interest coverage ratio, which were extended through December 31, 2021.

Refer to "Note 5.

Debt" for additional information regarding these amendments and convertible debt.

Based on these amendments and expense and cash burn rate reductions, we believe that we will have sufficient liquidity to meet our obligations for the next twelve months.

While we do not operate our hotel properties, both our asset management team and our executive management team monitor and work cooperatively with our hotel managers by advising and making recommendations in all aspects of our hotels’ operations, including property positioning and repositioning, revenue and expense management, operations analysis, physical design, renovation and capital improvements, guest experience and overall strategic direction.

8 unchanged sentences

and EBITDA for real estate ("EBITDA re " ) .

We evaluate individual hotel and

company-wide performance with comparisons to budgets, prior periods and competing properties.

We evaluate individual hotel and company-wide performance with comparisons to budgets, prior periods and competing properties.

ADR, occupancy and RevPAR may be impacted by macroeconomic factors as well as regional and local economies and events.

7 unchanged sentences

Same-Property Total RevPAR $ 89.14 $ 310.62

This schedule of hotel results for the year ended December 31 includes information from all of the hotels we owned as of December 31, 2019 and excludes Onyx Hotel for the second, third and fourth quarters in both 2019 and 2018 due to its sale in the second quarter of 2019 as well as Hotel Amarano Burbank, Rouge Hotel and Hotel Madera for the third and fourth quarters in both 2019 and 2018 due to their sales in the third quarter of 2019 and Topaz Hotel and Donovan Hotel for the fourth quarter in both 2019 and 2018 due to respective sale and closure in the fourth quarter of 2019.

These hotel results for the respective periods may include information reflecting operational performance prior to the Company's ownership of the hotels.

While the operations of many of our hotels were temporarily suspended beginning in March 2020, the above schedule of hotel results for the years ended December 31 includes information from all hotels owned as of December 31, 2020, except for Hotel Zena Washington DC (formerly Donovan Hotel) for the first, second and fourth quarters in both 2020 and 2019, because it was closed for renovations in the fourth quarter of 2019 and the first and second quarters of 2020.

Results of Operations

This section includes comparisons of certain 2020 financial information to the same information for 2019.

Year-to-year comparisons of the 2018 financial information to the same information for 2017 are contained in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 1, 2019.

Year-to-year comparisons of the 2019 financial information to the same information for 2018 are contained in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 20, 2020.

At December 31, 2020 and 2019, we had 53 and 56 wholly owned properties and leasehold interests, respectively.

All properties owned during these periods have been included in our results of operations during the respective periods since their dates of acquisition or through the dates of disposition.

Based on when a property was acquired or disposed, operating results for certain properties are not comparable for the years ended December 31, 2019 and 2018 .

The properties listed in the table below are hereinafter referred to as "non-comparable properties" for the periods indicated and all other properties are considered and referred to as "comparable properties":

Acquisition/Disposition Date

Non-comparable property for the years ended 2019 and 2018

LaSalle Hotel Properties' portfolio

Based on when a property was acquired or disposed, operating results for certain properties are not comparable.

The properties listed below are hereinafter referred to as "non-comparable properties" for the years ended December 31, 2020 and 2019.

All other properties are considered and referred to as "comparable properties":

Property Location Disposition Date

The Liaison Capitol Hill Washington, D.C.

February 14, 2019

Hotel Palomar Washington DC Washington, D.C.

February 22, 2019

Onyx Hotel Boston, MA May 29, 2019

Hotel Amarano Burbank Burbank, CA July 16, 2019

Rouge Hotel Washington, D.C.

September 12, 2019

Hotel Madera Washington, D.C.

September 26, 2019

Topaz Hotel Washington, D.C.

November 22, 2019

The Grand Hotel Minneapolis

Minneapolis, MN

December 4, 2018

(1) As a result of our merger with LaSalle Hotel Properties, we acquired a portfolio of 36 properties.

InterContinental Buckhead Atlanta Buckhead, GA March 6, 2020

Sofitel Washington DC Lafayette Square Washington, D.C.

March 6, 2020

Union Station Hotel Nashville, Autograph Collection Nashville, TN July 29, 2020

Comparison of the year ended December 31, 2020 to the year ended December 31, 2019

Revenues — Total hotel revenues increased by $783.5 million , of which $15.9 million was contributed by the comparable properties and an increase of $767.6 million was contributed by the non-comparable properties acquired through our merger with LaSalle.

The comparable properties increase was primarily due to increases in revenues at our San Francisco properties after the renovation and re-opening of the Moscone Center in late 2018 and the re-opening of LaPlaya after its closure from Hurricane Irma in 2017.

Hotel operating expenses — Total hotel operating expenses increased by $462.3 million .

The comparable properties contributed a net increase of $12.0 million, primarily due to increases in revenues and expenses at our San Francisco properties

after the renovation and re-opening of the Moscone Center in late 2018 and the re-opening of LaPlaya after its closure in 2017 from Hurricane Irma.

The acquisitions of hotel properties through our merger with LaSalle contributed to an additional $450.3 million increase which was offset by a decrease in expenses from the other non-comparable properties.

Depreciation and amortization — Depreciation and amortization expense increased by $126.4 million primarily due to the additional depreciation expense of $117.2 million from the acquisition of the LaSalle portfolio.

Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent increased by $70.8 million primarily due to additional real estate taxes, personal property taxes, property insurance and ground rent from the acquisition of the LaSalle portfolio.

Corporate general and administrative — Corporate general and administrative expenses increased by $13.1 million primarily due to additional employee and share-based compensation costs relating to the merger with LaSalle.

Corporate general and administrative expenses consist of employee compensation costs, legal and professional fees, insurance, state franchise taxes and other expenses.

Transaction costs — Transaction costs decreased by $66.4 million as a result of the merger with LaSalle which closed in November 2018.

Transaction costs consist of transfer taxes and financial advisory, legal and other professional service fees in connection with the Mergers and integration costs related to professional fees and employee-related costs, including compensation for transition employees.

(Gain) loss on sale of hotel properties — (Gain) loss on sale of hotel properties changed from a $2.1 million loss to a $2.8 million gain.

In 2018, we incurred a loss of $2.1 million from the sale of The Grand Hotel Minneapolis .

Revenues — Total revenues decreased by $1,169.3 million, of which $105.3 million was due to the non-comparable properties and the remaining decline was due to the decline in demand and suspension of operations resulting from the COVID-19 pandemic at most of our hotels during the year.

As of December 31, 2020, 37 hotels and resorts were open and operations at 16 hotels have been suspended.

Both occupancy and average daily rates at the opened hotels continue to be significantly below historical averages.

Hotel operating expenses — Total hotel operating expenses decreased by $594.7 million, of which $63.8 million was due to the non-comparable properties and the remaining decline was due to the significant cost mitigation efforts implemented at the hotels to respond to the significant loss of demand and suspension of operations as a result of the COVID-19 pandemic.

Depreciation and amortization — Depreciation and amortization expense decreased by $10.3 million primarily due to a decrease in assets resulting from the sales of hotels.

Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent decreased by $10.7 million due to a decline in ground rent on ground leases whose rent is based on a percentage of revenues and a decline in real estate taxes of approximately $5.0 million from properties that were sold.

These declines were offset by an increase in real estate taxes primarily at properties that have not been reassessed for the current level of activity or are under appeal.

General and administrative — General and administrative expenses consist of employee compensation costs, legal and professional fees, insurance and other expenses.

General and administrative expenses increased by $11.1 million primarily due to the non-cash expense of $16.0 million in share-based compensation costs relating to the cancellation of the retention LTIP unit awards and time-based service condition awards and an increase in legal fees, offset by the cost cutting program put in place in response to COVID-19 which reduced primarily employee and trustee compensation and audit fees.

Transaction costs — Transaction costs increased by $1.9 million due to additional transfer taxes paid in connection with the LaSalle merger.

Impairment loss — We recognized an impairment loss of $74.6 million related to two hotels and the retail component of a hotel.

There was no comparable transaction in 2019.

(Gain) loss on sale of hotel properties — (Gain) loss on sale of hotel properties increased from a $2.8 million gain to a $117.4 million gain.

In 2019, we recognized a gain of $2.8 million from the sale of seven hotel properties.

(Gain) loss and other operating expenses — (Gain) loss and other operating expenses changed from a gain of $10.9 million to a loss of $8.9 million .

In 2018, we recognized a gain of $13.1 million relating to the insurance settlement related to LaPlaya for damages resulting from Hurricane Irma.

In 2019, we incurred $5.9 million in hotel management transition expenses.

Interest expense — Interest expense increased by $54.6 million as a result of higher debt balances.

Other — Other decreased by $2.0 million due to a net gain from our investment in LaSalle common shares in 2018.

Income tax (expense) benefit — Income tax expense increased by $3.4 million due to an increase in taxable income of our taxable REIT subsidiaries.

Non-controlling interests — Non-controlling interests represent the allocation of income or loss of our Operating Partnership to the common units held by the OP unit holders.

Distributions to preferred shareholders — Distributions to preferred shareholders increased by $15.1 million as a result of the issuances of the Series E Preferred Shares and Series F Preferred Shares in connection with the merger with LaSalle.

Other comprehensive income (loss) — Other comprehensive income (loss) increased by $79.2 million as a result of an increase in net income and the change in the fair values of our interest rate swaps.

In 2020, we recognized a gain of $117.4 million from the sale of three hotel properties.

(Gain) loss and other operating expenses — (Gain) loss and other operating expenses decreased by $4.5 million due primarily to the $5.9 million in hotel management transition expense incurred in 2019.

Interest expense — Interest expense deceased by $4.4 million primarily as a result of a decrease in interest rates in 2020.

Other — Other increased by $0.5 million due to interest income from higher cash balances from the drawdown on the unsecured revolving credit facility to enhance liquidity.

Income tax (expense) benefit — Income tax (expense) benefit changed from an expense of $5.2 million to a benefit of $3.7 million due primarily to the taxable losses of our TRS as a result of suspended or decreased operations at our hotels compared to the prior year.

Non-controlling interests — Non-controlling interests represent the allocation of income or loss of our Operating Partnership to the common units held by the LTIP and OP unit holders.

Non-GAAP Financial Measures

9 unchanged sentences

For the year ended December 31,

2020 2019 2018

Net income (loss) $ (392,593) $ 115,725 $ 13,385

2 unchanged sentences

Impairment loss 74,556 — —

FFO $ (211,314) $ 347,497 $ 123,797

Distribution to preferred shareholders (32,556) (32,556) (17,466)

6 unchanged sentences

For the year ended December 31,

2020 2019 2018

Net income (loss) $ (392,593) $ 115,725 $ 13,385

2 unchanged sentences

Depreciation and amortization 224,560 234,880 108,475

EBITDA $ (67,632) $ 464,251 $ 177,525

(Gain) loss on sale of hotel properties (117,401) (2,819) 2,147

Impairment loss 74,556 — —

$ (110,477) $ 461,432 $ 179,672

FFO, EBITDA and EBITDA re do not represent cash generated from operating activities as determined by U.S.

9 unchanged sentences

Investment in Hotel Properties

Estimation and judgment is required to determine the fair values of our acquired hotel properties.

Estimation and judgment are required to determine the fair values of our acquired hotel properties.

Upon acquiring a business or hotel property, we measure and recognize the fair value of the acquired land, land improvements, building, furniture, fixtures and equipment, identifiable intangible assets or liabilities, other assets and assumed liabilities.

5 unchanged sentences

Hotel renovations and/or replacements of assets that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives.

Furniture, fixtures and equipment under capital leases are carried at the present value of the minimum lease payments.

Furniture, fixtures and equipment under finance leases are carried at the present value of the minimum lease payments.

Repair and maintenance costs are expensed as incurred.

6 unchanged sentences

New Accounting Pronouncements Not Yet Implemented

See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements.

See Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements for additional information relating to recently issued accounting pronouncements.

Liquidity and Capital Resources

We expect to meet our short-term liquidity requirements through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our senior unsecured revolving credit facilities.

We expect our existing cash balances and cash provided by operations will be adequate to fund operating requirements, service debt and fund dividends in accordance with the REIT requirements of the federal income tax laws.

We expect to meet our long-term liquidity requirements, such as hotel property acquisitions, property redevelopment, investments in new joint ventures, and debt principal payments and debt maturities, through the net proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited partnership interest in our Operating Partnership, secured and unsecured borrowings, hotel property sales and cash provided by operations.

The success of our business strategy may depend in part on our ability to access additional capital through issuances of debt and equity securities, which is dependent on favorable market conditions.

We strive to maintain prudent debt leverage and intend to opportunistically enhance our capital position.

Our debt consisted of the following as of December 31, 2019 and December 31, 2018 (dollars in thousands):

In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and the virus has continued to spread throughout the United States and the world.

As a result of this pandemic and subsequent government mandates, health official recommendations corporate travel policy changes and individual responses, hotel demand was dramatically reduced.

As of December 31, 2020, 37 of our hotels and resorts were open with operations of the remaining 16 hotels still temporarily suspended.

This has had a material impact on the Company's liquidity.

Refer to the Overview in Item 7., "Management’s Discussion and Analysis of Financial Condition and Results of Operations," for additional information.

Our debt consisted of the following as of December 31, 2020 and 2019 (dollars in thousands):

Balance Outstanding as of

Interest Rate

Maturity Date

December 31, 2019

December 31, 2018

Interest Rate Maturity Date December 31, 2020 December 31, 2019

Revolving credit facilities

Senior unsecured credit facility

PHL unsecured credit facility

Senior unsecured credit facility Floating (1)

January 2022 $ 40,000 $ 165,000

PHL unsecured credit facility Floating (2)

January 2022 — —

Total revolving credit facilities $ 40,000 $ 165,000

Unsecured term loans

First Term Loan

Second Term Loan

Third Term Loan

Fourth Term Loan

First Term Loan Floating (3)

January 2023 300,000 300,000

Second Term Loan Floating (3)

April 2022 65,000 65,000

Fourth Term Loan Floating (3)

October 2024 110,000 110,000

Sixth Term Loan:

December 2020

Tranche 2021 Floating (3)

November 2021 (4)

40,966 300,000

Tranche 2021 Extended Floating (3)

November 2022 173,034 —

Tranche 2022 Floating (3)

November 2022 286,000 400,000

Tranche 2023 Floating (3)

November 2023 400,000 400,000

Tranche 2024 Floating (3)

January 2024 400,000 400,000

Total Sixth Term Loan 1,300,000 1,500,000

2 unchanged sentences

Total term loans $ 1,766,545 $ 1,964,657

Convertible senior notes

Convertible senior notes 1.75% December 2026 500,000 —

Debt discount, net (113,099) —

Deferred financing costs, net (12,568) —

Total convertible senior notes $ 374,333 $ —

Senior unsecured notes

Series A Notes

December 2023

Series B Notes

December 2025

Series A Notes 4.70% December 2023 60,000 60,000

Series B Notes 4.93% December 2025 40,000 40,000

Total senior unsecured notes at stated value 100,000 100,000

1 unchanged sentence

Total senior unsecured notes $ 99,593 $ 99,563

Mortgage loans

The Westin San Diego Gaslamp Quarter

Deferred financing costs, net

Total mortgage loans

Total debt $ 2,280,471 $ 2,229,220

(1) Borrowings bear interest at floating rates equal to, at our option, either (i) LIBOR plus an applicable margin or (ii) an Adjusted Base Rate (as defined in the applicable credit agreement) plus an applicable margin.

1 unchanged sentence

(3) Borrowings under the term loan facilities bear interest at floating rates equal to, at our option, either (i) LIBOR plus an applicable margin or (ii) a Base Rate plus an applicable margin.

As of December 31, 2019 , approximately $1.6 billion of the borrowings under the term loan facilities was at a weighted-average fixed interest rate of 3.43% , after taking into account interest rate swap agreements, and approximately $345.0 million was at a weighted-average floating interest rate of 3.32% .

As of December 31, 2018 , approximately $1.2 billion of the

borrowings under the term loan facilities was at a weighted-average fixed interest rate of 3.46% , after taking into account interest rate swap agreements, and approximately $1.2 billion was at a weighted-average floating interest rate of 4.26% .

As of December 31, 2020, approximately $1.4 billion of the borrowings under the term loan facilities bore an effective weighted-average fixed interest rate of 4.19%, after taking into account interest rate swap agreements, and approximately $345.0 million bore a weighted-average floating interest rate of 2.46%.

As of December 31, 2019, approximately $1.6 billion of the borrowings under the term loan facilities bore a weighted-average fixed interest rate of 3.43%, after taking into account interest rate swap agreements, and approximately $345.0 million bore a weighted-average floating interest rate of 3.32%.

(4) In February 2021, we repaid $12.8 million of the Sixth Term Loan Tranche 2021 and extended the majority of the remaining balance to November 2022.

Unsecured Revolving Credit Facilities

We are party to a $650.0 million senior unsecured revolving credit facility maturing in January 2022, with options to extend the maturity date to January 2023, pursuant to certain terms and conditions and payment of an extension fee.

As of December 31, 2019 , we had $165.0 million of outstanding borrowings and $482.2 million borrowing capacity remaining on our senior unsecured revolving credit facility.

Interest is paid on the periodic advances under the senior unsecured revolving credit facility at varying rates, based upon either LIBOR or the alternate base rate, plus an additional margin amount.

In March 2020, as part of our plans to enhance liquidity due to the actual and anticipated impact of the COVID-19 pandemic, we fully drew down on this revolving credit facility.

As of December 31, 2020, we had $40.0 million of outstanding borrowings and borrowing capacity of $603.2 million remaining on our senior unsecured revolving credit facility.

Interest is paid on the periodic advances under the senior unsecured revolving credit facility at varying rates, based upon either LIBOR or the alternate base rate, plus an additional margin amount, or spread.

The interest rate depends upon our leverage ratio pursuant to the provisions of the credit facility agreement.

As a result of the amendments described in "Note 5.

Debt," the spread on the borrowings is fixed at 2.25% during the waiver period.

We have the ability to increase the aggregate borrowing capacity of our senior unsecured revolving credit facility to up to $1.3 billion, subject to lender approval.

3 unchanged sentences

Borrowings under the PHL Credit Facility bear interest at LIBOR plus an applicable margin, depending on our leverage ratio.

As a result of the amendments described in "Note 5.

Debt," the spread on the borrowings is fixed at 2.25% during the waiver period.

As of December 31, 2020, we had no borrowings under the PHL Credit Facility.

3 unchanged sentences

We entered into interest rate swap agreements to fix the LIBOR rate on a portion of these unsecured term loans.

Information about our senior unsecured term loans is found in the table above and Note 5 to the accompanying consolidated financial statements.

Information about our senior unsecured term loans is found in the table above and "Note 5.

Debt" to the accompanying consolidated financial statements.

Convertible Senior Notes

In December 2020, the Company issued $500.0 million aggregate principal amount of 1.75% Convertible Senior Notes maturing in December 2026 (the "Convertible Notes").

The Convertible Notes are governed by an indenture (the “Base Indenture”) between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee.

The net proceeds from the offering of the Notes were approximately $487.3 million after deducting the underwriting fees and other expenses paid by the Company.

Interest is payable semi-annually in arrears on June 15th and December 15th of each year, beginning on June 15, 2021.

The Company recorded coupon interest expense of $0.4 million for the year ended December 31, 2020.

The Company separated the Convertible Notes into liability and equity components.

The initial carrying amount of the liability component was $386.1 million and was calculated using a discount rate of 6.25%.

The discount rate was based on the terms of debt instruments that were similar to the Convertible Notes without an equity component.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the principal amount of the Convertible Notes, or $113.9 million.

The amount recorded in equity is not subject to remeasurement or amortization.

The $113.9 million also represents the initial discount recorded on the Convertible Notes.

The discount is accreted to interest expense using the effective interest rate method over the contractual term of the Convertible Notes.

The Company recorded interest expense related to the accretion of the discount and the amortization of the debt issuance costs of $0.9 million for the year ended December 31, 2020.

Prior to June 15, 2026, the Convertible Notes will be convertible only upon certain circumstances.

On and after June 15, 2026, holders may convert any of their Convertible Notes into the Company’s common shares, at the applicable conversion rate at any time at their election two days prior to the maturity date.

The initial conversion rate is 39.2549 common shares per $1,000 principal amount of Convertible Notes, which represents an initial conversion price of approximately $25.47 per share.

The conversion rate is subject to adjustment in certain circumstances.

The Company may redeem for cash all or a portion of the Convertible Notes, at its option, on or after December 20, 2023 upon certain circumstances.

The redemption price will be equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

If certain make-whole fundamental changes occur, the conversion rate for the Convertible Notes may be increased.

In connection with the Convertible Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the underwriters of the offering of the Convertible Notes or their respective affiliates and other financial institutions (the “Capped Call Counterparties”).

The Capped Call Transactions initially cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of common shares underlying the Convertible Notes.

The Capped Call Transactions are expected generally to reduce the potential dilution to holders of common shares upon conversion of the Convertible Notes and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction and/or offset subject to a cap.

The upper strike price of the Capped Call Transactions is $33.0225 per share.

The cost of the Capped Call Transactions was $38.3 million and was recorded within additional paid-in capital.

Senior Unsecured Notes

12 unchanged sentences

Sources and Uses of Cash

Our principal sources of cash are cash from operations, borrowings under mortgage financings and other debt, draws on our credit facilities, proceeds from offerings of our equity securities and hotel property sales.

Our principal uses of cash are asset acquisitions, debt service, capital investments, operating costs, corporate expenses and dividends.

Cash Provided by Operations.

Our cash provided by operating activities was $395.2 million for the year ended December 31, 2019 .

Our cash from operations includes the operating activities of the 56 hotels we owned as of December 31, 2019 , offset by corporate expenses and merger-related transaction expenses.

Cash (Used in) and Provided by Operations.

Our cash used in operating activities was $201.8 million for the year ended December 31, 2020.

Our cash from operations includes the operating activities of the 53 hotels we owned as of December 31, 2020, offset by corporate expenses.

The negative cash flow from operations during the year and decline from the prior year is due to the temporary suspension and reduced operations at our hotels as a result of COVID-19.

Our cash provided by operating activities was $395.2 million for the year ended December 31, 2019.

Our cash from operations includes the operating activities of the 63 hotels we wholly owned as of December 31, 2018 .

Cash Provided by and Used in Investing Activities.

Our cash from operations includes the operating activities of the 56 hotels we owned as of December 31, 2019, offset by corporate expenses.

Cash Provided by Investing Activities.

Our cash provided by investing activities was $250.1 million for the year ended December 31, 2020.

During the year ended December 31, 2019 , we invested $169.6 million in improvements to our

hotel properties and received $470.4 million from sales of hotel properties.

Our cash used in investing activities was $1,778.2 million for the year ended December 31, 2018 .

During the year ended December 31, 2018 , we paid $1,372.6 million to fund the LaSalle merger, invested $89.6 million in improvements to our hotel properties, purchased $356.2 million in marketable securities, sold $6.7 million in marketable securities, received $28.6 million from the sale of one hotel property and received $5.2 million in property insurance proceeds.

During the year ended December 31, 2020, we invested $125.0 million in improvements to our hotel properties and received $375.1 million from sales of hotel properties.

Our cash provided by investing activities was $300.0 million for the year ended December 31, 2019.

During the year ended December 31, 2019, we invested $169.6 million in improvements to our hotel properties and received $470.4 million from sales of hotel properties.

Cash Provided by and (Used in) Financing Activities.

Our cash used in financing activities was $746.1 million for the year ended December 31, 2019 .

Our cash provided by financing activities was $31.1 million for the year ended December 31, 2020.

During the year ended December 31, 2020, we borrowed $760.1 million under the revolving credit facilities, repaid $885.1 million under the revolving credit facilities, borrowed $513.0 million in other debt, repaid $213.0 million in other debt, purchased $38.3 million in Capped Call Transactions, repurchased $1.3 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid $86.5 million in distributions, paid $16.4 million in financing fees and paid $1.4 million in other transactions.

For the year ended December 31, 2019, cash used in financing activities was $746.1 million.

During the year ended December 31, 2019, we borrowed $414.8 million under the revolving credit facilities, repaid $419.8 million under the revolving credit facilities, repaid $518.2 million of debt, repurchased $4.0 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid $217.4 million in distributions and paid $1.5 million in other transactions.

For the year ended December 31, 2018 , cash provided by financing activities was $1,717.7 million .

During the year ended December 31, 2018 , we borrowed $550.2 million under the revolving credit facilities (a portion of which was used to purchase marketable securities described above in "Cash Used in and Provided by Investing Activities"), repaid $425.2 million under the revolving credit facilities, borrowed $1,850.0 million in debt to fund the LaSalle merger, repaid $102.4 million of debt, repurchased $2.5 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid $121.8 million in distributions and paid $29.4 million in financing costs.

Capital Investments

We maintain and intend to continue maintaining all of our hotels, including each hotel that we acquire in the future, in good repair and condition and in conformity with applicable laws and regulations and when applicable, in accordance with the franchisor’s standards and the agreed-upon requirements in our management agreements.

franchisor’s standards and the agreed-upon requirements in our management agreements.

Routine capital investments will be administered by the hotel management companies.

2 unchanged sentences

In addition, after we acquire a hotel property, we are often required by the franchisor or brand manager, if there is one, to complete a property improvement plan (“PIP”) in order to bring the hotel property up to the franchisor’s or brand’s standards.

Generally, we expect to fund renovations and improvements with available cash, restricted cash, borrowings under our credit facility, or proceeds from new mortgage debt or equity offerings.

For the year ended December 31, 2019 , we invested $169.6 million in capital investments to reposition and improve the properties we own.

We expect to invest approximately $165.0 million to $185.0 million in capital investments for our hotels in 2020, including a $17.0 million renovation at The Westin San Diego Gaslamp Quarter and a $18.0 million renovation at Embassy Suites San Diego Bay - Downtown , both of which are expected to be completed in the first quarter of 2020.

In November 2019, we commenced a $25.0 million renovation and repositioning at Donovan Hotel .

This renovation is expected to be completed during the second quarter of 2020 at which time the hotel will be relaunched as Hotel Zena Washington DC, a member of our "Unofficial Z Collection" proprietary brand.

Generally, we expect to fund renovations and improvements with available cash, restricted cash, borrowings under our credit facility, or proceeds from new debt or equity offerings.

For the year ended December 31, 2020, we invested $125.0 million in capital investments to reposition and improve our properties.

Since the beginning of 2020, we have completed the transformational redevelopments of several hotels and resorts, including Hotel Zena Washington DC (formerly Donovan Hotel), Embassy Suites San Diego Bay - Downtown, The Westin San Diego Gaslamp Quarter, Le Parc Suite Hotel, San Diego Mission Bay Resort (formerly Hilton San Diego Mission Bay Resort), Viceroy Santa Monica Hotel, Chaminade Resort & Spa, Viceroy Washington DC (formerly Mason & Rook Hotel) and The Marker Key West Harbor Resort.

Depending on market conditions, we expect total capital investments to be approximately $60.0 million to $70.0 million in 2021.

However, depending on the pace of the recovery, we may decide to proceed with previously planned but deferred renovations at our properties.

Contractual Obligations and Off-Balance Sheet Arrangements

2 unchanged sentences

Term loans (2)

$ 1,928,638 $ 106,424 $ 1,308,574 $ 513,640 $ —

Convertible senior notes (1)

552,135 8,750 17,500 17,500 508,385

Unsecured notes (1)

117,921 4,792 69,349 43,780 —

Borrowings under credit facilities (3)

41,056 1,014 40,042 — —

Hotel and ground leases (4)

Capital lease obligation

1,209,864 16,814 33,787 34,113 1,125,150

Finance lease obligation 65,009 1,331 2,720 2,802 58,156

Refundable membership initiation deposits (5)

29,260 203 — — 29,057

Purchase commitments (6)

2,971 2,971 — — —

Corporate office leases 15,719 1,828 3,309 2,424 8,158

Total $ 3,962,573 $ 144,127 $ 1,475,281 $ 614,259 $ 1,728,906

____________________

8 unchanged sentences

The table above reflects only minimum fixed rent for all periods presented and does not include assumptions for CPI adjustments.

Represents refundable initiation membership deposits from club members at LaPlaya.

(5) Represents refundable initiation membership deposits from club members at LaPlaya Beach Resort and Club.

(6) Amounts represent purchase orders and contracts that have been executed for renovation projects at the properties.

6 unchanged sentences

Generally, our hotels have lower revenue, operating income and cash flow in the first quarter of each year and higher revenue, operating income and cash flow in the third quarter of each year.

The historical trend has been disrupted as a result of COVID-19.

For the year ended December 31, 2020, the first quarter of the year had higher revenue, operating income and cash flow with hotels suspensions and decline in operations beginning in March 2020.

Derivative Instruments

7 unchanged sentences

We have designated these pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges.

For the years ended December 31, 2019 and 2018 , there was $(26.0) million and $(2.9) million in unrealized (loss) gain, respectively, recorded in accumulated other comprehensive income (loss).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis