Pebblebrook Hotel Trust 10-Q

Item 1. Financial Statements. Pebblebrook Hotel Trust Consolidated Balance Sheets (In thousands, except share and per-share data) March 31, 2021 December 31, 2020 (Unaudited) ASSETS Investment in hotel properties, net $ 5,731,727 $ 5,882,022 Hotel held for sale 90,384 — Cash and cash equivalents 113,338 124,274 Restricted cash 11,294 12,026 Hotel receivables (net of allowance for doubtful accounts of $ 539 and $ 183 , respectively) 16,647 10,225 Prepaid expenses and other assets 45,519 47,819 Total assets $ 6,008,909 $ 6,076,366 LIABILITIES AND EQUITY Debt $ 2,433,980 $ 2,280,471 Accounts payable, accrued expenses and other liabilities 239,278 226,446 Lease liabilities - operating leases 254,831 255,106 Deferred revenues 41,202 36,057 Accrued interest 9,087 4,653 Liabilities related to hotel held for sale 2,293 — Distribution payable 9,082 9,307 Total liabilities 2,989,753 2,812,040 Commitments and contingencies (Note 11) Shareholders’ equity: Preferred shares of beneficial interest, $ .01 par value (liquidation preference $ 510,000 at March 31, 2021 and December 31, 2020), 100,000,000 shares authorized; 20,400,000 shares issued and outstanding at March 31, 2021 and December 31, 2020 204 204 Common shares of beneficial interest, $ .01 par value, 500,000,000 shares authorized; 130,812,917 shares issued and outstanding at March 31, 2021 and 130,673,300 shares issued and outstanding at December 31, 2020 1,308 1,307 Additional paid-in capital 4,038,860 4,169,870 Accumulated other comprehensive income (loss) ( 43,917 ) ( 60,071 ) Distributions in excess of retained earnings ( 983,771 ) ( 853,973 ) Total shareholders’ equity 3,012,684 3,257,337 Non-controlling interests 6,472 6,989 Total equity 3,019,156 3,264,326 Total liabilities and equity $ 6,008,909 $ 6,076,366 The accompanying notes are an integral part of these financial statements. 3 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Operations and Comprehensive Income (In thousands, except share and per-share data) (Unaudited) For the three months ended March 31, 2021 2020 Revenues: Room $ 53,463 $ 177,141 Food and beverage 14,809 67,092 Other operating 15,371 24,874 Total revenues 83,643 269,107 Expenses: Hotel operating expenses: Room 16,710 54,125 Food and beverage 10,743 51,859 Other direct and indirect 45,228 95,470 Total hotel operating expenses 72,681 201,454 Depreciation and amortization 55,443 55,828 Real estate taxes, personal property taxes, property insurance, and ground rent 28,590 29,766 General and administrative 7,646 22,577 Transaction costs 111 36 Impairment loss 14,856 20,570 (Gain) loss on sale of hotel properties — ( 117,448 ) (Gain) loss and other operating expenses 451 1,433 Total operating expenses 179,778 214,216 Operating income (loss) ( 96,135 ) 54,891 Interest expense ( 25,331 ) ( 23,591 ) Other 29 24 Income (loss) before income taxes ( 121,437 ) 31,324 Income tax (expense) benefit ( 3 ) 10,744 Net income (loss) ( 121,440 ) 42,068 Net income (loss) attributable to non-controlling interests ( 858 ) 119 Net income (loss) attributable to the Company ( 120,582 ) 41,949 Distributions to preferred shareholders ( 8,139 ) ( 8,139 ) Net income (loss) attributable to common shareholders $ ( 128,721 ) $ 33,810 Net income (loss) per share available to common shareholders, basic $ ( 0.98 ) $ 0.26 Net income (loss) per share available to common shareholders, diluted $ ( 0.98 ) $ 0.26 Weighted-average number of common shares, basic 130,775,873 130,555,846 Weighted-average number of common shares, diluted 130,775,873 130,678,908 4 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Operations and Comprehensive Income - Continued (In thousands, except share and per-share data) (Unaudited) For the three months ended March 31, 2021 2020 Comprehensive Income: Net income (loss) $ ( 121,440 ) $ 42,068 Other comprehensive income (loss): Change in fair value of derivative instruments 9,736 ( 57,474 ) Amounts reclassified from other comprehensive income 6,418 3,209 Comprehensive income (loss) ( 105,286 ) ( 12,197 ) Comprehensive income (loss) attributable to non-controlling interests ( 752 ) ( 35 ) Comprehensive income (loss) attributable to the Company $ ( 104,534 ) $ ( 12,162 ) The accompanying notes are an integral part of these financial statements. 5 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Equity (In thousands, except share data) (Unaudited) Preferred Shares Common Shares Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Distributions in Excess of Retained Earnings Total Shareholders' Equity Non-Controlling Interests Total Equity Shares Amount Shares Amount Balance at December 31, 2019 20,400,000 $ 204 130,484,956 $ 1,305 $ 4,069,410 $ ( 24,715 ) $ ( 424,996 ) $ 3,621,208 $ 10,728 $ 3,631,936 Issuance of shares, net of offering costs — — — — ( 85 ) — — ( 85 ) — ( 85 ) Issuance of common shares for Board of Trustees compensation — — 23,528 1 636 — — 637 — 637 Repurchase of common shares — — ( 47,507 ) ( 1 ) ( 1,254 ) — — ( 1,255 ) — ( 1,255 ) Share-based compensation — — 102,249 1 7,020 — — 7,021 10,616 17,637 Distributions on common shares/units — — — — — — ( 764 ) ( 764 ) ( 4 ) ( 768 ) Distributions on preferred shares — — — — — — ( 8,139 ) ( 8,139 ) — ( 8,139 ) Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — ( 57,474 ) — ( 57,474 ) — ( 57,474 ) Amounts reclassified from other comprehensive income — — — — — 3,209 — 3,209 — 3,209 Net income (loss) — — — — — — 41,949 41,949 119 42,068 Balance at March 31, 2020 20,400,000 $ 204 130,563,226 $ 1,306 $ 4,075,727 $ ( 78,980 ) $ ( 391,950 ) $ 3,606,307 $ 21,459 $ 3,627,766 6 Table of Contents Preferred Shares Common Shares Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Distributions in Excess of Retained Earnings Total Shareholders' Equity Non-Controlling Interests Total Equity Shares Amount Shares Amount Balance at December 31, 2020 20,400,000 $ 204 130,673,300 $ 1,307 $ 4,169,870 $ ( 60,071 ) $ ( 853,973 ) $ 3,257,337 $ 6,989 $ 3,264,326 Issuance of shares, net of offering costs — — — — ( 10 ) — — ( 10 ) — ( 10 ) Issuance of common shares for Board of Trustees compensation — — 27,711 1 515 — — 516 — 516 Repurchase of common shares — — ( 38,310 ) ( 1 ) ( 719 ) — — ( 720 ) — ( 720 ) Share-based compensation — — 150,216 1 3,278 — — 3,279 349 3,628 Distributions on common shares/units — — — — — — ( 1,077 ) ( 1,077 ) ( 8 ) ( 1,085 ) Distributions on preferred shares — — — — — — ( 8,139 ) ( 8,139 ) — ( 8,139 ) Cumulative effect adjustment from adoption of new accounting standard — — — — ( 113,099 ) — — ( 113,099 ) — ( 113,099 ) Purchases of capped calls in connection with convertible senior notes — — — — ( 20,975 ) — — ( 20,975 ) — ( 20,975 ) Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — 9,736 — 9,736 — 9,736 Amounts reclassified from other comprehensive income — — — — — 6,418 — 6,418 — 6,418 Net income (loss) — — — — — — ( 120,582 ) ( 120,582 ) ( 858 ) ( 121,440 ) Balance at March 31, 2021 20,400,000 $ 204 130,812,917 $ 1,308 $ 4,038,860 $ ( 43,917 ) $ ( 983,771 ) $ 3,012,684 $ 6,472 $ 3,019,156 The accompanying notes are an integral part of these financial statements. 7 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Cash Flows (In thousands) (Unaudited) For the three months ended March 31, 2021 2020 Operating activities: Net income (loss) $ ( 121,440 ) $ 42,068 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 55,443 55,828 Share-based compensation 2,182 17,637 Amortization of deferred financing costs, non-cash interest and mortgage loan premiums 4,744 3,594 (Gain) loss on sale of hotel properties — ( 117,448 ) Impairment loss 14,856 20,570 Non-cash ground rent 1,521 1,574 Other 69 146 Changes in assets and liabilities: Hotel receivables ( 6,800 ) 23,386 Prepaid expenses and other assets 1,686 ( 5,200 ) Accounts payable and accrued expenses 35,110 ( 26,326 ) Deferred revenues 5,493 ( 14,337 ) Net cash provided by (used in) operating activities ( 7,136 ) 1,492 Investing activities: Improvements and additions to hotel properties ( 9,623 ) ( 50,099 ) Proceeds from sales of hotel properties — 320,036 Purchase of corporate office equipment, software, and furniture ( 47 ) — Net cash provided by (used in) investing activities ( 9,670 ) 269,937 Financing activities: Payment of offering costs — common and preferred shares ( 10 ) ( 85 ) Payment of deferred financing costs ( 9,576 ) — Borrowings under revolving credit facilities — 760,115 Repayments under revolving credit facilities ( 40,000 ) ( 281,947 ) Proceeds from debt 263,750 — Repayments of debt ( 177,000 ) — Purchases of capped calls for convertible senior notes ( 20,975 ) — Repurchases of common shares ( 720 ) ( 1,255 ) Distributions — common shares/units ( 1,312 ) ( 50,027 ) Distributions — preferred shares ( 8,139 ) ( 8,139 ) Repayments of refundable membership deposits ( 880 ) ( 198 ) Net cash provided by (used in) financing activities 5,138 418,464 Net change in cash and cash equivalents and restricted cash ( 11,668 ) 689,893 Cash and cash equivalents and restricted cash, beginning of year 136,300 56,875 Cash and cash equivalents and restricted cash, end of period $ 124,632 $ 746,768 The accompanying notes are an integral part of these financial statements. 8 PEBBLEBROOK HOTEL TRUST NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Organization Pebblebrook Hotel Trust (the "Company") was formed as a Maryland real estate investment trust in October 2009 to opportunistically acquire and invest in hotel properties located primarily in major United States cities, with an emphasis on major gateway coastal markets. As of March 31, 2021, the Company owned 53 hotels with a total of 13,236 guest rooms. The hotels are located in the following markets: Boston, Massachusetts; Chicago, Illinois; Key West, Florida; Miami (Coral Gables), Florida; Los Angeles, California (Beverly Hills, Santa Monica, and West Hollywood); Naples, Florida; New York, New York; Philadelphia, Pennsylvania; Portland, Oregon; San Diego, California; San Francisco, California; Seattle, Washington; Stevenson, Washington; and Washington, D.C. Substantially all of the Company’s assets are held by, and all of the Company's operations are conducted through, Pebblebrook Hotel, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership. At March 31, 2021, the Company owned 99.3 % of the common limited partnership units issued by the Operating Partnership ("common units"). The remaining 0.7 % of the common units are owned by the other limited partners of the Operating Partnership. For the Company to maintain its qualification as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), it cannot operate the hotels it owns. Therefore, the Operating Partnership and its subsidiaries lease the hotel properties to subsidiaries of Pebblebrook Hotel Lessee, Inc. (collectively with its subsidiaries, "PHL"), a taxable REIT subsidiary ("TRS"), which in turn engage third-party eligible independent contractors to manage the hotels. PHL is consolidated into the Company’s financial statements. COVID-19 Operations and Liquidity Update 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 policy changes and individual responses, hotel demand was dramatically reduced. In response, the Company implemented significant cost controls, salary reductions and temporarily suspended operations at 47 of its hotels and resorts. As demand has returned over the past year, the Company reopened the majority of its hotels and resorts. As of March 31, 2021, 40 of the Company's hotels and resorts were open, with operations at the remaining 13 hotels listed below still temporarily suspended. The Company anticipates reopening additional hotels as demand returns. Property Location 1. Argonaut Hotel (1) San Francisco, CA 2. Harbor Court Hotel San Francisco (1) San Francisco, CA 3. Hotel Vitale San Francisco, CA 4. Hotel Zelos San Francisco (1) San Francisco, CA 5. Hotel Zephyr Fisherman's Wharf (1) San Francisco, CA 6. Hotel Zeppelin San Francisco (1) San Francisco, CA 7. Hotel Zoe Fisherman's Wharf (1) San Francisco, CA 8. The Marker San Francisco (1) San Francisco, CA 9. Sir Francis Drake (2) San Francisco, CA 10. Villa Florence San Francisco on Union Square San Francisco, CA 11. Revere Hotel Boston Common (1) Boston, MA 12. The Westin Michigan Avenue Chicago Chicago, IL 13. The Roger New York New York, NY (1) Hotel reopened in April 2021. (2) Hotel was sold in April 2021. The COVID-19 pandemic has had a significant negative impact on the Company's operations and financial results to date and the Company expects that it will continue to have a significant negative impact on the Company's results of operations, financial position and cash flow in 2021. The Company cannot estimate when travel demand will fully recover. 9 Table of Contents In February 2021, the Company issued, at a 5.5 % premium to par, an additional $ 250.0 million aggregate principal amount of its convertible notes originally issued in December 2020. In connection with the pricing of the convertible notes, the Company entered into privately negotiated capped call transactions with certain of the underwriters, their respective affiliates and/or other counterparties. The Company used the net proceeds to reduce amounts outstanding under the Company’s senior unsecured revolving credit facility and unsecured term loans, and for general corporate purposes. In February 2021, the Company amended the agreements governing its existing credit facilities, term loan facilities and senior notes to, among other items, 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, and to increase the interest rate spread. Refer to "Note 5. Debt" for additional information regarding these amendments and the convertible notes. Based on these amendments and expense and cash burn rate reductions, the Company believes that it has sufficient liquidity to meet its obligations for the next twelve months. The Company adopted a staggered return-to-work policy and other physical distancing policies at its corporate office and does not anticipate these policies to have any adverse impact on its ability to continue to operate its business. Transitioning to a hybrid remote-work environment has not had a material adverse impact on the Company's financial reporting system, internal controls or disclosure controls and procedures. Note 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP and in conformity with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) applicable to interim financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of equity and consolidated statements of cash flows for the periods presented. Interim results are not necessarily indicative of full-year performance, as a result of the impact of seasonal and other short-term variations and the acquisitions and or dispositions of hotel properties. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The Company and its subsidiaries are separate legal entities and maintain records and books of account separate and apart from each other. The consolidated financial statements include all of the accounts of the Company and its subsidiaries and are presented in accordance with U.S. GAAP. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior period's financial statements to conform to the current year presentation. Use of Estimates The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management’s best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates. Fair Value Measurements A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value are as follows: 1. Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. 2. Level 2 – Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable. 3. Level 3 – Model-derived valuations with unobservable inputs. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. 10 The Company's financial instruments include cash and cash equivalents, restricted cash, accounts payable and accrued expenses. Due to their short maturities, the carrying amounts of these assets and liabilities approximate fair value. See Note 5 to the accompanying consolidated financial statements for disclosures on the fair value of debt and derivative instruments. Investment in Hotel Properties Upon acquiring a business or hotel property, the Company measures and recognizes the fair value of the acquired land, land improvements, building, furniture, fixtures and equipment, identifiable intangible assets or liabilities, other assets and assumed liabilities. Identifiable intangible assets or liabilities typically arise from contractual arrangements in connection with the transaction, including terms that are above or below market compared to an estimated market agreement at the acquisition date. Acquisition-date fair values of assets and assumed liabilities are determined using a combination of the market, cost and income approaches. These valuation methodologies are based on significant Level 2 and Level 3 inputs in the fair value hierarchy, such as estimates of future income growth, capitalization rates, discount rates, capital expenditures and cash flow projections, including hotel revenues and net operating income, at the respective hotel properties. Transaction costs related to business combinations are expensed as incurred and included on the consolidated statements of operations and comprehensive income. Hotel renovations and replacements of assets that improve or extend the life of the asset are recorded at cost and depreciated over their estimated useful lives. Furniture, fixtures and equipment under finance leases are recorded at the present value of the minimum lease payments. Repair and maintenance costs are expensed as incurred. Hotel properties are recorded at cost and depreciated using the straight-line method over an estimated useful life of 10 to 40 years for buildings, land improvements, and building improvements and 1 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. Intangible assets arising from contractual arrangements are typically amortized over the life of the contract. The Company is required to make subjective assessments as to the useful lives and classification of properties for purposes of determining the amount of depreciation expense to reflect each year with respect to the assets. These assessments may impact the Company’s results of operations. The Company reviews its investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, when a hotel property experiences a current or projected loss from operations, when it becomes more likely than not that a hotel property will be sold before the end of its useful life, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, the Company performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying value of the asset, an adjustment to reduce the carrying value to the related hotel’s estimated fair market value is recorded and an impairment loss is recognized. In the evaluation of impairment of its hotel properties, the Company makes many assumptions and estimates including projected cash flows both from operations and eventual disposition, expected useful life and estimated holding period, future required capital expenditures, and fair values, including consideration of expected terminal capitalization rates, discount rates, and comparable selling prices. The Company will adjust its assumptions with respect to the remaining useful life of the hotel property when circumstances change or it is more likely than not that the hotel property will be sold prior to its previously expected useful life. The Company will classify a hotel as held for sale and will cease recording depreciation expense when a binding agreement to sell the property has been signed under which the buyer has committed a significant amount of nonrefundable cash, approval of the Company's board of trustees (the "Board of Trustees") has been obtained, no significant financing contingencies exist, and the sale is expected to close within one year. If the fair value less costs to sell is lower than the carrying value of the hotel, the Company will record an impairment loss. The Company will classify the loss as continuing or discontinuing operations on the consolidated statements of operations and comprehensive income and classify the assets and related liabilities as held for sale on the consolidated balance sheets. The Company will report a disposed or held for sale hotel property or group of hotel properties in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on its operations and financial results. All other disposed hotel properties will have their operating results reflected within continuing operations on the Company's consolidated statements of operations and comprehensive income for all periods presented. Revenue Recognition Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over the length of a customer's hotel stay. Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the point in time or over the time period that goods or services are 11 provided to the customer. Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or agent in these arrangements. If the Company is the agent, revenue is recognized based upon the commission earned from the third party. If the Company is the principal, the Company recognizes revenue based upon the gross sales price. Some contracts for rooms or food and beverage services require an upfront deposit which is recorded as deferred revenues (or contract liabilities) and recognized once the performance obligations are satisfied. The Company recognizes revenue related to nonrefundable membership initiation fees and refundable membership initiation deposits over the expected life of an active membership. For refundable membership initiation deposits, the difference between the amount paid by the member and the present value of the refund obligation is deferred and recognized as other operating revenues on the consolidated statements of operations and comprehensive income over the expected life of an active membership. The present value of the refund obligation is recorded as a membership initiation deposit liability in the consolidated balance sheets and accretes over the nonrefundable term using the effective interest method using the Company's incremental borrowing rate. The accretion is included in interest expense. Certain of the Company's hotels have retail spaces, restaurants or other spaces which the Company leases to third parties. When collection of substantially all lease payments during the lease term is considered probable, lease revenue is recognized on a straight-line basis over the life of the lease. When collection of substantially all lease payments during the lease term is not considered probable, revenue is recognized as the lesser of the amount under straight-line basis or cash received. Lease revenue is included in other operating revenues in the Company's consolidated statements of operations and comprehensive income. The Company collects sales, use, occupancy and similar taxes at its hotels which are presented on a net basis on the consolidated statements of operations and comprehensive income. Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. The Company maintains an allowance for doubtful accounts sufficient to cover estimated potential credit losses. Income Taxes To qualify as a REIT for federal income tax purposes, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90 percent of its REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains) to its shareholders. As a REIT, the Company generally is not subject to federal corporate income tax on that portion of its taxable income that is currently distributed to shareholders. The Company is subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, the Company's TRS lessees are subject to federal and state income taxes. The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Share-based Compensation The Company has adopted an equity incentive plan that provides for the grant of common share options, share awards, share appreciation rights, performance units and other equity-based awards. Equity-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the vesting period. Share-based compensation awards that contain a performance condition are reviewed at least quarterly to assess the achievement of the performance condition. Compensation expense will be adjusted when a change in the assessment of achievement of the specific performance condition level is determined to be probable. The determination of fair value of these awards is subjective and involves estimates and assumptions including expected volatility of the Company's shares, expected dividend yield, expected term and assumptions of whether these awards will achieve parity with other operating partnership units or achieve performance thresholds. Earnings Per Share Basic earnings per share (“EPS”) is computed by dividing the net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income (loss) available to common shareholders, as adjusted for dilutive securities, by the weighted-average number of common shares outstanding plus dilutive securities. Any anti-dilutive securities are excluded from the diluted per-share calculation. Recent Accounting Standards During the first quarter of 2020, the Financial Accounting Standards Board (" FASB") issued ASU 2020-04, Reference Rate Reform (Topic 848) . ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company has elected to apply the hedge accounting 12 expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40), which, among other things, simplifies the accounting for convertible instruments by eliminating the requirement to separate conversion features from the host contract. The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. As a result, in more cases, convertible debt will be accounted for as a single instrument. The guidance also removes certain conditions for equity classification related to contracts in an entity’s own equity and requires the application of the if-converted method for calculating diluted earnings per share. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods. The Company early adopted ASU 2020-06 on January 1, 2021. As such, on January 1, 2021, the Company reclassified its equity component of the convertible debt to the liability. Convertible debt is now recorded entirely as a single liability with no portion of the proceeds from the issuance of the convertible debt instrument recorded as attributable to the conversion feature. In addition, the Company ceased recording non-cash interest expense associated with amortization of the debt discount and calculates earnings per share using the if-converted method to the extent those shares are not anti-dilutive. Note 3. Acquisition and Disposition of Hotel Properties There were no acquisitions of hotel properties during the three months ended March 31, 2021 and 2020. As of March 31, 2021, the Company had entered into an agreement to sell the Sir Francis Drake for $ 157.6 million. This hotel was designated as held for sale as it met all of the Company's held for sale criteria. Accordingly, the Company classified all of the assets and liabilities related to this hotel as assets and liabilities held for sale in the accompanying consolidated balance sheets and ceased depreciating the assets. On April 1, 2021, the Company completed the sale of the Sir Francis Drake. There were no dispositions of hotel properties during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company sold two hotel properties in a single transaction for an aggregate sales price of $ 331.0 million. For the three months ended March 31, 2020, the Company recognized a gain on its dispositions of $ 117.4 million, which is included in (gain) loss on sale of hotel properties in the accompanying consolidated statements of operations and comprehensive income. For the three months ended March 31, 2020, the accompanying consolidated statements of operations and comprehensive income included operating income of $ 4.3 million related to the hotel properties sold. The sales of the hotel properties described above did not represent a strategic shift that had a major effect on the Company’s operations and financial results, and therefore, did not qualify as discontinued operations. Note 4. Investment in Hotel Properties Investment in hotel properties as of March 31, 2021 and December 31, 2020 consisted of the following (in thousands): March 31, 2021 December 31, 2020 Land $ 947,263 $ 973,848 Buildings and improvements 4,759,264 4,849,644 Furniture, fixtures and equipment 499,810 515,975 Finance lease asset 114,835 114,835 Construction in progress 4,546 5,443 $ 6,325,718 $ 6,459,745 Right-of-use asset, operating leases 318,944 320,564 Investment in hotel properties $ 6,644,662 $ 6,780,309 Less: Accumulated depreciation ( 912,935 ) ( 898,287 ) Investment in hotel properties, net $ 5,731,727 $ 5,882,022 The Company reviews its investment in hotel properties for impairment whenever events or circumstances indicate potential impairment. As a result of the ongoing effects of the COVID-19 pandemic on its expected future operating cash flows and estimated hold periods for certain properties, the Company determined certain impairment triggers had occurred and therefore, the Company assessed its investment in hotel properties for recoverability. Based on the analyses performed, for the three months ended March 31, 2021, the Company recognized an impairment loss of $ 14.9 million related to one hotel as a result of the fair value being lower than its carrying value. The impairment loss was determined using Level 2 inputs under authoritative guidance for fair value measurements using information from current marketing efforts for this property. For the three months ended March 31, 2020, the Company recognized an impairment loss of $ 20.6 million related to a retail 13 Table of Contents component of a hotel as a result of the fair value being lower than its carrying value. The impairment loss was determined using Level 2 inputs under authoritative guidance for fair value measurements. The Company recognized right-of-use assets and related liabilities related to its ground leases, all of which are operating leases. Since most of the Company's leases do not provide an implicit rate, the Company used incremental borrowing rates, which ranged from 5.5 % to 7.6 %. All of these ground leases have long terms, ranging from 10 years to 88 years and the Company included the exercise of options to extend when it is reasonably certain the Company will exercise such option. See Note 11 for additional information about the ground leases. The right-of-use assets and liabilities are amortized to ground rent expense over the term of the underlying lease agreements. As of March 31, 2021, the Company's lease liabilities consisted of operating lease liabilities of $ 254.8 million and financing lease liabilities of $ 46.5 million. As of December 31, 2020, the Company's lease liabilities consisted of operating lease liabilities of $ 255.1 million and financing lease liabilities of $ 46.4 million. The financing lease liabilities are included in accounts payable, accrued expenses and other liabilities on the Company's accompanying consolidated balance sheets. Note 5. Debt On February 18, 2021, the Company amended its credit agreements and related documents governing its unsecured revolving credit facilities, term loan agreements and senior notes, which: • extended the waiver period for financial covenants through the end of the first quarter of 2022 except for the minimum fixed charge coverage and the minimum unsecured interest coverage ratio which are extended through December 31, 2021. The covenants are substantially less restrictive through a phase-in period; • extended the majority of the remaining balance of the Company's Sixth Term Loan 2021 tranche, from November 2021 to November 2022; • increased the spread on the unsecured revolving credit facility to LIBOR plus 2.4 % and unsecured term loans to LIBOR plus 2.35 %; • increased the fixed rate on the Senior Unsecured Notes by 0.45 % during the waiver period; and • extended other terms through the waiver period. 14 Table of Contents The Company's debt consisted of the following as of March 31, 2021 and December 31, 2020 (dollars in thousands): Balance Outstanding as of Interest Rate Maturity Date March 31, 2021 December 31, 2020 Revolving credit facilities Senior unsecured credit facility Floating (1) January 2022 $ — $ 40,000 PHL unsecured credit facility Floating (2) January 2022 — — Total revolving credit facilities $ — $ 40,000 Unsecured term loans First Term Loan Floating (3) January 2023 300,000 300,000 Second Term Loan Floating (3) April 2022 45,000 65,000 Fourth Term Loan Floating (3) October 2024 110,000 110,000 Sixth Term Loan Tranche 2021 Floating (3) November 2021 (4) 6,720 40,966 Tranche 2021 Extended Floating (3) November 2022 140,280 173,034 Tranche 2022 Floating (3) November 2022 196,000 286,000 Tranche 2023 Floating (3) November 2023 400,000 400,000 Tranche 2024 Floating (3) January 2024 400,000 400,000 Total Sixth Term Loan 1,143,000 1,300,000 Total term loans at stated value 1,598,000 1,775,000 Deferred financing costs, net ( 8,248 ) ( 8,455 ) Total term loans $ 1,589,752 $ 1,766,545 Convertible senior notes Convertible senior notes 1.75 % December 2026 750,000 500,000 Debt premium (discount), net 13,360 ( 113,099 ) Deferred financing costs, net ( 18,645 ) ( 12,568 ) Total convertible senior notes $ 744,715 $ 374,333 Senior unsecured notes Series A Notes 5.15 % (5) December 2023 60,000 60,000 Series B Notes 5.38 % (6) December 2025 40,000 40,000 Total senior unsecured notes at stated value 100,000 100,000 Deferred financing costs, net ( 487 ) ( 407 ) Total senior unsecured notes $ 99,513 $ 99,593 Total debt $ 2,433,980 $ 2,280,471 ________________________ (1) Borrowings bear interest at floating rates equal to, at the Company's 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. (2) Borrowings bear interest at floating rates equal to, at the Company's option, either (i) LIBOR plus an applicable margin or (ii) an Eurocurrency Rate (as defined in the applicable credit agreement) plus an applicable margin. (3) Borrowings under the term loan facilities bear interest at floating rates equal to, at the Company's option, either (i) LIBOR plus an applicable margin or (ii) a Base Rate plus an applicable margin. As of March 31, 2021, $ 1.4 billion of the borrowings under the term loan facilities bore an effective weighted-average fixed interest rate of 4.13 %, after taking into account interest rate swap agreements, and $ 168.0 million bore an effective weighted-average floating interest rate of 2.62 %. As of December 31, 2020, $ 1.4 billion of the borrowings under the term loan facilities bore a weighted-average fixed interest rate of 4.19 %, after taking into account interest rate swap agreements, and $ 345.0 million bore a weighted-average floating interest rate of 2.46 %. (4 ) In February 2021, the majority of the remaining balance was extended to November 2022. 15 Table of Contents (5) In February 2021, the interest rate increased from 4.70 % to 5.15 %. The increased interest rate is effective through the end of the waiver period. (6) In February 2021, the interest rate increased from 4.93 % to 5.38 %. The increased interest rate is effective through the end of the waiver period. Unsecured Revolving Credit Facilities The Company has 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 March 31, 2021, the Company had no outstanding borrowings, $ 6.8 million of outstanding letters of credit and borrowing capacity of $ 643.2 million remaining on its senior unsecured 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 Company has the ability to further increase the aggregate borrowing capacity under the credit agreement up to $ 1.3 billion, subject to lender approval. Borrowings on the revolving credit facility bear interest at LIBOR plus 1.45 % to 2.25 %, depending on the Company’s leverage ratio. As a result of the amendments to the credit agreements and related documentation described above, the spread on the borrowings is fixed at 2.40 % during the waiver period. Additionally, the Company is required to pay an unused commitment fee at an annual rate of 0.20 % or 0.30 % of the unused portion of the revolving credit facility, depending on the amount of borrowings outstanding. The credit agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a maximum percentage of secured debt to total asset value. The Company also has a $ 25.0 million unsecured revolving credit facility (the "PHL Credit Facility") to be used for PHL's working capital and general corporate purposes. This credit facility has substantially similar terms as the Company's senior unsecured revolving credit facility and matures in January 2022. Borrowings on the PHL Credit Facility bear interest at LIBOR plus 1.45 % to 2.25 %, depending on the Company's leverage ratio. As a result of the amendments described above, the spread of the borrowings is fixed at 2.40 % during the waiver period. The PHL Credit Facility is subject to debt covenants substantially similar to the covenants under the Company's credit agreement that governs the Company's senior unsecured revolving credit facility. As of March 31, 2021, the Company had no borrowings under the PHL Credit Facility and had $ 25.0 million borrowing capacity remaining available under the PHL Credit Facility. Under the terms of the credit agreement for the unsecured revolving credit facility, one or more standby letters of credit, up to a maximum aggregate outstanding balance of $ 30.0 million, may be issued on behalf of the Company by the lenders under the unsecured revolving credit facility. The Company will incur a fee that shall be agreed upon with the issuing bank. Any outstanding standby letters of credit reduce the available borrowings on the senior unsecured revolving credit facility by a corresponding amount. Standby letters of credit of $ 6.8 million were outstanding as of March 31, 2021 and December 31, 2020. As of March 31, 2021, the Company was in compliance with all debt covenants of the credit agreements that govern the unsecured revolving credit facilities. Unsecured Term Loan Facilities The Company has senior unsecured term loans with different maturities. Each unsecured term loan bears interest at a variable rate of a benchmark interest rate plus an applicable margin, depending on the Company's leverage ratio. Each of the term loan facilities is subject to debt covenants substantially similar to the covenants under the credit agreement that governs the revolving credit facility. Upon completion of the convertible notes offering in February 2021, the Company repaid $ 177.0 million of the Company's second and sixth term loans. As of March 31, 2021, the Company was in compliance with all debt covenants of its term loan facilities. The Company entered into interest rate swap agreements to fix the LIBOR rate on a portion of these unsecured term loan facilities. See Derivative and Hedging Activities below. Convertible Senior Notes In December 2020, the Company issued $ 500.0 million aggregate principal amount of 1.75 % Convertible Senior Notes due December 2026 (the "Convertible Notes"). The net proceeds from this offering of the Convertible Notes were approximately $ 487.3 million after deducting the underwriting fees and other expenses paid by the Company. In February 2021, the Company issued an additional $ 250.0 million aggregate principal amount of Convertible Notes. These additional Convertible Notes were sold at a 5.5 % premium to par and generated net proceeds of approximately $ 257.2 million after deducting the underwriting fees and other expenses paid by the Company of $ 6.5 million, which was offset by a premium received in the amount of $ 13.8 million. 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 Convertible Notes bear interest at a rate of 1.75 % per annum, payable semi-annually in arrears on June 15th and December 15th of each year, beginning on June 15, 2021. The Convertible Notes will 16 Table of Contents mature on December 15, 2026. The Company recorded coupon interest expense of $ 2.8 million for the three months ended March 31, 2021. The Company separated the Convertible Notes issued in December 2020 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. 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 such Convertible Notes, or $ 113.9 million. The amount recorded in equity was not subject to remeasurement or amortization. The $ 113.9 million also represented the initial discount recorded on the Convertible Notes. The Company early adopted ASU 2020-06 on January 1, 2021. As a result, the Convertible Notes are now recorded as a single liability with no portion recorded in equity. The Company also ceased recording non-cash interest expense associated with amortization of the debt discount. 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 of beneficial interest (“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. As of March 31, 2021 and December 31, 2020, the if-converted value of the Convertible Notes did not exceed the principal amount. 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 issuances, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the underwriters of the offerings 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 entered into in December 2020 and February 2021 was $ 38.3 million and $ 21.0 million, respectively, and was recorded within additional paid-in capital. Senior Unsecured Notes The Company has $ 60.0 million of senior unsecured notes outstanding bearing a fixed interest rate of 4.70 % per annum and maturing in December 2023 (the "Series A Notes") and $ 40.0 million of senior unsecured notes outstanding bearing a fixed interest rate of 4.93 % per annum and maturing in December 2025 (the "Series B Notes"). As a result of the amendments described above, the interest rates of the Series A Notes and the Series B Notes are fixed at 5.15 % and 5.38 %, respectively, for the duration of the waiver period. The debt covenants of the Series A Notes and the Series B Notes are substantially similar to those of the Company's senior unsecured revolving credit facility. As of March 31, 2021, the Company was in compliance with all such debt covenants. Interest Expense The components of the Company's interest expense consisted of the following (in thousands): For the three months ended March 31, 2021 2020 Unsecured revolving credit facilities $ 561 $ 2,305 Unsecured term loan facilities 15,909 17,152 Convertible senior notes 2,819 — Senior unsecured notes 1,252 1,198 Amortization of deferred financing fees 2,659 1,190 Other 2,131 1,746 Total interest expense $ 25,331 $ 23,591 The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates, taking into consideration general market conditions and maturity of the debt with similar credit terms 17 Table of Contents and is classified within Level 2 of the fair value hierarchy. The estimated fair value of the Company’s fixed rate debt (unsecured senior notes and convertible senior notes) as of March 31, 2021 and December 31, 2020 was $ 684.3 million and $ 491.8 million, respectively. Derivative and Hedging Activities The Company enters into interest rate swap agreements to hedge against interest rate fluctuations. All of the Company's interest rate swaps are cash flow hedges. All unrealized gains and losses on these hedging instruments are reported in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. 18 Table of Contents The Company's interest rate swaps at March 31, 2021 and December 31, 2020 consisted of the following (dollars in thousands): Notional Value as of Hedge Type Interest Rate Maturity March 31, 2021 December 31, 2020 Swap - cash flow 1.74 % January 2021 — 75,000 Swap - cash flow 1.75 % January 2021 — 50,000 Swap - cash flow 1.53 % January 2021 — 37,500 Swap - cash flow 1.53 % January 2021 — 37,500 Swap - cash flow 1.46 % January 2021 — 100,000 Swap - cash flow 1.47 % January 2021 — 47,500 Swap - cash flow 1.47 % January 2021 — 47,500 Swap - cash flow 1.47 % January 2021 — 47,500 Swap - cash flow 1.47 % January 2021 — 47,500 Swap - cash flow 2.60 % October 2021 55,000 55,000 Swap - cash flow 2.60 % October 2021 55,000 55,000 Swap - cash flow 1.78 % January 2022 100,000 100,000 Swap - cash flow 1.78 % January 2022 50,000 50,000 Swap - cash flow 1.79 % January 2022 30,000 30,000 Swap - cash flow 1.68 % April 2022 25,000 25,000 Swap - cash flow 1.68 % April 2022 25,000 25,000 Swap - cash flow 1.64 % April 2022 25,000 25,000 Swap - cash flow 1.64 % April 2022 25,000 25,000 Swap - cash flow 0.17 % January 2023 100,000 — Swap - cash flow 0.17 % January 2023 50,000 — Swap - cash flow 0.17 % January 2023 25,000 — Swap - cash flow 0.17 % January 2023 25,000 — Swap - cash flow 1.99 % November 2023 85,000 85,000 Swap - cash flow 1.99 % November 2023 85,000 85,000 Swap - cash flow 1.99 % November 2023 50,000 50,000 Swap - cash flow 1.99 % November 2023 30,000 30,000 Swap - cash flow 2.60 % January 2024 75,000 75,000 Swap - cash flow 2.60 % January 2024 50,000 50,000 Swap - cash flow 2.60 % January 2024 25,000 25,000 Swap - cash flow 2.60 % January 2024 75,000 75,000 Swap - cash flow 2.60 % January 2024 75,000 75,000 Swap - cash flow 1.43 % February 2026 150,000 — Swap - cash flow 1.44 % February 2026 50,000 — Swap - cash flow 1.44 % February 2026 50,000 — Swap - cash flow 1.44 % February 2026 40,000 — Total $ 1,430,000 $ 1,430,000 During the three months ended March 31, 2021, the Company had interest rates swaps for an aggregate notional amount of $ 490.0 million that became effective as other interest rate swaps matured. As of March 31, 2021, there are no additional interest rate swaps outstanding that will become effective in the future. The Company records all derivative instruments at fair value in the accompanying consolidated balance sheets. Fair values of interest rate swaps are determined using the standard market methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. Variable interest rates used in the calculation of projected receipts and payments on the swaps are based on an expectation of future interest rates derived from observable market interest rate curves (Overnight Index Swap curves) and volatilities (Level 2 inputs). Derivatives expose the Company to credit risk in the event of non-performance by the 19 Table of Contents counterparties under the terms of the interest rate hedge agreements. The Company incorporates these counterparty credit risks in its fair value measurements. The Company believes it minimizes the credit risk by transacting with major creditworthy financial institutions. As of March 31, 2021, the Company's derivative instruments were in both asset and liability positions, with aggregate asset and liability fair values of $ 0.1 million and $ 42.6 million, which are included in prepaid expenses and other assets and accounts payable, accrued expenses and other liabilities, respectively, in the accompanying consolidated balance sheets. The Company expects approximately $ 22.7 million will be reclassified from accumulated other comprehensive income (loss) to interest expense within the next 12 months. Note 6. Revenue The Company presents revenue on a disaggregated basis in the accompanying consolidated statements of operations and comprehensive income. The following table presents revenues by geographic location for the three months ended March 31, 2021 and 2020 (in thousands): For the three months ended March 31, 2021 2020 Southern FL $ 35,244 $ 35,191 San Diego, CA 14,678 41,679 Boston, MA 9,757 35,942 Los Angeles, CA 8,040 34,788 Portland, OR 5,782 15,648 Other(1) 2,975 20,311 San Francisco, CA 2,953 60,040 Washington, D.C. 1,902 10,909 Chicago, IL 1,824 10,273 Seattle, WA 488 4,326 $ 83,643 $ 269,107 (1) Other includes: Atlanta (Buckhead), GA, Nashville, TN, New York, NY, Philadelphia, PA and Santa Cruz, CA. Payments from customers are primarily made when services are provided. Due to the short-term nature of the Company's contracts and the almost simultaneous receipt of payment, almost all of the contract liability balance at the beginning of the period is expected to be recognized as revenue over the following 12 months. Note 7. Equity Common Shares The Company is authorized to issue up to 500,000,000 common shares of beneficial interest, $ 0.01 par value per share (“common shares”). Each outstanding common share entitles the holder to one vote on each matter submitted to a vote of shareholders. Holders of the Company’s common shares are entitled to receive dividends when authorized by the Company's Board of Trustees. On February 22, 2016, the Company announced that the Board of Trustees authorized a share repurchase program of up to $ 150.0 million of the Company's outstanding common shares. Under this program, the Company may repurchase its common shares from time to time in transactions on the open market or by private agreement. The Company may suspend or discontinue this program at any time. Upon repurchase by the Company, common shares cease to be outstanding and become authorized but unissued common shares. For the three months ended March 31, 2021, the Company had no repurchases under this program and as of March 31, 2021, $ 56.6 million of common shares remained available for repurchase under this program. On July 27, 2017, the Company announced that the Board of Trustees authorized a new share repurchase program of up to $ 100.0 million of the Company's outstanding common shares. Under this program, the Company may repurchase its common shares from time to time in transactions on the open market or by private agreement. The Company may suspend or discontinue this program at any time. This $ 100.0 million share repurchase program will commence upon completion of the Company's $ 150.0 million share repurchase program. 20 Table of Contents Common Dividends The Company declared the following dividends on common shares/units for the three months ended March 31, 2021: Dividend per Share/Unit For the Quarter Ended Record Date Payable Date $ 0.01 March 31, 2021 March 31, 2021 April 15, 2021 Preferred Shares The Company is authorized to issue up to 100,000,000 preferred shares of beneficial interest, $ 0.01 par value per share (“preferred shares”). The following Preferred Shares were outstanding as of March 31, 2021 and December 31, 2020: Security Type March 31, 2021 December 31, 2020 6.50 % Series C 5,000,000 5,000,000 6.375 % Series D 5,000,000 5,000,000 6.375 % Series E 4,400,000 4,400,000 6.30 % Series F 6,000,000 6,000,000 20,400,000 20,400,000 The Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares (collectively, the “Preferred Shares”) rank senior to the common shares and on parity with each other with respect to payment of distributions. The Preferred Shares are cumulative redeemable preferred shares, do not have any maturity date and are not subject to mandatory redemption. The Company could not redeem the Series C Preferred Shares prior to March 18, 2018, may not redeem the Series D Preferred Shares prior to June 9, 2021, could not redeem the Series E Preferred Shares prior to March 4, 2018 and may not redeem the Series F Preferred Shares prior to May 25, 2021, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. On or after May 25, 2021 and June 9, 2021, the Company may, at its option, redeem the Series F Preferred Shares and Series D Preferred Shares, respectively, and at any time the Company may, at its option, redeem the Series C Preferred Shares or the Series E Preferred Shares, or both, in each case in whole or from time to time in part, by payment of $ 25.00 per share, plus any accumulated, accrued and unpaid distributions through the date of redemption. Upon the occurrence of a change of control, as defined in the Company's declaration of trust, the result of which the Company’s common shares and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE MKT or NASDAQ, or any successor exchanges, the Company may, at its option, redeem the Preferred Shares in whole or in part within 120 days following the change of control by paying $ 25.00 per share, plus any accrued and unpaid distributions through the date of redemption. If the Company does not exercise its right to redeem the Preferred Shares upon a change of control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares based on defined formulas subject to share caps. The share cap on each Series C Preferred Share is 2.0325 common shares, on each Series D Preferred Share is 1.9794 common shares, on each Series E Preferred Share is 1.9372 common shares and on each Series F Preferred Share is 2.0649 common shares. 21 Table of Contents Preferred Dividends The Company declared the following dividends on preferred shares for the three months ended March 31, 2021: Security Type Dividend per Share/Unit For the Quarter Ended Record Date Payable Date 6.50 % Series C $ 0.41 March 31, 2021 March 31, 2021 April 15, 2021 6.375 % Series D $ 0.40 March 31, 2021 March 31, 2021 April 15, 2021 6.375 % Series E $ 0.40 March 31, 2021 March 31, 2021 April 15, 2021 6.30 % Series F $ 0.39 March 31, 2021 March 31, 2021 April 15, 2021 Non-controlling Interest of Common Units in Operating Partnership Holders of Operating Partnership units have certain redemption rights that enable the unit holders to cause the Operating Partnership to redeem their units in exchange for, at the Company’s option, cash per unit equal to the market price of the Company’s common shares at the time of redemption or the Company’s common shares on a one-for-one basis. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of share splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the Operating Partnership's limited partners or the Company's shareholders. As of March 31, 2021, the Operating Partnership had two classes of long-term incentive partnership units ("LTIP") units, LTIP Class A units and LTIP Class B units. All of the outstanding LTIP units are held by officers of the Company. On February 12, 2020, the Board of Trustees granted 415,818 LTIP Class B units to executive officers of the Company. These LTIP units were to vest ratably on January 1, 2023, 2024, 2025 and 2026. In March 2020, the Company cancelled this grant and as a result accelerated and recognized the full expense of $ 10.5 million. On July 24, 2020, 109,240 LTIP Class B units were converted to common shares. On February 18, 2021, the Board of Trustees granted an aggregate of 600,097 LTIP Class B units to executive officers of the Company. These LTIP units will vest ratably on January 1, 2023, 2024, 2025 and 2026 contingent upon continued employment with the Company. As of March 31, 2021 and December 31, 2020, the Operating Partnership had 727,208 and 127,111 LTIP units outstanding, respectively. Of the 727,208 LTIP units outstanding at March 31, 2021, 127,111 LTIP units have vested. Only vested LTIP units may be converted to common units of the Operating Partnership, which in turn can be tendered for redemption as described above. On November 30, 2018, in connection with the merger with LaSalle Hotel Properties ("LaSalle"), the Company issued 133,605 OP units in the Operating Partnership to third-party limited partners of LaSalle's operating partnership. As of March 31, 2021 and December 31, 2020, the Operating Partnership had 133,605 OP units held by third parties, excluding LTIP units. Note 8. Share-Based Compensation Plan The Company maintains the 2009 Equity Incentive Plan, as amended and restated (as amended, the "Plan"), to attract and retain independent trustees, executive officers and other key employees and service providers. The Plan provides for the grant of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards. Share awards under the Plan vest over a period determined by the Board of Trustees, generally over three to five years . The Company pays or accrues for dividends on share-based awards. All share awards are subject to full or partial accelerated vesting upon a change in control and upon death or disability or certain other employment termination events as set forth in the award agreements. As of March 31, 2021, there were 130,439 common shares available for issuance under the Plan. 22 Table of Contents Service Condition Share Awards From time to time, the Company awards restricted common shares under the Plan to members of the Board of Trustees, officers and employees. These shares generally vest over three to five years based on continued service or employment. The following table provides a summary of service condition restricted share activity as of March 31, 2021: Shares Weighted-Average Grant Date Fair Value Unvested at December 31, 2020 242,727 $ 24.94 Granted 410,838 $ 22.69 Vested ( 80,758 ) $ 30.39 Forfeited ( 466 ) $ 28.17 Unvested at March 31, 2021 572,341 $ 22.55 The fair value of each of these service condition restricted share awards is determined based on the closing price of the Company’s common shares on the grant date and compensation expense is recognized on a straight-line basis over the vesting period. In March 2020, the Company cancelled the February 2020 service condition share award (retention grant) and as a result accelerated and recognized an expense of $ 5.5 million. For the three months ended March 31, 2021 and 2020, the Company recognized approximately $ 0.8 million and $ 6.1 million, respectively, of share-based compensation expense related to these service condition restricted shares in the accompanying consolidated statements of operations and comprehensive income. As of March 31, 2021, there was $ 12.1 million of total unrecognized share-based compensation expense related to unvested restricted shares. The unrecognized share-based compensation expense is expected to be recognized over the weighted-average remaining vesting period of 3.6 years. Performance-Based Equity Awards On December 13, 2013, the Board of Trustees approved a target award of 252,088 performance-based equity awards to officers and employees of the Company that were eligible for vesting in January 2016, 2017, 2018, 2019 and 2020. The actual number of common shares that vested was based on the two performance criteria defined in the award agreements for the period of performance beginning on the grant date and ending on the applicable vesting date. Based upon the extent to which the performance criteria had been met, the Company issued 25,134 , 12,285 , 72,236 , 35,471 and 27,881 common shares in January 2016, 2017, 2018, 2019 and 2020, respectively. On February 10, 2016, the Board of Trustees approved a target award of 100,919 performance-based equity awards to officers and employees of the Company. In January 2019, these awards vested and the Company issued 142,173 and 31,146 common shares to officers and employees, respectively. The actual number of common shares that vested was based on the three performance criteria defined in the award agreements for the period of performance from January 1, 2016 through December 31, 2018. On February 15, 2017, the Board of Trustees approved a target award of 81,939 performance-based equity awards to officers and employees of the Company. In January 2020, these awards vested and the Company issued 1,972 and 405 common shares to officers and employees, respectively. The actual number of common shares that vested was based on the two performance criteria defined in the award agreements for the period of performance from January 1, 2017 through December 31, 2019. On February 14, 2018, the Board of Trustees approved a target award of 78,918 performance-based equity awards to officers and employees of the Company. In January 2021, none of these awards vested and the Company issued no common shares to officers or employees. The actual number of common shares that vested was based on the two performance criteria defined in the award agreements for the period of performance from January 1, 2018 through December 31, 2020. On February 13, 2019, the Board of Trustees approved a target award of 126,891 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2022. The actual number of common shares that ultimately vest will be from 0 % to 200 % of the target award and will be determined in 2022 based on the two performance criteria defined in the award agreements for the period of performance from January 1, 2019 through December 31, 2021. On February 12, 2020, the Board of Trustees approved a target award of 161,777 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2023. The actual number of common shares that ultimately vest will be from 0 % to 200 % of the target award and will be determined in 2023 based on the performance criteria defined in the award agreements for the period of performance from January 1, 2020 through December 31, 2022. On February 18, 2021, the Board of Trustees approved a target award of 189,348 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2024. The actual number of common shares that 23 Table of Contents ultimately vest will be from 0 % to 200 % of the target award and will be determined in 2024 based on the performance criteria defined in the award agreements for the period of performance from January 1, 2021 through December 31, 2023. The grant date fair value of the performance awards, with market conditions, were determined using a Monte Carlo simulation method with the following assumptions (dollars in millions): Performance Award Grant Date Percentage of Total Award Grant Date Fair Value by Component Volatility Interest Rate Dividend Yield December 13, 2013 Relative Total Shareholder Return 50.00 % $ 4.7 29.00 % 0.34 % - 2.25 % 2.40 % Absolute Total Shareholder Return 50.00 % $ 2.9 29.00 % 0.34 % - 2.25 % 2.40 % February 10, 2016 Relative Total Shareholder Return 70.00 % $ 1.6 25.00 % 0.71 % 3.00 % Absolute Total Shareholder Return 15.00 % $ 0.2 25.00 % 0.71 % 3.00 % EBITDA Comparison 15.00 % $ 0.4 25.00 % 0.71 % 3.00 % February 15, 2017 Relative and Absolute Total Shareholder Return 65.00 % / 35.00 % $ 2.7 28.00 % 1.27 % 5.60 % February 14, 2018 Relative and Absolute Total Shareholder Return 65.00 % / 35.00 % $ 3.5 28.00 % 2.37 % 4.70 % February 13, 2019 Relative and Absolute Total Shareholder Return 65.00 % / 35.00 % $ 4.5 26.00 % 2.52 % 4.20 % February 12, 2020 Relative Total Shareholder Return 100.00 % $ 4.9 23.40 % 1.41 % — % February 18, 2021 Relative Total Shareholder Return 100.00 % $ 6.0 56.00 % 0.19 % — % In the table above, the Relative Total Shareholder Return and Absolute Total Shareholder Return components are market conditions as defined by ASC 718. The EBITDA Comparison component is a performance condition as defined by ASC 718, and, therefore, compensation expense related to this component will be reassessed at each reporting date based on the Company's estimate of the probable level of achievement, and the accrual of compensation expense will be adjusted as appropriate. Dividends on unvested performance-based equity awards accrue over the vesting period and will be paid on the actual number of shares that vest at the end of the applicable period. The Company recognizes compensation expense on a straight-line basis through the vesting date. As of March 31, 2021, there was approximately $ 9.7 million of unrecognized compensation expense related to these performance-based equity awards which will be recognized over the weighted-average remaining vesting period of 2.2 years. For the three months ended March 31, 2021 and 2020, the Company recognized approximately $ 1.0 million and $ 0.9 million, respectively, in expense related to these awards. Long-Term Incentive Partnership Units LTIP units, which are also referred to as profits interest units, may be issued to eligible participants for the performance of services to or for the benefit of the Operating Partnership. LTIP units are a class of partnership unit in the Operating Partnership and receive, whether vested or not, the same per-unit profit distributions as the other outstanding units in the Operating 24 Table of Contents Partnership, which equal per-share distributions on common shares. LTIP units are allocated their pro-rata share of the Company's net income (loss). Vested LTIP units may be converted by the holder, at any time, into an equal number of common Operating Partnership units and thereafter will possess all of the rights and interests of a common Operating Partnership unit, including the right to redeem the common Operating Partnership unit for a common share in the Company or cash, at the option of the Operating Partnership. As of March 31, 2021, the Operating Partnership had two classes of LTIP units, LTIP Class A units and LTIP Class B units. All of the outstanding LTIP units are held by officers of the Company. On December 13, 2013, the Board of Trustees approved a grant of 226,882 LTIP Class B units to executive officers of the Company. These LTIP units were subject to time-based vesting in five equal annual installments beginning January 1, 2016 and ending on January 1, 2020. The fair value of each award was determined based on the closing price of the Company’s common shares on the grant date of $ 29.19 per unit. The aggregate grant date fair value of the LTIP Class B units was $ 6.6 million. On February 12, 2020, the Board of Trustees granted 415,818 LTIP Class B units to executive officers. These LTIP units were to vest ratably on January 1, 2023, 2024, 2025 and 2026. In March 2020, the Company cancelled this grant and as a result accelerated and recognized the full expense of $ 10.5 million. On July 24, 2020, 109,240 LTIP Class B units were redeemed for common shares. On February 18, 2021, the Board of Trustees granted 600,097 LTIP Class B units to executive officers of the Company. These LTIP units vest ratably on January 1, 2023, 2024, 2025 and 2026. The fair value of each award was determined based on the closing price of the Company’s common shares on the grant date of $ 22.69 per unit. The aggregate grant date fair value of the LTIP Class B units was $ 13.6 million. As of March 31, 2021 and December 31, 2020, the Operating Partnership had 727,208 and 127,111 LTIP units outstanding, respectively. Of the 727,208 LTIP units outstanding at March 31, 2021, 127,111 LTIP units have vested. Only vested LTIP units may be converted to common units of the Operating Partnership, which in turn can be tendered for redemption as described above. For the three months ended March 31, 2021 and 2020, the Company recognized approximately $ 0.3 million and $ 10.6 million, respectively, in expense related to these LTIP units. As of March 31, 2021, there was $ 13.3 million of unrecognized share-based compensation expense related to LTIP units. The aggregate expense related to the LTIP unit grants is presented as non-controlling interest in the Company’s accompanying consolidated balance sheets. Note 9. Income Taxes PHL is subject to federal and state corporate income taxes at statutory tax rates. Given the continued negative impact of the COVID-19 pandemic on the Company's financial results and uncertainties about the Company's ability to utilize its net operating loss in future years, the Company has recorded a valuation allowance on its income tax benefit for the three months ended March 31, 2021 and has recorded a valuation allowance on all deferred tax assets. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local jurisdictions, where applicable. As of March 31, 2021 and December 31, 2020, the statute of limitations remains open for all major jurisdictions for tax years dating back to 2016. 25 Table of Contents Note 10. Earnings Per Share The following is a reconciliation of basic and diluted earnings per common share (in thousands, except share and per-share data): For the three months ended March 31, 2021 2020 Numerator: Net income (loss) attributable to common shareholders $ ( 128,721 ) $ 33,810 Less: dividends paid on unvested share-based compensation ( 12 ) ( 2 ) Undistributed earnings attributable to share-based compensation — ( 48 ) Net income (loss) available to common shareholders $ ( 128,733 ) $ 33,760 Denominator: Weighted-average number of common shares — basic 130,775,873 130,555,846 Effect of dilutive share-based compensation — 123,062 Weighted-average number of common shares — diluted 130,775,873 130,678,908 Net income (loss) per share available to common shareholders — basic $ ( 0.98 ) $ 0.26 Net income (loss) per share available to common shareholders — diluted $ ( 0.98 ) $ 0.26 For the three months ended March 31, 2021 and 2020, 1,041,130 and 203,152 , respectively, of unvested service condition restricted shares and performance-based equity awards were excluded from diluted weighted-average common shares, as their effect would have been anti-dilutive. For the three months ended March 31, 2021, 29,441,175 shares underlying the Convertible Notes have been excluded from diluted shares as their effect would have been anti-dilutive. The LTIP and OP units held by the non-controlling interest holders have been excluded from the denominator of the diluted earnings per share as there would be no effect on the amounts since the limited partners' share of income (loss) would also be added or subtracted to derive net income (loss) available to common shareholders. Note 11. Commitments and Contingencies Management Agreements The Company’s hotel properties are operated pursuant to management agreements with various management companies. The terms of these management agreements range from 1 year to 22 years, not including renewals, and 1 year to 52 years, including renewals. The majority of the Company’s management agreements are terminable at will by the Company upon paying a termination fee and some are terminable by the Company upon sale of the property, with, in some cases, the payment of termination fees. Most of the agreements also provide the Company the ability to terminate based on failure to achieve defined operating performance thresholds. Termination fees range from zero to up to six times the annual base management and incentive management fees, depending on the agreement and the reason for termination. Certain of the Company’s management agreements are non-terminable except upon the manager’s breach of a material representation or the manager’s failure to meet performance thresholds as defined in the management agreement. The management agreements require the payment of a base management fee generally between 1 % and 4 % of hotel revenues. Under certain management agreements, the management companies are also eligible to receive an incentive management fee if hotel operating income, cash flows or other performance measures, as defined in the agreements, exceed certain performance thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on its investment in the hotel. For the three months ended March 31, 2021 and 2020, com bined base and incentive management fees were $ 2.3 million and $ 6.9 million, respectively. Base and incentive management fees are included in other direct and indirect expenses in the Company's accompanying consolidated statements of operations and comprehensive income. 26 Table of Contents Reserve Funds Certain of the Company’s agreements with its hotel managers, franchisors, ground lessors and lenders have provisions for the Company to provide funds, typically 4.0 % of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ furniture, fixtures and equipment. Restricted Cash At March 31, 2021 and December 31, 2020, the Company had $ 11.3 million and $ 12.0 million, respectively, in restricted cash, which consisted of reserves for replacement of furniture and fixtures or reserves to pay for real estate taxes or property insurance under certain hotel management agreements or loan agreements. Ground and Hotel Leases As of March 31, 2021, the following hotels were subject to leases as follows: Lease Properties Lease Type Lease Expiration Date Hotel Monaco Washington DC Operating lease November 2059 Argonaut Hotel Operating lease December 2059 Hotel Zelos San Francisco Operating lease June 2097 Hotel Zephyr Fisherman's Wharf Operating lease February 2062 Hotel Palomar Los Angeles Beverly Hills Operating lease January 2107 (1) Restaurant at Southernmost Beach Resort Operating lease April 2029 Hyatt Regency Boston Harbor Operating lease April 2077 San Diego Mission Bay Resort Operating lease July 2068 Paradise Point Resort & Spa Operating lease May 2050 Hotel Vitale Operating lease March 2070 (2) Viceroy Santa Monica Hotel Operating lease September 2065 The Westin Copley Place, Boston Operating lease December 2077 (3) The Liberty, A Luxury Collection Hotel, Boston Operating lease May 2080 Hotel Zeppelin San Francisco Operating and finance lease June 2089 (4) Harbor Court Hotel San Francisco Finance lease August 2052 The Roger New York Finance lease December 2044 (1) The expiration date assumes the exercise of all 19 five-year extension options. (2) The expiration date assumes the exercise of a 14 -year extension option. (3) No payments are required through maturity. (4) The expiration date assumes the exercise of a 30 -year extension option. The Company's leases may require minimum fixed rent payments, percentage rent payments based on a percentage of revenues in excess of certain thresholds or rent payments equal to the greater of a minimum fixed rent or percentage rent. Minimum fixed rent may be adjusted annually by increases in consumer price index ("CPI") and may be subject to minimum and maximum increases. Some leases also contain certain restrictions on modifications that can be made to the hotel structures due to their status as national historic landmarks. 27 Table of Contents The Company records expense on a straight-line basis for leases that provide for minimum rental payments that increase in pre-established amounts over the remaining terms of the leases. Ground rent expense is included in real estate taxes, personal property taxes, property insurance and ground rent in the Company's accompanying consolidated statements of operations and comprehensive income. The components of ground rent expense for the three months ended March 31, 2021 and 2020 are as follows (in thousands): For the three months ended March 31, 2021 2020 Fixed ground rent $ 4,313 $ 4,289 Variable ground rent 1,496 2,048 Total ground lease rent $ 5,809 $ 6,337 Future maturities of lease liabilities for the Company's operating leases at March 31, 2021 were as follows (in thousands): 2021 $ 13,903 2022 18,849 2023 18,034 2024 18,119 2025 18,203 Thereafter 1,127,864 Total lease payments $ 1,214,972 Less: Imputed interest ( 960,141 ) Present value of lease liabilities $ 254,831 Litigation The nature of the operations of hotels exposes the Company's hotels, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. The Company has insurance to cover certain potential material losses. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any material litigation threatened against the Company. Note 12. Supplemental Information to Statements of Cash Flows For the three months ended March 31, 2021 2020 (in thousands) Interest paid, net of capitalized interest $ 17,438 $ 20,300 Interest capitalized $ — $ 680 Income taxes paid (refunded) $ ( 21 ) $ ( 4 ) Non-Cash Investing and Financing Activities: Convertible debt discount adjustment $ 113,099 $ — Distributions payable on common shares/units $ 1,524 $ 1,746 Distributions payable on preferred shares $ 7,558 $ 7,558 Issuance of common shares for Board of Trustees compensation $ 516 $ 637 Issuance of common shares for executive and employee bonuses $ 1,446 $ — Accrued additions and improvements to hotel properties $ 1,242 $ 7,124 Write-off of deferred financing costs $ 2,817 $ — 28 Table of Contents