What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-29 · 118 added, 93 removed, 248 unchanged (46% of the section changed)

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The current and uncertain future impact of the COVID-19 pandemic, including its effect on the ability or desire of people to travel, is expected to continue to impact our results, operations, outlooks, plans, goals, growth, reputation, cash flows, liquidity and share price;

• as a result of the COVID-19 pandemic, we suspended operations at some of our hotels and resorts, and if we are unable to recommence operations in the near-term, we may become out of compliance with maintenance covenants in certain of our debt facilities;

• as a result of the COVID-19 pandemic, we suspended operations at some of our hotels and resorts.

Operations have recommenced and are improving, however, if continued improvement is interrupted, we may become out of compliance with maintenance covenants in certain of our debt facilities;

• world events impacting the ability or desire of people to travel may lead to a decline in demand for hotels;

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• risks associated with redevelopment and repositioning projects, including delays and cost overruns;

• the other factors discussed under the heading "Risk Factors" in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020.

• the other factors discussed under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020.

Accordingly, there is no assurance that our expectations will be realized.

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

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.

In March 2020, the World Health Organization declared the novel coronavirus ("COVID-19") to be a global pandemic and the virus 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, we implemented significant cost controls and salary reductions and temporarily suspended operations at 47 of our hotels and resorts.

As demand has returned over the past year, we have reopened the majority of our hotels and resorts.

As of March 31, 2021, 40 of our hotels and resorts were open, with operations at the remaining 13 hotels still temporarily suspended.

In April 2021, we reopened an additional eight hotels and we anticipate reopening additional hotels as demand returns.

In February 2021, we issued, at a 5.5% premium to par, an additional $250.0 million aggregate principal amount of our 1.75% Convertible Senior Notes due 2026, which we initially issued in December 2020.

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 amended the agreements governing our existing credit facilities, term loan facilities and senior notes to, among other things, 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 our convertible notes.

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.

In addition, to improve liquidity, we raised capital by issuing convertible notes and additional preferred shares.

As demand returned over the past several months, the result of an increase in vaccinations and corresponding lifting of governmental restrictions and recommendations, we have reopened our hotels and resorts.

As of June 30, 2021, 49 of our hotels and resorts were open, with operations remaining suspended at Villa Florence San Francisco on Union Square and Hotel Vitale.

Subsequent to June 30, 2021, we re-opened Villa Florence San Francisco on Union Square and commenced a renovation of Hotel Vitale with the intent to reopen the property at the completion of the renovation in the fourth quarter of 2021.

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 fully recover.

However, leisure travel as a result of pent-up leisure demand has exceeded expectations, particularly at our warmer weather and resort properties.

In February 2021, we issued, at a 5.5% premium to par, an additional $250.0 million aggregate principal amount of the convertible notes originally issued in December 2020.

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

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

In February 2021,we amended the agreements governing our 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.

For additional information regarding these amendments and the convertible notes, see Note 5, Debt, of the notes to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In May 2021, we issued 9,200,000 6.375% Series G Cumulative Redeemable Preferred Shares at a public offering price of $25.00 per share for net proceeds of $222.6 million.

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

Based on the amendments to our credit agreements described in Note 1, Organization, of the notes to our unaudited financial statements of this Quarterly Report on Form 10-Q, expense and cash burn rate reductions, and our ability to raise additional liquidity through equity issuances, we believe we 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.

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

See "Non-GAAP Financial Matters" for further discussion of FFO, EBITDA and EBIDTA re .

See "Non-GAAP Financial Matters" in Part I, Item 2 of this Quarterly Report on Form 10-Q for further discussion of FFO, EBITDA and EBIDTA re .

Hotel Operating Statistics

The following table represents the key same-property hotel operating statistics for our hotels for the three months ended March 31, 2021 and 2020.

For the three months ended March 31,

The following table represents the key same-property hotel operating statistics for our hotels for the three and six months ended June 30, 2021 and 2020.

For the three months ended June 30, For the six months ended June 30,

2021 2020 2021 2020

Same-Property Occupancy 38.6 % 3.5 % 28.5 % 30.7 %

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Same-Property Total RevPAR $ 143.59 $ 19.45 $ 106.54 $ 118.61

While the operations of many of our hotels were temporarily suspended beginning in March 2020, the above schedule of hotel results for the three months ended March 31, 2020 includes information from all hotels owned as of March 31, 2021, except for Hotel Zena Washington DC (formerly Donovan Hotel) for the first quarter in both 2021 and 2020, because it was closed for renovations in the first quarter of 2020.

While the operations of many of our hotels were temporarily suspended beginning in March 2020, the above schedule of hotel results for the three and six months ended June 30, 2021 and 2020 includes information from all hotels owned as of June 30, 2021, except for Hotel Zena Washington DC (formerly Donovan Hotel), which was excluded because it was closed during the first and second quarters of 2020 for renovations.

Sir Francis Drake and The Roger New York were also excluded from the above schedule due to our disposition of these hotels in the second quarter of 2021.

Non-GAAP Financial Measures

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By excluding the effect of real estate related depreciation and amortization including our share of the joint venture depreciation and amortization, gains (losses) from sales of real estate and impairments of real estate assets (including impairment of real estate related joint ventures), all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance, we believe that FFO provides investors a useful financial measure to evaluate our operating performance.

The following table reconciles net income (loss) to FFO and FFO available to common share and unit holders for the three months ended March 31, 2021 and 2020 (in thousands):

For the three months ended March 31,

The following table reconciles net income (loss) to FFO and FFO available to common share and unit holders for the three and six months ended June 30, 2021 and 2020 (in thousands):

For the three months ended June 30, For the six months ended June 30,

2021 2020 2021 2020

Net income (loss) $ 1,428 $ (130,914) $ (120,012) $ (88,846)

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We believe that EBITDA and EBITDA re provide investors useful financial measures to evaluate our operating performance, excluding the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization).

The following table reconciles net income (loss) to EBITDA and EBITDA re for the three months ended March 31, 2021 and 2020 (in thousands):

For the three months ended March 31,

The following table reconciles net income (loss) to EBITDA and EBITDA re for the three and six months ended June 30, 2021 and 2020 (in thousands):

For the three months ended June 30, For the six months ended June 30,

2021 2020 2021 2020

Net income (loss) $ 1,428 $ (130,914) $ (120,012) $ (88,846)

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Results of Operations

At March 31, 2021 and 2020, we had 53 and 54, respectively, wholly owned properties and leasehold interests.

At June 30, 2021 and 2020, we had 51 and 54, respectively, wholly owned properties and leasehold interests.

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

Based on when a property was acquired or disposed, operating results for certain properties are not comparable for the three months ended March 31, 2021 and 2020.

Based on when a property was acquired or disposed, operating results for certain properties are not comparable for the three and six months ended June 30, 2021 and 2020.

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

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

Comparison of the three months ended March 31, 2021 to the three months ended March 31, 2020

Revenues — Total hotel revenues decreased by $185.5 million, of which $16.2 million was due to the non-comparable properties and the remaining decline was due to the decline in demand which began in March 2020 as a result of the COVID-19 pandemic.

The decline was partially offset by increases at Southermost Beach Resort, The Marker Key West Harbor Resort and Chaminade Resort & Spa and an increase at Hotel Zena Washington DC (formerly Donovan Hotel), which was closed during the first quarter of 2020 for renovation.

Hotel operating expenses — Total hotel operating expenses decreased by $128.8 million, of which $10.9 million was due to the non-comparable properties and the remaining decline was due to the decline in demand which began in March 2020 as a result of the COVID-19 pandemic.

Depreciation and amortization — Depreciation and amortization expense decreased by $0.4 million due primarily to a decrease in assets resulting from the sales of three hotels in 2020, partially offset by an increase in depreciation and amortization expense related to recently renovated 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 $1.2 million primarily due to the sales of three hotels in 2020 and a decline in percentage ground rent which is based on a percentage of revenues.

General and administrative — General and administrative expenses decreased by $14.9 million primarily due to $16.0 million in share-based compensation costs relating to the cancellation of the retention LTIP unit awards and time-based service

condition awards in 2020.

Sir Francis Drake San Francisco, CA April 1, 2021

The Roger New York New York, NY June 10, 2021

Comparison of the three months ended June 30, 2021 to the three months ended June 30, 2020

Revenues — Total hotel revenues increased by $140.7 million primarily due to an increase in leisure travel demand during the summer travel season.

This increase in demand was the result of an increase in COVID-19 vaccination rates and corresponding decreases in infection rates and easing of governmental restrictions.

Most of our hotels suspended operations in March 2020 and operations remained suspended throughout the second quarter of 2020.

Hotel operating expenses — Total hotel operating expenses increased by $66.7 million primarily due to resuming operations at our comparable properties and returning demand in the second quarter of 2021.

Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent increased by $2.0 million primarily due to an increase in percentage ground rent, which is based on a percentage of revenues.

General and administrative — General and administrative expenses increased by $1.5 million primarily due to an increase in share-based compensation expense of $1.3 million.

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

Transaction costs — Transaction costs remained consistent compared to the prior year.

Impairment loss — Impairment loss decreased by $5.7 million.

For the three months ended March 31, 2021, we recognized an impairment loss of $14.9 million related to one hotel.

For the three months ended March 31, 2020, we recognized an impairment loss of $20.6 million related to a retail component of a hotel.

(Gain) loss on sale of hotel properties — Gain on sale of hotel properties was $117.4 million in 2020 as a result of the sale of the InterContinental Buckhead Atlanta and Sofitel Washington DC Lafayette Square hotels in the first quarter of 2020.

There were no property sales in the first quarter of 2021.

(Gain) loss and other operating expenses — (Gain) loss and other operating expenses decreased $1.0 million primarily due to reductions in pre-opening and hotel management transition expenses.

Interest expense — Interest expense increased by $1.7 million primarily due to an increase in the effective interest rate and the increase in amortization of deferred financing costs associated with unsecured term loans.

Other — Other income remained consistent compared to the prior year.

Income tax (expense) benefit — Income tax (expense) benefit decreased from a benefit of $10.7 million in 2020 to an immaterial expense in 2021 as a result of the valuation allowance recognized resulting from the uncertainty of utilizing net operating losses in future periods.

(Gain) loss on sale of hotel properties — Gain on sale of hotel properties increased by $64.6 million primarily due to the sale of Sir Francis Drake in the second quarter of 2021.

Interest expense — Interest expense increased by $0.7 million primarily due to the write-off of deferred financing fees associated with the partial repayment of certain of the term loans during the second quarter of 2021.

Income tax (expense) benefit — Income tax (expense) benefit is immaterial in 2021 as a result of the taxable REIT subsidiary continuing to incur a loss and a valuation allowance being recognized offsetting the deferred tax asset.

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.

Comparison of the six months ended June 30, 2021 to the six months ended June 30, 2020

Revenues — Total hotel revenues decreased by $44.7 million, of which $29.3 million was due to the non-comparable properties and the balance was due to lower demand in the first quarter of 2021 compared to the prior year offset by an increase in revenues in the second quarter of 2021 as hotels reopened and leisure demand returned particularly at the resort properties.

Hotel operating expenses — Total hotel operating expenses decreased by $62.1 million, of which $21.7 million was due to the non-comparable properties and the balance was correlated to the decline in revenue noted above.

Depreciation and amortization — Depreciation and amortization expense decreased by $1.2 million primarily due to a decrease in assets resulting from the sales of three hotels in 2020 and two hotels in 2021.

The decrease was partially offset by an increase in depreciation and amortization expense related to recently renovated hotels, including Hotel Zena Washington DC (formerly Donovan Hotel).

General and administrative — General and administrative expenses decreased by $13.4 million primarily due to $16.0 million in share-based compensation costs relating to the cancellation of the retention LTIP unit awards and time-based service condition awards in 2020.

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

Impairment loss — We recognized an impairment loss of $14.9 million in 2021 related to one hotel.

We recognized an impairment loss of $20.6 million in 2020 related to the retail component of a hotel.

(Gain) loss on sale of hotel properties — We recognized a net gain on sale of $64.6 million in 2021 primarily due to the sale of Sir Francis Drake.

We recognized a net gain on sale of $117.4 million in 2020 primarily due to the sale of Sofitel Washington DC Lafayette Square and InterContinental Buckhead Atlanta.

(Gain) loss and other operating expenses — (Gain) loss and other operating expenses decreased by $1.9 million primarily due to reductions in pre-opening, hotel management transition and franchise tax expenses.

Interest expense — Interest expense increased by $2.5 million primarily due to increased amortization and write-off of deferred financing fees as a result of the partial repayment of certain of the term loans during 2021.

Income tax (expense) benefit — Income tax (expense) benefit was a benefit of $14.3 million in 2020 which was due to the deferred tax asset recognized in 2020 on the taxable REIT subsidiary's estimated loss.

In 2021, the Company has recognized a valuation allowance offsetting the deferred tax asset on the current year taxable REIT subsidiary's loss due to the uncertainty of utilizing the deferred tax asset in the future.

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.

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Critical Accounting Policies

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Recent Accounting Standards

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

See Note 2, Summary of Significant Accounting Policies, to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information relating to recently issued accounting pronouncements.

New Accounting Pronouncements Not Yet Implemented

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

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 March 31, 2021, 40 of our hotels and resorts were open with operations of the remaining 13 hotels still temporarily suspended.

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

In April 2021, we reopened an additional eight hotels and we anticipate reopening additional hotels as demand returns.

As of March 31, 2021, we had liquidity of $767.8 million, which includes cash and cash equivalents, restricted cash and the amount available on our revolving credit facility.

On April 1, 2021, we sold the Sir Francis Drake Hotel and received net proceeds from the sale of $157.6 million which further improved our 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 March 31, 2021 and December 31, 2020 (dollars in thousands):

As of June 30, 2021, we had liquidity of $967.2 million, which includes cash and cash equivalents, restricted cash and the amount available on our senior unsecured revolving credit facility.

For further discussion on our liquidity and the impact of COVID-19, see Overview included in Part I, Item 2 of this Quarterly Report on Form 10-Q.

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Our debt consisted of the following as of June 30, 2021 and December 31, 2020 (dollars in thousands):

Balance Outstanding as of

Interest Rate Maturity Date March 31, 2021 December 31, 2020

Interest Rate Maturity Date June 30, 2021 December 31, 2020

Revolving credit facilities

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(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.

(2) The Company has the option to extend the maturity date to January 2023, pursuant to certain terms and conditions and payment of an extension fee.

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

(4) 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 March 31, 2021, approximately $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 approximately $168.0 million bore a weighted-average floating interest rate of 2.62%.

As of June 30, 2021, approximately $1.4 billion of the borrowings under the term loan facilities bore an effective weighted-average fixed interest rate of 4.12%, after taking into account interest rate swap agreements, and approximately $57.0 million bore a weighted-average floating interest rate of 2.67%.

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%.

(4) In February 2021, the majority of the remaining balance was extended to November 2022.

(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.

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(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.

We intend to repay indebtedness incurred under our revolving credit facilities, unsecured term loans, convertible senior notes and senior unsecured notes out of our cash flows from operations and, as market conditions permit, from the net proceeds from issuances of additional equity or debt securities and dispositions of hotel properties.

For further discussion on the components of our overall debt, see Note 5, Debt, to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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 March 31, 2021, we had no outstanding borrowings and borrowing capacity of $643.2 million remaining on our senior unsecured revolving credit facility.

As of June 30, 2021, we had no outstanding borrowings, $5.8 million of outstanding letters of credit and borrowing capacity of $644.2 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 2.40% during the waiver period.

As a result of the amendments described in Note 5, Debt, to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, the spread on the borrowings is fixed at 2.40% during the waiver period.

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

We intend to repay indebtedness incurred under the senior unsecured revolving credit facility from time to time out of cash flows from operations and, as market conditions permit, from the net proceeds of issuances of additional equity and debt securities and from the net proceeds of dispositions of hotel properties.

We also have a $25.0 million unsecured revolving credit facility (the "PHL Credit Facility") to be used for PHL's working capital and general corporate purposes.

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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 2.40% during the waiver period.

As of March 31, 2021, we had no borrowings under the PHL Credit Facility.

As of June 30, 2021, we had no borrowings under the PHL Credit Facility.

Unsecured Term Loan Facilities

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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.

"Debt" to the accompanying consolidated financial statements.

For further discussion on our unsecured term loan facilities, see Note 5, Debt, to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Convertible Senior Notes

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The Convertible Notes will 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 recorded coupon interest expense of $3.3 million and $6.1 million, respectively, for the three and six months ended June 30, 2021.

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

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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.

As of June 30, 2021 and December 31, 2020, the if-converted value of the Convertible Notes did not exceed the principal amount.

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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.

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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 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.

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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.

As of June 30, 2021, the Company was in compliance with all such debt covenants.

Issuance of Shares of Beneficial Interest

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We may suspend or discontinue this program at any time.

No common shares were repurchased by the Company under the share repurchase program during the three months ended March 31, 2021.

As of March 31, 2021, $56.6 million of common shares remained available for repurchase under this program.

No common shares were repurchased by the Company under the share repurchase program during the six months ended June 30, 2021.

As of June 30, 2021, $56.6 million of common shares remained available for repurchase under this program.

On July 27, 2017, we announced that our board of trustees authorized a new share repurchase program of up to $100.0 million of the Company's outstanding common shares.

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This $100.0 million share repurchase program will commence upon the completion of our $150.0 million share repurchase program.

On April 29, 2021, we filed a prospectus supplement with the SEC to sell up to $200.0 million of common shares under an "at the market" offering program (the "ATM program").

No common shares were issued or sold under the ATM program during the six months ended June 30, 2021.

As of June 30, 2021, $200.0 million of common shares remained available for issuance under the ATM program.

In May 2021, we issued 9,200,000 6.375% Series G Cumulative Redeemable Preferred Shares (the “Shares”) at a public offering price of $25.00 per share for net proceeds of $222.6 million.

The Shares may be redeemed, at the Company’s option, on or after May 13, 2026, 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.

For further discussion on our shares of beneficial interest, see Note 7, Equity, to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Sources and Uses of Cash

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

Cash (Used in) and Provided by Operations.

Our cash used in operating activities was $7.1 million for the three months ended March 31, 2021.

Our cash from operations includes the operating activities of the 53 hotels we owned as of March 31, 2021, offset by corporate expenses.

The negative cash flow from operations during the quarter and decline from the prior year is due to the reduced operations at our hotels as a result of COVID-19, including carrying costs on hotels that are temporarily suspended.

Our cash provided by operating activities was $1.5 million for the three months ended March 31, 2020.

Our cash from operations includes the operating activities of the 54 hotels we owned as of March 31, 2020, offset by corporate expenses.

Cash (Used in) and Provided by Investing Activities.

Our cash used in investing activities was $9.7 million for the three months ended March 31, 2021.

During the three months ended March 31, 2021, we invested $9.6 million in improvements to our hotel properties.

Our cash provided by investing activities was $269.9 million for the three months ended March 31, 2020.

During the three months ended March 31, 2020, we invested $50.1 million in improvements to our hotel properties and received $320.0 million from sales of hotel properties.

Cash (Used in) Operations.

Our cash used in operating activities was $2.3 million for the six months ended June 30, 2021.

Our cash from operations includes the operating activities of the 51 hotels we owned as of June 30, 2021, offset by corporate expenses.

Our cash used in operating activities was $86.6 million for the six months ended June 30, 2020.

Our cash from operations includes the operating activities of the 54 hotels we owned as of June 30, 2020, offset by corporate expenses.

The negative cash flow from operations during the six months ended June 30, 2021 and 2020 is due to the reduced operations at our hotels as a result of COVID-19, including carrying costs on hotels that were temporarily suspended.

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Cash Provided by Investing Activities.

Our cash provided by investing activities was $127.8 million for the six months ended June 30, 2021.

During the six months ended June 30, 2021, we invested $27.0 million in improvements to our hotel properties, received $172.0 million from sales of hotel properties and placed deposits totaling $17.1 million on two hotel properties.

Our cash provided by investing activities was $230.4 million for the six months ended June 30, 2020.

During the six months ended June 30, 2020, we invested $89.6 million in improvements to our hotel properties and received $320.0 million from sales of hotel properties.

Cash Provided by Financing Activities.

Our cash provided by financing activities was $5.1 million for the three months ended March 31, 2021.

During the three months ended March 31, 2021, we repaid $40.0 million under the revolving credit facilities, received proceeds from the issuance of convertible notes of $263.8 million, repaid $177.0 million in other debt, purchased $21.0 million in Capped Call Transactions, repurchased $0.7 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid $9.5 million in distributions, paid $9.6 million in financing fees, and paid $0.9 million in other transactions.

For the three months ended March 31, 2020, cash provided by financing activities was $418.5 million.

During the three months ended March 31, 2020, we borrowed $760.1 million under the revolving credit facilities, repaid $281.9 million under the revolving credit facilities, repurchased $1.3 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid $58.2 million in distributions and paid $0.2 million in other transactions.

Our cash provided by financing activities was $61.2 million for the six months ended June 30, 2021.

During the six months ended June 30, 2021, we repaid $40.0 million under the revolving credit facilities, received gross proceeds from the issuance of preferred shares of $230.0 million, paid $7.7 million in offering costs, received proceeds from the issuance of convertible notes and other debt of $268.6 million, repaid $338.0 million in other debt, purchased $21.0 million in Capped Call Transactions, repurchased $0.7 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid $18.9 million in distributions, paid $9.6 million in financing fees, and paid $1.5 million in other transactions.

Our cash provided by financing activities was $152.1 million for the six months ended June 30, 2020.

During the six months ended June 30, 2020, we borrowed $760.1 million under the revolving credit facilities, repaid $535.1 million under the revolving credit facilities, borrowed and repaid $13.0 million in other debt, repurchased $1.3 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid $67.6 million in distributions, paid $3.6 million in financing fees related to the credit agreement amendments and paid $0.3 million in other transactions.

Capital Investments

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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 three months ended March 31, 2021, we invested $9.6 million in capital investments to reposition and improve our properties primarily the renovation of the L'Auberge Del Mar.

Depending on market conditions, we expect to invest an additional $60.0 million to $80.0 million in capital investments during the remainder of 2021.

For the six months ended June 30, 2021, we invested $27.0 million in capital investments to reposition and improve our properties, primarily the renovation of the L'Auberge Del Mar.

Depending on market conditions, we expect to invest an additional $40.0 million to $60.0 million in capital investments during the remainder of 2021, including a $25.0 million transformation of Hotel Vitale.

The redevelopment is expected to be completed at year-end, at which time the hotel will reopen as 1 Hotel San Francisco.

We also commenced a $15.0 million renovation at Southernmost Beach Resort, which we expect will be completed in the fourth quarter.

However, as fundamentals improve, we will evaluate commencing additional previously planned major renovations and repositioning projects later in 2021.

Table of Content

Contractual Obligations and Off-Balance Sheet Arrangements

The table below summarizes our contractual obligations as of March 31, 2021 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

The table below summarizes our contractual obligations as of June 30, 2021 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

Payments due by period

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(3) Amounts include principal and interest under the two revolving credit facilities.

Interest expense is calculated based on the weighted-average interest rate for all outstanding credit facility borrowings as of March 31, 2021.

Interest expense is calculated based on the weighted-average interest rate for all outstanding credit facility borrowings as of June 30, 2021.

It is assumed that the outstanding borrowings will be repaid upon maturity with fixed interest-only payments until then.

6 unchanged sentences

Off-Balance Sheet Arrangements

As of March 31, 2021, we had no off-balance sheet arrangements.

As of June 30, 2021, we had no off-balance sheet arrangements.

We rely on the performance of the hotels to increase revenues to keep pace with inflation.

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The Company believes it minimizes the credit risk by transacting with major credit-worthy financial institutions.

The Company has interest rate swap agreements with an aggregate notional amount of $1.4 billion to hedge variable interest rates on our unsecured term loans.

Table of Content

We have interest rate swap agreements with an aggregate notional amount of $1.4 billion to hedge variable interest rates on our unsecured term loans.

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

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-Q

Item 2. Management’s Discussion and Analysis