Pebblebrook Hotel Trust 10-Q

Item 1. Financial Statements. Pebblebrook Hotel Trust Consolidated Balance Sheets (In thousands, except share and per-share data) September 30, 2021 December 31, 2020 (Unaudited) ASSETS Investment in hotel properties, net $ 5,962,878 $ 5,882,022 Cash and cash equivalents 157,554 124,274 Restricted cash 25,114 12,026 Hotel receivables (net of allowance for doubtful accounts of $ 865 and $ 183 , respectively) 31,523 10,225 Prepaid expenses and other assets 50,399 47,819 Total assets $ 6,227,468 $ 6,076,366 LIABILITIES AND EQUITY Debt $ 2,384,230 $ 2,280,471 Accounts payable, accrued expenses and other liabilities 263,424 226,446 Lease liabilities - operating leases 302,141 255,106 Deferred revenues 53,122 36,057 Accrued interest 8,447 4,653 Distribution payable 13,802 9,307 Total liabilities 3,025,166 2,812,040 Commitments and contingencies (Note 11) Shareholders’ equity: Preferred shares of beneficial interest, $ .01 par value (liquidation preference $ 740,000 and $ 510,000 at September 30, 2021 and December 31, 2020, respectively), 100,000,000 shares authorized; 29,600,000 shares issued and outstanding at September 30, 2021 and 20,400,000 shares issued and outstanding at December 31, 2020 296 204 Common shares of beneficial interest, $ .01 par value, 500,000,000 shares authorized; 130,813,750 shares issued and outstanding at September 30, 2021 and 130,673,300 shares issued and outstanding at December 31, 2020 1,308 1,307 Additional paid-in capital 4,265,695 4,169,870 Accumulated other comprehensive income (loss) ( 33,429 ) ( 60,071 ) Distributions in excess of retained earnings ( 1,038,955 ) ( 853,973 ) Total shareholders’ equity 3,194,915 3,257,337 Non-controlling interests 7,387 6,989 Total equity 3,202,302 3,264,326 Total liabilities and equity $ 6,227,468 $ 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 September 30, For the nine months ended September 30, 2021 2020 2021 2020 Revenues: Room $ 162,548 $ 51,337 $ 324,614 $ 239,279 Food and beverage 48,900 12,454 95,223 82,635 Other operating 27,362 13,189 65,930 46,765 Total revenues 238,810 76,980 485,767 368,679 Expenses: Hotel operating expenses: Room 40,504 15,835 85,777 75,390 Food and beverage 34,925 10,578 68,121 66,144 Other direct and indirect 72,622 44,538 174,069 171,456 Total hotel operating expenses 148,051 70,951 327,967 312,990 Depreciation and amortization 55,492 56,696 165,636 168,044 Real estate taxes, personal property taxes, property insurance, and ground rent 26,204 27,947 84,230 85,173 General and administrative 9,433 7,466 26,803 38,259 Transaction costs ( 49 ) 10,339 63 10,474 Impairment loss — — 14,856 20,570 (Gain) loss on sale of hotel properties ( 171 ) 47 ( 64,729 ) ( 117,401 ) (Gain) loss and other operating expenses 480 917 1,451 3,753 Total operating expenses 239,440 174,363 556,277 521,862 Operating income (loss) ( 630 ) ( 97,383 ) ( 70,510 ) ( 153,183 ) Interest expense ( 22,930 ) ( 27,514 ) ( 73,065 ) ( 75,196 ) Other 27 115 85 442 Income (loss) before income taxes ( 23,533 ) ( 124,782 ) ( 143,490 ) ( 227,937 ) Income tax (expense) benefit ( 5 ) ( 5,778 ) ( 60 ) 8,531 Net income (loss) ( 23,538 ) ( 130,560 ) ( 143,550 ) ( 219,406 ) Net income (loss) attributable to non-controlling interests ( 125 ) ( 253 ) ( 1,085 ) ( 535 ) Net income (loss) attributable to the Company ( 23,413 ) ( 130,307 ) ( 142,465 ) ( 218,871 ) Distributions to preferred shareholders ( 12,528 ) ( 8,139 ) ( 30,761 ) ( 24,417 ) Issuance costs of redeemed preferred shares ( 8,043 ) — ( 8,043 ) — Net income (loss) attributable to common shareholders $ ( 43,984 ) $ ( 138,446 ) $ ( 181,269 ) $ ( 243,288 ) Net income (loss) per share available to common shareholders, basic $ ( 0.34 ) $ ( 1.06 ) $ ( 1.39 ) $ ( 1.86 ) Net income (loss) per share available to common shareholders, diluted $ ( 0.34 ) $ ( 1.06 ) $ ( 1.39 ) $ ( 1.86 ) Weighted-average number of common shares, basic 130,813,750 130,645,990 130,801,187 130,588,765 Weighted-average number of common shares, diluted 130,813,750 130,645,990 130,801,187 130,588,765 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 September 30, For the nine months ended September 30, 2021 2020 2021 2020 Comprehensive Income: Net income (loss) $ ( 23,538 ) $ ( 130,560 ) $ ( 143,550 ) $ ( 219,406 ) Other comprehensive income (loss): Change in fair value of derivative instruments ( 323 ) 790 7,103 ( 64,629 ) Amounts reclassified from other comprehensive income 6,494 8,932 19,319 19,681 Comprehensive income (loss) ( 17,367 ) ( 120,838 ) ( 117,128 ) ( 264,354 ) Comprehensive income (loss) attributable to non-controlling interests ( 84 ) ( 187 ) ( 912 ) ( 624 ) Comprehensive income (loss) attributable to the Company $ ( 17,283 ) $ ( 120,651 ) $ ( 116,216 ) $ ( 263,730 ) 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) For the three months ended September 30, 2021 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 June 30, 2021 29,600,000 $ 296 130,813,750 $ 1,308 $ 4,263,473 $ ( 39,820 ) $ ( 993,654 ) $ 3,231,603 $ 7,043 $ 3,238,646 Redemption of preferred shares ( 10,000,000 ) ( 100 ) — — ( 241,857 ) — ( 8,043 ) ( 250,000 ) — ( 250,000 ) Issuance of shares, net of offering costs 10,000,000 100 — — 241,676 — — 241,776 — 241,776 Share-based compensation — — — — 2,403 — — 2,403 697 3,100 Distributions on common shares/units — — — — — — ( 1,317 ) ( 1,317 ) ( 8 ) ( 1,325 ) Distributions on preferred shares — — — — — — ( 12,528 ) ( 12,528 ) — ( 12,528 ) Other adjustment — — — — — 393 — 393 ( 393 ) — Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — ( 496 ) — ( 496 ) 173 ( 323 ) Amounts reclassified from other comprehensive income — — — — — 6,494 — 6,494 — 6,494 Net income (loss) — — — — — — ( 23,413 ) ( 23,413 ) ( 125 ) ( 23,538 ) Balance at September 30, 2021 29,600,000 $ 296 130,813,750 $ 1,308 $ 4,265,695 $ ( 33,429 ) $ ( 1,038,955 ) $ 3,194,915 $ 7,387 $ 3,202,302 6 Table of Contents For the three months ended September 30, 2020 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 June 30, 2020 20,400,000 $ 204 130,564,060 $ 1,306 $ 4,077,497 $ ( 79,385 ) $ ( 531,914 ) $ 3,467,708 $ 21,038 $ 3,488,746 Share-based compensation — — — — 1,660 — — 1,660 — 1,660 Distributions on common shares/units — — — — — — ( 1,307 ) ( 1,307 ) ( 3 ) ( 1,310 ) Distributions on preferred shares — — — — — — ( 8,139 ) ( 8,139 ) — ( 8,139 ) Redemption of non-controlling interest LTIP units — — 109,240 1 13,445 — — 13,446 ( 13,446 ) — Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — 790 — 790 — 790 Amounts reclassified from other comprehensive income — — — — — 8,932 — 8,932 — 8,932 Net income (loss) — — — — — — ( 130,307 ) ( 130,307 ) ( 253 ) ( 130,560 ) Balance at September 30, 2020 20,400,000 $ 204 130,673,300 $ 1,307 $ 4,092,602 $ ( 69,663 ) $ ( 671,667 ) $ 3,352,783 $ 7,336 $ 3,360,119 7 Table of Contents For the nine months ended September 30, 2021 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 Redemption of preferred shares ( 10,000,000 ) ( 100 ) — — ( 241,857 ) — ( 8,043 ) ( 250,000 ) — ( 250,000 ) Issuance of shares, net of offering costs 19,200,000 192 — — 463,914 — — 464,106 — 464,106 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 — — 151,049 1 8,046 — — 8,047 1,744 9,791 Distributions on common shares/units — — — — — — ( 3,713 ) ( 3,713 ) ( 41 ) ( 3,754 ) Distributions on preferred shares — — — — — — ( 30,761 ) ( 30,761 ) — ( 30,761 ) 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 adjustment — — — — — 393 — 393 ( 393 ) — Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — 6,930 — 6,930 173 7,103 Amounts reclassified from other comprehensive income — — — — — 19,319 — 19,319 — 19,319 Net income (loss) — — — — — — ( 142,465 ) ( 142,465 ) ( 1,085 ) ( 143,550 ) Balance at September 30, 2021 29,600,000 $ 296 130,813,750 $ 1,308 $ 4,265,695 $ ( 33,429 ) $ ( 1,038,955 ) $ 3,194,915 $ 7,387 $ 3,202,302 8 Table of Contents For the nine months ended September 30, 2020 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 — — — — ( 94 ) — — ( 94 ) — ( 94 ) 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 — — 103,083 1 10,459 — — 10,460 10,616 21,076 Distributions on common shares/units — — — — — — ( 3,383 ) ( 3,383 ) ( 27 ) ( 3,410 ) Distributions on preferred shares — — — — — — ( 24,417 ) ( 24,417 ) — ( 24,417 ) Redemption of non-controlling interest LTIP units — — 109,240 1 13,445 — — 13,446 ( 13,446 ) — Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — ( 64,629 ) — ( 64,629 ) — ( 64,629 ) Amounts reclassified from other comprehensive income — — — — — 19,681 — 19,681 — 19,681 Net income (loss) — — — — — — ( 218,871 ) ( 218,871 ) ( 535 ) ( 219,406 ) Balance at September 30, 2020 20,400,000 $ 204 130,673,300 $ 1,307 $ 4,092,602 $ ( 69,663 ) $ ( 671,667 ) $ 3,352,783 $ 7,336 $ 3,360,119 The accompanying notes are an integral part of these financial statements. 9 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Cash Flows (In thousands) (Unaudited) For the nine months ended September 30, 2021 2020 Operating activities: Net income (loss) $ ( 143,550 ) $ ( 219,406 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 165,636 168,044 Share-based compensation 8,345 21,076 Amortization of deferred financing costs, non-cash interest and other amortization 12,668 11,199 (Gain) loss on sale of hotel properties ( 64,729 ) ( 117,401 ) Impairment loss 14,856 20,570 Non-cash ground rent 4,563 4,669 Other ( 214 ) ( 289 ) Changes in assets and liabilities: Hotel receivables ( 21,657 ) 37,217 Prepaid expenses and other assets ( 540 ) ( 3,933 ) Accounts payable and accrued expenses 57,685 ( 47,896 ) Deferred revenues 11,190 ( 20,708 ) Net cash provided by (used in) operating activities 44,253 ( 146,858 ) Investing activities: Improvements and additions to hotel properties ( 52,778 ) ( 110,443 ) Proceeds from sales of hotel properties 255,927 375,131 Acquisition of hotel properties ( 190,968 ) — Deposits on hotel properties ( 1,020 ) — Purchase of corporate office equipment, software, and furniture ( 96 ) — Net cash provided by (used in) investing activities 11,065 264,688 Financing activities: Gross proceeds from issuance of preferred shares 480,000 — Payment of offering costs — common and preferred shares ( 15,894 ) ( 94 ) Payment of deferred financing costs ( 10,082 ) ( 3,618 ) Borrowings under revolving credit facilities — 760,115 Repayments under revolving credit facilities ( 40,000 ) ( 635,115 ) Proceeds from debt 268,599 12,965 Repayments of debt ( 388,000 ) ( 12,965 ) Purchases of capped calls for convertible senior notes ( 20,975 ) — Repurchases of common shares ( 720 ) ( 1,255 ) Redemption of preferred shares ( 250,000 ) — Distributions — common shares/units ( 3,957 ) ( 52,649 ) Distributions — preferred shares ( 26,049 ) ( 24,417 ) Repayments of refundable membership deposits ( 1,872 ) ( 697 ) Net cash provided by (used in) financing activities ( 8,950 ) 42,270 Net change in cash and cash equivalents and restricted cash 46,368 160,100 Cash and cash equivalents and restricted cash, beginning of year 136,300 56,875 Cash and cash equivalents and restricted cash, end of period $ 182,668 $ 216,975 The accompanying notes are an integral part of these financial statements. 10 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 September 30, 2021, the Company owned 52 hotels with a total of 13,006 guest rooms. The hotels are located in the following markets: Boston, Massachusetts; Chicago, Illinois; Hollywood, Florida; Jekyll Island, Georgia; Key West, Florida; Miami (Coral Gables), Florida; Los Angeles, California (Beverly Hills, Santa Monica, and West Hollywood); Naples, Florida; Philadelphia, Pennsylvania; Portland, Oregon; San Diego, California; San Francisco, California; Santa Cruz, 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. As of September 30, 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 and Liquidity Update 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 dramatically declined. In response, the Company implemented significant cost controls, salary reductions and temporarily suspended operations at 47 of its hotels and resorts in 2020. In addition, to improve liquidity, the Company raised capital by issuing convertible notes and additional preferred shares as summarized below. As demand has since improved as a result of an increase in vaccinations and corresponding lifting of governmental restrictions and recommendations, the Company gradually reopened its hotels and resorts. As of September 30, 2021, all of the Company's hotels and resorts were open, with the exception of Hotel Vitale, whose operations will remain suspended until the expected completion of renovations in the first quarter of 2022. The COVID-19 pandemic has had a significant negative impact on the Company's operations and financial results and is expected to continue to have a significant negative impact on the Company's results of operations, financial position and cash flow for the remainder of 2021. The Company cannot estimate when travel demand will fully recover. However, the Company anticipates further recovery in 2022. Leisure travel in the second and third quarters of 2021 exceeded expectations, particularly at the Company's warmer weather and resort properties. However, business travel continues to be substantially lower. During the nine months ended September 30, 2021, the Company conducted the following transactions: • On February 9, 2021, 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. • On February 18, 2021, amended the agreements governing existing credit facilities, term loan facilities and unsecured 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 ratios, which were extended through December 31, 2021. • On April 1, 2021, sold the Sir Francis Drake for $ 157.6 million. • On May 13, 2021, raised $ 222.6 million of net proceeds from the issuance of 9,200,000 6.375 % Series G Cumulative Redeemable Preferred Shares. • On June 10, 2021 sold The Roger New York for $ 19.0 million. • On July 22, 2021, acquired the leasehold interest in Jekyll Island Club Resort for $ 94.0 million. • On July 27, 2021, raised $ 242.1 million of net proceeds from the issuance of 10,000,000 5.70 % Series H Cumulative Redeemable Preferred Shares. • On August 21, 2021, redeemed all outstanding 6.375 % Series D Cumulative Redeemable Preferred Shares. 11 Table of Contents • On August 22, 2021, redeemed all outstanding 6.50 % Series C Cumulative Redeemable Preferred Shares. • On September 9, 2021, sold Villa Florence San Francisco on Union Square for $ 87.5 million. • On September 23, 2021, acquired the leasehold interest in Margaritaville Hollywood Beach Resort for $ 270.0 million, including the assumption of a $ 161.5 million mortgage loan. • Paid down $ 428.0 million of debt, consisting of $ 338.0 million of term loans, $ 50.0 million of senior unsecured notes and $ 40.0 million on the senior unsecured credit facility. Based on the amendments to the Company's credit agreements, expense and cash burn rate reductions, and the ability to raise additional liquidity through equity issuances, the Company believes it has sufficient liquidity to meet its obligations for the next twelve months. 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. 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, Debt , for disclosures on the fair value of debt and derivative instruments. 12 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 are expensed for acquisitions that are considered business combinations and capitalized for asset acquisitions. 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. 13 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 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. 14 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 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 Acquisitions On July 22, 2021, the Company acquired the leasehold interest in the 200 -room Jekyll Island Club Resort in Jekyll Island, Georgia for $ 94.0 million, excluding prorations and transaction costs, using cash on hand. On September 23, 2021, the Company acquired the leasehold interest in the 369 -room Margaritaville Hollywood Beach Resort in Hollywood, Florida for $ 270.0 million, excluding prorations and transaction costs, using cash on hand and the assumption of a $ 161.5 million mortgage loan. See Note 5, Debt, for additional information about the mortgage loan and Note 11, Commitments and Contingencies , for additional information about the leasehold interest. Dispositions The following table summarizes disposition transactions during the nine months ended September 30, 2021 and 2020 (in thousands): Hotel Property Name Location Sale Date Sale Price Sir Francis Drake San Francisco, CA April 1, 2021 $ 157,625 The Roger New York New York, NY June 10, 2021 19,000 Villa Florence San Francisco on Union Square San Francisco, CA September 9, 2021 87,500 2021 Total $ 264,125 Sofitel Washington DC Lafayette Square and InterContinental Buckhead Atlanta Washington, DC / Buckhead, GA March 6, 2020 $ 331,000 Union Station Hotel Nashville, Autograph Collection Nashville, TN July 29, 2020 56,000 2020 Total $ 387,000 For the three and nine months ended September 30, 2021 the accompanying consolidated statements of operations and comprehensive income included operating income (loss) of $( 0.6 ) million and $( 6.4 ) million, respectively, excluding impairment loss and (gain) loss on sale of hotel properties, related to the hotel properties sold. For the three and nine months ended September 30, 2020, the accompanying consolidated statements of operations and comprehensive income included operating income (loss) of $( 5.7 ) million and $( 9.6 ) million, respectively, excluding impairment loss and (gain) loss on sale of hotel properties, 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. 15 Table of Contents Note 4. Investment in Hotel Properties Investment in hotel properties as of September 30, 2021 and December 31, 2020 consisted of the following (in thousands): September 30, 2021 December 31, 2020 Land $ 921,957 $ 973,848 Buildings and improvements 5,056,232 4,849,644 Furniture, fixtures and equipment 527,257 515,975 Finance lease asset 91,181 114,835 Construction in progress 10,296 5,443 $ 6,606,923 $ 6,459,745 Right-of-use asset, operating leases 364,002 320,564 Investment in hotel properties $ 6,970,925 $ 6,780,309 Less: Accumulated depreciation ( 1,008,047 ) ( 898,287 ) Investment in hotel properties, net $ 5,962,878 $ 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 nine months ended September 30, 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 nine months ended September 30, 2020, the Company recognized an impairment loss of $ 20.6 million related to a retail 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. Right-of-use Assets and Lease Liabilities 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 4.7 % to 7.6 %. In addition, the term used includes any options to exercise extensions when it is reasonably certain the Company will exercise such option. See Note 11, Commitments and Contingencies , 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 September 30, 2021, the Company's lease liabilities consisted of operating lease liabilities of $ 302.1 million and financing lease liabilities of $ 41.8 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. 16 Table of Contents The Company's debt consisted of the following as of September 30, 2021 and December 31, 2020 (dollars in thousands): Balance Outstanding as of Interest Rate Maturity Date September 30, 2021 December 31, 2020 Revolving credit facilities Senior unsecured credit facility Floating (1) (2) January 2022 $ — $ 40,000 PHL unsecured credit facility Floating (3) January 2022 — — Total revolving credit facilities $ — $ 40,000 Unsecured term loans First Term Loan Floating (4) January 2023 300,000 300,000 Second Term Loan Floating (4) April 2022 26,327 65,000 Fourth Term Loan Floating (4) October 2024 110,000 110,000 Sixth Term Loan Tranche 2021 Floating (4) November 2021 3,932 40,966 Tranche 2021 Extended Floating (4) November 2022 82,071 173,034 Tranche 2022 Floating (4) November 2022 114,670 286,000 Tranche 2023 Floating (4) November 2023 400,000 400,000 Tranche 2024 Floating (4) January 2024 400,000 400,000 Total Sixth Term Loan 1,000,673 1,300,000 Total term loans at stated value 1,437,000 1,775,000 Deferred financing costs, net ( 5,777 ) ( 8,455 ) Total term loans $ 1,431,223 $ 1,766,545 Convertible senior notes Convertible senior notes 1.75 % December 2026 750,000 500,000 Debt premium (discount), net 12,190 ( 113,099 ) Deferred financing costs, net ( 17,014 ) ( 12,568 ) Total convertible senior notes $ 745,176 $ 374,333 Senior unsecured notes Series A Notes 5.15 % (5) December 2023 47,600 60,000 Series B Notes 5.38 % (6) December 2025 2,400 40,000 Total senior unsecured notes at stated value 50,000 100,000 Deferred financing costs, net ( 182 ) ( 407 ) Total senior unsecured notes $ 49,818 $ 99,593 Mortgage loan Margaritaville Hollywood Beach Resort Floating (7) May 2022 161,500 — Debt premium (discount), net ( 3,023 ) — Deferred financing costs, net ( 464 ) — Total mortgage loan $ 158,013 $ — Total debt $ 2,384,230 $ 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) 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 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. 17 Table of Contents (4) 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 September 30, 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 $ 7.0 million bore an effective weighted-average floating interest rate of 3.0 %. 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 %. (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. (7) The loan bears interest at a floating rate equal to one-month LIBOR plus a weighted-average spread of 2.37 %. The Company has the option to extend the maturity date for up to two one-year periods. 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 September 30, 2021, the Company had no outstanding borrowings, $ 5.8 million of outstanding letters of credit and borrowing capacity of $ 644.2 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 the London Inter-bank Offered Rate ("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 September 30, 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 $ 5.8 million and $ 6.8 million were outstanding as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 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. During the nine months ended September 30, 2021, the Company repaid $ 338.0 million aggregate principal balance of the Company's second and sixth term loans. As of September 30, 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 for further discussion on the interest rate swaps. 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. 18 Table of Contents 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 mature on December 15, 2026. The Company recorded coupon interest expense of $ 3.3 million and $ 9.4 million for the three and nine months ended September 30, 2021, respectively. 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. As a result of the Company's early adoption of ASU 2020-06 on January 1, 2021, 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 September 30, 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 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 $ 47.6 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 $ 2.4 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 September 30, 2021, the Company was in compliance with all such debt covenants. Mortgage Loan On September 23, 2021, the Company assumed a $ 161.5 million loan secured by a first-lien mortgage on the leasehold interest of the Margaritaville Hollywood Beach Resort ("Margaritaville"). The loan requires interest-only payments based on a floating interest rate of one-month LIBOR plus a weighted-average spread of 2.37 %. The loan matures on May 9, 2022 and may be extended for up to two one-year periods. If the loan is extended for the second of the two one-year periods, the interest rate spread will increase by 20 basis points for the second year only. The loan is also subject to an interest rate cap agreement. 19 Table of Contents The loan is non-recourse to the Company except for customary carve-outs to the general non-recourse liability. The loan contains customary provisions regarding events of default, as well as customary cash management, cash trap and lockbox provisions. Cash trap provisions are triggered if performance of the hotel is below a certain threshold. Once triggered, all of the cash flow generated by the hotel is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our lender. No event of default has occurred under the loan documents. Margaritaville triggered the cash trap provisions prior to the acquisition, and therefore cash from hotel operations is being held by the lender in the cash management accounts and reflected as restricted cash in the accompanying consolidated balance sheets. Cash will be released from the lockbox once the hotel reaches profitability levels that terminate the cash trap or the loan is paid off. Interest Expense The components of the Company's interest expense consisted of the following for the three and nine months ended September 30, 2021 and 2020 (in thousands): For the three months ended September 30, For the nine months ended September 30, 2021 2020 2021 2020 Unsecured revolving credit facilities $ 513 $ 2,557 $ 1,581 $ 8,226 Unsecured term loan facilities 15,442 19,694 46,983 53,330 Convertible senior notes 3,282 — 9,381 — Senior unsecured notes 645 1,198 2,917 3,594 Mortgage debt 88 — 88 — Amortization of deferred financing fees 2,046 1,518 7,414 3,898 Other 914 2,547 4,701 6,148 Total interest expense $ 22,930 $ 27,514 $ 73,065 $ 75,196 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 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 September 30, 2021 and December 31, 2020 was $ 642.5 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. The Company's interest rate swaps at September 30, 2021 and December 31, 2020 consisted of the following, by maturity date (dollars in thousands): Aggregate Notional Value as of Hedge Type Interest Rate Range Maturity September 30, 2021 December 31, 2020 Swap-cash flow 1.46 % - 1.75 % January 2021 $ — $ 490,000 Swap-cash flow 2.60 % October 2021 110,000 110,000 Swap-cash flow 1.78 % - 1.79 % January 2022 180,000 180,000 Swap-cash flow 1.64 % - 1.68 % April 2022 100,000 100,000 Swap-cash flow 0.17 % January 2023 200,000 — Swap-cash flow 1.99 % November 2023 250,000 250,000 Swap-cash flow 2.60 % January 2024 300,000 300,000 Swap-cash flow 1.43 % - 1.44 % February 2026 290,000 — Total $ 1,430,000 $ 1,430,000 During the nine months ended September 30, 2021, the Company had interest rate swaps for an aggregate notional amount of $ 490.0 million that became effective as other interest rate swaps matured. As of September 30, 2021, there are no additional interest rate swaps outstanding that will become effective in the future. 20 Table of Contents The Company records all derivative instruments at fair value in the accompanying consolidated balance sheets. Fair values of interest rate swaps and caps 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 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 September 30, 2021, the Company's derivative instruments were in a liability position, with an aggregate fair value of $ 33.2 million. There were no derivative instruments in an asset position. Derivative assets are included in prepaid expenses and other assets and derivative liabilities are included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. The Company expects approximately $ 18.4 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 and nine months ended September 30, 2021 and 2020 (in thousands): For the three months ended September 30, For the nine months ended September 30, 2021 2020 2021 2020 San Diego, CA $ 63,524 $ 31,641 $ 119,668 $ 79,135 Southern Florida/Georgia 30,928 13,801 104,901 65,272 Boston, MA 45,213 10,714 78,425 48,621 Los Angeles, CA 32,502 7,648 62,283 43,937 Portland, OR 20,078 5,462 38,002 22,196 San Francisco, CA 16,524 1,591 28,653 64,594 Other (1) 9,731 3,363 19,335 14,527 Chicago, IL 10,598 1,950 16,696 14,223 Washington, D.C. 6,275 598 12,441 11,601 Seattle, WA 3,437 212 5,363 4,573 $ 238,810 $ 76,980 $ 485,767 $ 368,679 ______________________ (1) Other includes: 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. Each outstanding common share entitles the holder to one vote on each matter submitted to a vote of shareholders. Holders of common shares are entitled to receive dividends when authorized by the 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 common shares. Under this program, the Company may repurchase 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 nine months ended September 30, 2021, the Company had no repurchases under this program and as of September 30, 2021, $ 56.6 million of common shares remained available for repurchase under this program. 21 Table of Contents 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 common shares. Under this program, the Company may repurchase 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. On April 29, 2021, the Company 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 nine months ended September 30, 2021. As of September 30, 2021, $ 200.0 million of common shares remained available for issuance under the ATM program. Common Dividends The Company declared the following dividends on common shares/units for the nine months ended September 30, 2021: Dividend per Share/Unit For the Quarter Ended Record Date Payable Date $ 0.01 March 31, 2021 March 31, 2021 April 15, 2021 $ 0.01 June 30, 2021 June 30, 2021 July 15, 2021 $ 0.01 September 30, 2021 September 30, 2021 October 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”). In May 2021, the Company 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. In July 2021, the Company issued 10,000,000 5.70 % Series H Cumulative Redeemable Preferred Shares at a public offering price of $ 25.00 per share for net proceeds of $ 242.1 million. In August 2021, the Company redeemed all outstanding shares of 6.50 % Series C Cumulative Redeemable Preferred Shares and 6.375 % Series D Cumulative Redeemable Preferred Shares at the redemption amount of $ 25.00 per share plus accrued and unpaid dividends of $ 0.17 and $ 0.16 per share, respectively. The following Preferred Shares were outstanding as of September 30, 2021 and December 31, 2020: Security Type September 30, 2021 December 31, 2020 6.50 % Series C — 5,000,000 6.375 % Series D — 5,000,000 6.375 % Series E 4,400,000 4,400,000 6.30 % Series F 6,000,000 6,000,000 6.375 % Series G 9,200,000 — 5.70 % Series H 10,000,000 — 29,600,000 20,400,000 . 22 Table of Contents The Series C, Series D, Series E, Series F, Series G and Series H Cumulative Redeemable 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 do not have any maturity date and are not subject to mandatory redemption. The Series C, Series D, Series E and Series F Preferred Shares could not be redeemed prior to March 18, 2018, June 9, 2021, March 4, 2018, and May 25, 2021, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. The Series G and Series H Preferred Shares may not be redeemed prior to May 13, 2026 and July 27, 2026, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. On or after such dates, the Company may, at its option, redeem the Preferred Shares, 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 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 common shares based on defined formulas subject to share caps. The share cap on each Series E Preferred Share is 1.9372 common shares, on each Series F Preferred Share is 2.0649 common shares, on each Series G Preferred Share is 2.1231 common shares, and on each Series H Preferred Share is 2.2311 common shares. Preferred Dividends The Company declared the following dividends on preferred shares for the nine months ended September 30, 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 6.50 % Series C $ 0.41 June 30, 2021 June 30, 2021 July 15, 2021 6.375 % Series D $ 0.40 March 31, 2021 March 31, 2021 April 15, 2021 6.375 % Series D $ 0.40 June 30, 2021 June 30, 2021 July 15, 2021 6.375 % Series E $ 0.40 March 31, 2021 March 31, 2021 April 15, 2021 6.375 % Series E $ 0.40 June 30, 2021 June 30, 2021 July 15, 2021 6.375 % Series E $ 0.40 September 30, 2021 September 30, 2021 October 15, 2021 6.30 % Series F $ 0.39 March 31, 2021 March 31, 2021 April 15, 2021 6.30 % Series F $ 0.39 June 30, 2021 June 30, 2021 July 15, 2021 6.30 % Series F $ 0.39 September 30, 2021 September 30, 2021 October 15, 2021 6.375 % Series G (1) $ 0.67 September 30, 2021 September 30, 2021 October 15, 2021 5.70 % Series H (2) $ 0.31 September 30, 2021 September 30, 2021 October 15, 2021 ______________________ (1) The initial long-period dividend for the 6.375 % Series G Preferred Shares will be paid in October 2021. (2) The initial short-period dividend for the 5.700 % Series H Preferred Shares will be paid in October 2021. Non-controlling Interest of Common Units in Operating Partnership Holders of Operating Partnership units ("OP Units") have certain redemption rights that enable OP 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 common shares at the time of redemption or 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 September 30, 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. See Note 8, Share-Based Compensation Plan, for further discussion on LTIP units. 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 September 30, 2021 and December 31, 2020, the Operating Partnership had 133,605 OP units held by third parties, excluding LTIP units. 23 Table of Contents Note 8. Share-Based Compensation Plan Available Shares 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. On May 19, 2021, the Company’s shareholders approved an amendment to the Plan which increased the aggregate number of common shares that may be issued under the Plan as share awards, performance units, options, share appreciation rights and other equity-based awards by 1,675,000 . As of September 30, 2021, there were 1,808,182 common shares available for issuance under the Plan. Service Condition Share Awards The following table provides a summary of service condition restricted share activity as of September 30, 2021: Shares Weighted-Average Grant Date Fair Value Unvested at December 31, 2020 242,727 $ 24.94 Granted 415,531 $ 22.69 Vested ( 81,591 ) $ 30.41 Forfeited ( 7,902 ) $ 23.33 Unvested at September 30, 2021 568,765 $ 22.53 For the three and nine months ended September 30, 2021, the Company recognized approximately $ 1.1 million and $ 3.0 million, respectively, of share-based compensation expense related to these awards in the accompanying consolidated statements of operations and comprehensive income. Performance-Based Equity Awards 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 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. For the three and nine months ended September 30, 2021, the Company recognized approximately $ 1.3 million and $ 3.6 million, respectively, of share-based compensation expense related to performance-based equity awards in the accompanying consolidated statements of operations and comprehensive income. Long-Term Incentive Partnership ("LTIP") Units As of September 30, 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 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 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, contingent upon continued employment with the Company. 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 September 30, 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 September 30, 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 in Note 7, Equity . For the three and nine months ended September 30, 2021, the Company recognized approximately $ 0.7 million and $ 1.7 million, respectively, in expense related to these 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. 24 Table of Contents 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 and nine months ended September 30, 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 September 30, 2021 and December 31, 2020, the statute of limitations remains open for all major jurisdictions for tax years dating back to 2016. 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 September 30, For the nine months ended September 30, 2021 2020 2021 2020 Numerator: Net income (loss) attributable to common shareholders $ ( 43,984 ) $ ( 138,446 ) $ ( 181,269 ) $ ( 243,288 ) Less: dividends paid on unvested share-based compensation ( 12 ) ( 2 ) ( 35 ) ( 6 ) Net income (loss) available to common shareholders $ ( 43,996 ) $ ( 138,448 ) $ ( 181,304 ) $ ( 243,294 ) Denominator: Weighted-average number of common shares — basic 130,813,750 130,645,990 130,801,187 130,588,765 Effect of dilutive share-based compensation — — — — Weighted-average number of common shares — diluted 130,813,750 130,645,990 130,801,187 130,588,765 Net income (loss) per share available to common shareholders — basic $ ( 0.34 ) $ ( 1.06 ) $ ( 1.39 ) $ ( 1.86 ) Net income (loss) per share available to common shareholders — diluted $ ( 0.34 ) $ ( 1.06 ) $ ( 1.39 ) $ ( 1.86 ) For the three and nine months ended September 30, 2021, 1,035,369 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 and nine months ended September 30, 2020, 547,203 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 and nine months ended September 30, 2021, 29,441,175 common 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. 25 Table of Contents 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 and nine months ended September 30, 2021, com bined base and incentive management fees were $ 5.1 million and $ 11.8 million, respectively. For the three and nine months ended September 30, 2020, com bined base and incentive management fees were $ 1.5 million and $ 8.0 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. On April 30, 2021, the Company provided a notice of default to sbe concerning the hotel management agreement of the Mondrian Los Angeles. Sbe is refuting the Company’s notice of default and has requested arbitration to cure the alleged default. 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 September 30, 2021 and December 31, 2020, the Company had $ 25.1 million and $ 12.0 million, respectively, in restricted cash, which consisted of funds held in cash management and lockbox accounts held by a lender, reserves for replacement of furniture and fixtures and reserves to pay for real estate taxes, ground rent or property insurance under certain hotel management agreements or loan agreements. Ground and Hotel Leases As of September 30, 2021, the following hotels were subject to leases as follows: Lease Properties Lease Type Lease Expiration Date Restaurant at Southernmost Beach Resort Operating lease April 2029 Paradise Point Resort & Spa Operating lease May 2050 Hotel Monaco Washington DC Operating lease November 2059 Argonaut Hotel Operating lease December 2059 Hotel Zephyr Fisherman's Wharf Operating lease February 2062 Viceroy Santa Monica Hotel Operating lease September 2065 San Diego Mission Bay Resort Operating lease July 2068 Hotel Vitale Operating lease March 2070 (1) Hyatt Regency Boston Harbor Operating lease April 2077 The Westin Copley Place, Boston Operating lease December 2077 (2) The Liberty, a Luxury Collection Hotel, Boston Operating lease May 2080 Jekyll Island Club Resort and Restaurant Operating lease January 2089 Hotel Zelos San Francisco Operating lease June 2097 Hotel Palomar Los Angeles Beverly Hills Operating lease January 2107 (3) Margaritaville Hollywood Beach Resort Operating lease July 2112 Hotel Zeppelin San Francisco Operating and finance lease June 2089 (4) Harbor Court Hotel San Francisco Finance lease August 2052 ______________________ (1) The expiration date assumes the exercise of a 14 -year extension option. (2) No payments are required through maturity. (3) The expiration date assumes the exercise of all 19 five-year extension options. (4) The expiration date assumes the exercise of a 30-year extension option. 26 Table of Contents 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 the consumer price index 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. 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 and nine months ended September 30, 2021 and 2020 are as follows (in thousands): For the three months ended September 30, For the nine months ended September 30, 2021 2020 2021 2020 Fixed ground rent $ 3,929 $ 4,314 $ 12,532 $ 12,907 Variable ground rent 2,917 1,072 6,275 3,816 Total ground rent $ 6,846 $ 5,386 $ 18,807 $ 16,723 Future maturities of lease liabilities for the Company's operating leases at September 30, 2021 were as follows (in thousands): 2021 $ 4,946 2022 19,594 2023 19,238 2024 19,323 2025 19,450 Thereafter 1,587,326 Total lease payments $ 1,669,877 Less: Imputed interest ( 1,367,736 ) Present value of lease liabilities $ 302,141 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. 27 Table of Contents Note 12. Supplemental Information to Statements of Cash Flows For the nine months ended September 30, 2021 2020 (in thousands) Interest paid, net of capitalized interest $ 59,803 $ 66,252 Interest capitalized $ 675 $ 1,247 Income taxes paid (refunded) $ 75 $ 3,369 Non-Cash Investing and Financing Activities: Convertible debt discount adjustment $ 113,099 $ — Distributions payable on common shares/units $ 1,532 $ 1,748 Distributions payable on preferred shares $ 12,270 $ 7,558 Issuance of common shares for Board of Trustees compensation $ 516 $ 637 Issuance of common shares for executive and employee bonuses $ 1,446 $ — Issuance of common shares for LTIP units redemption $ — $ 2,831 Accrued additions and improvements to hotel properties $ 2,292 $ 7,842 Right of use assets obtained in exchange for lease liabilities $ 48,302 $ — Write-off of deferred financing costs $ 5,043 $ — Mortgage loan assumed in connection with acquisition $ 161,500 $ — Below (above) market rate contracts assumed in connection with acquisition $ 3,071 $ — Note 13. Subsequent Events On October 20, 2021, the Company acquired the 19 -room Avalon Bed & Breakfast and the 12 -room Duval Gardens, both located in Key West, Florida, for $ 20.0 million. The two properties will be consolidated and operated as part of the Company's Southernmost Beach Resort. 28 Table of Contents