Pebblebrook Hotel Trust 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Pebblebrook Hotel Trust is a Maryland real estate investment trust that conducts its operations so as to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Substantially all of the operations are conducted through Pebblebrook Hotel, L.P. (our "Operating Partnership"), a Delaware limited partnership of which Pebblebrook Hotel Trust is the sole general partner. In this report, we use the terms "the Company", "we" or "our" to refer to Pebblebrook Hotel Trust and its subsidiaries, unless the context indicates otherwise. FORWARD-LOOKING STATEMENTS This report, together with other statements and information publicly disseminated by us, contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may", "will", "should", "potential", "could", "seek", "assume", "forecast", "believe", "expect", "intend", "anticipate", "estimate", "project" or similar expressions. Forward-looking statements in this report include, among others, statements about our business strategy, including acquisition and development strategies, industry trends, estimated revenues and expenses, estimated costs and durations of renovation or restoration projects, estimated insurance recoveries, our ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and our ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. These factors include, but are not limited to, the following: • the COVID-19 pandemic has had, and is expected to continue to have, a significant impact on our financial condition and operations, which impacts our ability to obtain acceptable financing to fund resulting reductions in cash from operations. 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. 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; • risks associated with the hotel industry, including competition, changes in visa and other travel policies by the U.S. government making it less convenient, more difficult or less desirable for international travelers to enter the U.S., increases in employment costs, energy costs and other operating costs, or decreases in demand caused by events beyond our control including, without limitation, actual or threatened terrorist attacks, natural disasters, cyber attacks, any type of flu or disease-related pandemic, or downturns in general and local economic conditions; • the availability and terms of financing and capital and the general volatility of securities markets; • our dependence on third-party managers of our hotels, including our inability to implement strategic business decisions directly; • risks associated with the U.S. and global economies, the cyclical nature of hotel properties and the real estate industry, including environmental contamination and costs of complying with new or existing laws, including the Americans with Disabilities Act and similar laws; • interest rate increases; • our possible failure to qualify as a REIT under the Code and the risk of changes in laws affecting REITs; • the timing and availability of potential hotel acquisitions, our ability to identify and complete hotel acquisitions and our ability to complete hotel dispositions in accordance with our business strategy; • the possibility of uninsured losses; • risks associated with redevelopment and repositioning projects, including delays and cost overruns; and • the other factors discussed under 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. 29 Table of Contents 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. Overview 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, we implemented significant cost controls, salary reductions and temporarily suspended operations at 47 of our hotels and resorts in 2020. In addition, to improve liquidity, we 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, we gradually reopened our hotels and resorts. As of September 30, 2021, all of our 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 our operations and financial results and is expected to continue to have a significant negative impact on our results of operations, financial position and cash flow for the remainder of 2021. We cannot estimate when travel demand will fully recover. However, we anticipate further recovery in 2022. Leisure travel in the second and third quarters of 2021 exceeded expectations, particularly at our warmer weather and resort properties. However, business travel continues to be substantially lower. During the nine months ended September 30, 2021, we 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. • 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. • Repaid $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 our credit agreements, 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. Through these efforts, we seek to improve property efficiencies, lower costs, maximize revenues and enhance property operating margins, which we expect will enhance returns to our shareholders. 30 Table of Contents Key Indicators of Financial Condition and Operating Performance We measure hotel results of operations and the operating performance of our business by evaluating financial and non-financial metrics such as room revenue per available room ("RevPAR"); total revenue per available room ("Total RevPAR"); average daily rate ("ADR"); occupancy rate ("Occupancy"); funds from operations ("FFO"); earnings before interest, income taxes, depreciation and amortization ("EBITDA"); and EBITDA for real estate ("EBITDA re " ) . We evaluate individual hotel and company-wide performance with comparisons to budgets, prior periods and competing properties. ADR, occupancy and RevPAR may be impacted by macroeconomic factors as well as regional and local economies and events. 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 and nine months ended September 30, 2021 and 2020. For the three months ended September 30, For the nine months ended September 30, 2021 2020 2021 2020 Same-Property Occupancy 52.3 % 21.7 % 36.4 % 27.7 % Same-Property ADR $ 272.54 $ 218.42 $ 258.14 $ 242.17 Same-Property RevPAR $ 142.48 $ 47.37 $ 94.00 $ 67.19 Same-Property Total RevPAR $ 209.02 $ 71.57 $ 140.53 $ 103.07 While the operations of many of our hotels were temporarily suspended beginning in March 2020, the above table of hotel operating statistics for the three months ended September 30, 2021 and 2020, includes information from all of the hotels we owned as of September 30, 2021, except for Margaritaville Hollywood Beach Resort for the third quarter of 2021 and 2020, and Hotel Vitale for the third quarter of 2021 and 2020, as it was closed for renovation during the third quarter of 2021. The above table of hotel operating statistics for the nine months ended September 30, 2021 and 2020, includes information from all of the hotels we owned as of September 30, 2021, except for the following: Hotel Zena Washington DC, formerly known as Donovan Hotel, for the first and second quarters of 2021 and 2020, as it was closed for renovation during the first and second quarters of 2020; Hotel Vitale for the third quarter of 2021 and 2020, as it was closed for renovation during the third quarter of 2021; and Margaritaville Hollywood Beach Resort for the third quarter of 2021. Also included in the above table is information for Sir Francis Drake and The Roger New York for the first quarter of 2021 and 2020; and Villa Florence San Francisco on Union Square for the first and second quarters of 2021 and 2020. Non-GAAP Financial Measures Non-GAAP financial measures are measures of our historical or future financial performance that are different from measures calculated and presented in accordance with U.S. GAAP. We report FFO, EBITDA and EBITDA re , which are non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance. We calculate FFO in accordance with standards established by Nareit, formerly known as the National Association of Real Estate Investment Trusts, which defines FFO as net income (calculated in accordance with U.S. GAAP), excluding real estate related depreciation and amortization, gains (losses) from sales of real estate, impairments of real estate assets (including impairment of real estate related joint ventures), the cumulative effect of changes in accounting principles and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. 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. 31 Table of Contents The following table reconciles net income (loss) to FFO and FFO available to common share and unit holders 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 Net income (loss) $ (23,538) $ (130,560) $ (143,550) $ (219,406) Adjustments: Depreciation and amortization 55,379 56,587 165,301 167,716 (Gain) loss on sale of hotel properties (171) 47 (64,729) (117,401) Impairment loss — — 14,856 20,570 FFO $ 31,670 $ (73,926) $ (28,122) $ (148,521) Distribution to preferred shareholders (12,528) (8,139) (30,761) (24,417) Issuance costs of redeemed preferred shares (8,043) — (8,043) — FFO available to common share and unit holders $ 11,099 $ (82,065) $ (66,926) $ (172,938) EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. The white paper issued by Nareit entitled “Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate” defines EBITDA re as net income or loss (computed in accordance with U.S. GAAP), excluding interest expense, income tax, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change of control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate, and after comparable adjustments for our portion of these items related to unconsolidated affiliates. 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 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 Net income (loss) $ (23,538) $ (130,560) $ (143,550) $ (219,406) Adjustments: Interest expense 22,930 27,514 73,065 75,196 Income tax expense (benefit) 5 5,778 60 (8,531) Depreciation and amortization 55,492 56,696 165,636 168,044 EBITDA $ 54,889 $ (40,572) $ 95,211 $ 15,303 (Gain) loss on sale of hotel properties (171) 47 (64,729) (117,401) Impairment loss — — 14,856 20,570 EBITDA re $ 54,718 $ (40,525) $ 45,338 $ (81,528) FFO, EBITDA and EBITDA re do not represent cash generated from operating activities as determined by U.S. GAAP and should not be considered as alternatives to U.S. GAAP net income (loss), as indications of our financial performance, or to U.S. GAAP cash flow from operating activities, as measures of liquidity. In addition, FFO, EBITDA and EBITDA re are not indicative of funds available to fund cash needs, including the ability to make cash distributions. 32 Results of Operations At September 30, 2021 and 2020, we had 52 and 53, 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 and nine months ended September 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": Property Location Disposition Date InterContinental Buckhead Atlanta Buckhead, GA March 6, 2020 Sofitel Washington DC Lafayette Square Washington, D.C. March 6, 2020 Union Station Hotel Nashville, Autograph Collection Nashville, TN July 29, 2020 Sir Francis Drake San Francisco, CA April 1, 2021 The Roger New York New York, NY June 10, 2021 Villa Florence San Francisco on Union Square San Francisco, CA September 9, 2021 Acquisition Date Jekyll Island Club Resort Jekyll Island, GA July 22, 2021 Margaritaville Hollywood Beach Resort Hollywood, FL September 23, 2021 Comparison of the three months ended September 30, 2021 to the three months ended September 30, 2020 Revenues — Total hotel revenues increased by $161.8 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 easing of governmental restrictions. Most of our hotels suspended operations in March 2020 and operations remained suspended throughout the third quarter of 2020. Hotel operating expenses — Total hotel operating expenses increased by $77.1 million primarily due to resuming operations at our comparable properties and returning demand in the third quarter of 2021. Depreciation and amortization — Depreciation and amortization expense decreased by $1.2 million primarily due to the sale of three hotels in 2020 and three hotels in 2021. This was partially offset by the acquisition of two hotels in 2021. Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent decreased by $1.7 million primarily due to a successful appeal of one property's real estate tax assessment. This was partially offset by an increase in percentage ground rent due to an increase in revenues. General and administrative — General and administrative expenses increased by $2.0 million primarily due to an increase in share-based compensation expense of $1.4 million. General and administrative expenses consist of employee compensation costs, legal and professional fees, insurance and other expenses. Transaction costs — Transaction costs incurred during the third quarter of 2020 were the result of additional transfer taxes paid in connection with the LaSalle merger. Transaction costs incurred during the third quarter of 2021 were immaterial. Interest expense — Interest expense decreased by $4.6 million primarily due to decreased borrowings, as certain term loans, senior unsecured notes and amounts under our senior unsecured credit facility were paid down in 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. Distributions to preferred shareholders — Distributions to preferred shareholders increased as a result of the issuance of the Series G and Series H Cumulative Redeemable Preferred Shares in May 2021 and July 2021, respectively. The increase was partially offset by the redemption of the Series C and Series D Cumulative Redeemable Preferred Shares in August 2021. Issuance costs of redeemed preferred shares — Issuance costs of redeemed preferred shares increased due to the redemption of the Series C and Series D Cumulative Redeemable Preferred Shares in August 2021. These costs are included in the determination of net income (loss) attributable to common shareholders. 33 Comparison of the nine months ended September 30, 2021 to the nine months ended September 30, 2020 Revenues — Total hotel revenues increased by $117.1 million primarily in the second and third quarters of 2021 as hotels reopened and leisure travel demand increased during the spring and summer travel season. This increase in demand was the result of an increase in COVID-19 vaccination rates and easing of governmental restrictions. Most of our hotels suspended operations in March 2020 and operations remained suspended throughout the third quarter of 2020. Hotel operating expenses — Total hotel operating expenses increased by $15.0 million primarily due to resuming operations at our comparable properties and returning demand in the second and third quarters of 2021. Depreciation and amortization — Depreciation and amortization expense decreased by $2.4 million primarily due to the sale of three hotels in 2020 and three hotels in 2021. This was partially offset by the acquisition of two hotels in 2021 and capital investments related to recently renovated hotels, including Hotel Zena. General and administrative — General and administrative expenses decreased by $11.5 million primarily due to a decrease 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. Transaction costs — Transaction costs incurred during 2020 were the result of additional transfer taxes paid in connection with the LaSalle merger. Transactions costs incurred during 2021 were immaterial. Impairment loss — The Company recognized an impairment loss of $14.9 million in 2021 related to one hotel. The Company 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 — The Company recognized a net gain on sale of $64.7 million in 2021 primarily due to the sale of Sir Francis Drake. The Company recognized a net gain on sale of $117.4 million in 2020 primarily due to the sale of InterContinental Buckhead Atlanta. (Gain) loss and other operating expenses — (Gain) loss and other operating expenses decreased by $2.3 million primarily due to reductions in pre-opening, hotel management transition and franchise tax expenses. Interest expense — Interest expense decreased by $2.1 million primarily due to decreased borrowings, as certain term loans, senior unsecured notes and amounts under our senior unsecured credit facility were paid down in 2021. This was partially offset by 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 $8.5 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. Distributions to preferred shareholders — Distributions to preferred shareholders increased as a result of the issuance of the Series G and Series H Cumulative Redeemable Preferred Shares in May 2021 and July 2021, respectively. This was partially offset by the redemption of the Series C and Series D Cumulative Redeemable Preferred Shares in August 2021. Issuance costs of redeemed preferred shares — Issuance costs of redeemed preferred shares increased due to the redemption of the Series C and Series D Cumulative Redeemable Preferred Shares in August 2021. These costs are included in the determination of net income (loss) attributable to common shareholders. 34 Table of Content Critical Accounting Policies Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. Recent Accounting Standards 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 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. Liquidity and Capital Resources As of September 30, 2021, we had liquidity of $826.9 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. 35 Table of Content Debt Our 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 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) We have 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. 36 Table of Content (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 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%. We have the option to extend the maturity date for up to two one-year periods. We intend to repay indebtedness incurred under our revolving credit facilities, unsecured term loans, convertible senior notes, senior unsecured notes and mortgage loan 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. 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 further discussion on these amendments and 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 September 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 the London Inter-bank Offered Rate ("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 , 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 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. This credit facility has substantially similar terms as our senior unsecured revolving credit facility and matures in January 2022. 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, 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. As of September 30, 2021, we had no borrowings under the PHL Credit Facility. Unsecured Term Loan Facilities We are party to 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 our leverage ratio. We entered into interest rate swap agreements to fix the LIBOR rate on a portion of these unsecured term loans. For further discussion on our unsecured term loan facilities and interest rate swap agreements, 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 In December 2020, the Company issued $500.0 million aggregate principal amount of 1.75% Convertible Senior Notes due December 2026 (the "Convertible Notes"). The net proceeds from this offering of the Convertible Notes were approximately $487.3 million after deducting the underwriting fees and other expenses paid by the Company. In February 2021, the Company issued an additional $250.0 million aggregate principal amount of Convertible Notes. These additional Convertible Notes were sold at a 5.5% premium to par and generated net proceeds of approximately $257.2 million after deducting the underwriting fees and other expenses paid by the Company of $6.5 million, which was offset by a premium received in the amount of $13.8 million. 37 Table of Content 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. 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 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 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, we 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. We intend to exercise the options to extend. The loan is also subject to an interest rate cap agreement. 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. This loan may remain subject to cash trap provisions for a substantial period of time which could limit our liquidity and ability to pay dividends or reduce debt balances. 38 Table of Content Issuance of Shares of Beneficial Interest Common Shares On February 22, 2016, we announced that our Board of Trustees authorized a share repurchase program of up to $150.0 million of the Company's outstanding common shares. Under this program, we may repurchase common shares from time to time in transactions on the open market or by private agreement. 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 nine months ended September 30, 2021. As of September 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. Under this program, we may repurchase common shares from time to time in transactions on the open market or by private agreement. We may suspend or discontinue this program at any time. 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 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. Preferred Shares 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. These 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. We used the net proceeds to reduce amounts outstanding under our unsecured term loans and for general corporate purposes. In July 2021, we issued 10,000,000 5.700% Series H Cumulative Redeemable Preferred Shares at a public offering price of $25.00 per share for net proceeds of $242.1 million. These shares may be redeemed, at the Company’s option, on or after July 27, 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. We used the net proceeds to redeem all outstanding 6.50% Series C Cumulative Redeemable Preferred Shares and 6.375% Series D Cumulative Redeemable Preferred Shares in August 2021. 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 Our principal sources of cash are cash from operations, borrowings under mortgage financings and other debt, draws on our credit facilities, proceeds from offerings of our equity securities, debt securities and hotel property sales. Our principal uses of cash are asset acquisitions, debt service, capital investments, operating costs, corporate expenses and dividends. Cash Provided by (Used in) Operations. Our cash provided by operating activities was $44.3 million for the nine months ended September 30, 2021. Our cash from operations includes the operating activities of the 52 hotels we owned as of September 30, 2021, offset by corporate expenses. Our cash used in operating activities was $146.9 million for the nine months ended September 30, 2020. Our cash from operations includes the operating activities of the 53 hotels we owned as of September 30, 2020, offset by corporate expenses. The negative cash flow from operations during the nine months ended September 30, 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. Cash Provided by Investing Activities. Our cash provided by investing activities was $11.1 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2021, we invested $52.8 million in improvements to our hotel properties, received $255.9 million from the sales of three hotel properties, purchased two hotel properties using cash of $191.0 million and placed deposits totaling $1.0 million on hotel properties. Our cash provided by investing activities was $264.7 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2020, we invested $110.4 million in improvements to our hotel properties and received $375.1 million from sales of three hotel properties. 39 Table of Content Cash Provided by (Used in) Financing Activities. Our cash used in financing activities was $9.0 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2021, we repaid $40.0 million under the revolving credit facilities, received gross proceeds of $480.0 million from the issuance of our Series G and Series H Preferred Shares, used $250.0 million to redeem all our Series C and Series D Preferred Shares, paid $15.9 million in offering costs, received proceeds from the issuance of convertible notes and other debt of $268.6 million, repaid $388.0 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 $30.0 million in distributions, paid $10.1 million in financing fees, and paid $1.9 million in other transactions. Our cash provided by financing activities was $42.3 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2020, we borrowed $760.1 million under the revolving credit facilities, repaid $635.1 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 $77.1 million in distributions, paid $3.6 million in financing fees related to the credit agreement amendments and paid $0.7 million in other transactions. Capital Investments We maintain and intend to continue maintaining all of our hotels, including each hotel that we acquire in the future, in good repair and condition and in conformity with applicable laws and regulations and when applicable, in accordance with the franchisor’s standards and the agreed-upon requirements in our management agreements. Routine capital investments will be administered by the hotel management companies. However, we maintain approval rights over the capital investments as part of the annual budget process and as otherwise required from time to time. From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, meeting space and restaurants, in order to better compete with other hotels in our markets. In addition, after we acquire a hotel property, we are often required by the franchisor or brand manager, if there is one, to complete a property improvement plan (“PIP”) in order to bring the hotel property up to the franchisor’s or brand’s standards. Generally, we expect to fund renovations and improvements with available cash, restricted cash, borrowings under our credit facility or proceeds from new debt or equity offerings. For the nine months ended September 30, 2021, we invested $52.8 million in capital investments to reposition and improve our properties, primarily the renovations of Hotel Vitale, Southernmost Beach Resort and L'Auberge Del Mar. Depending on market conditions, we expect to invest an additional $30.0 million to $40.0 million in capital investments during the remainder of 2021, including a $25.0 million transformation of Hotel Vitale. The Hotel Vitale redevelopment is expected to be completed in the first quarter of 2022, 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 of 2021. Contractual Obligations and Off-Balance Sheet Arrangements The table below summarizes our contractual obligations as of September 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 Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Mortgage loans (1)(7) $ 172,416 $ 4,114 $ 168,302 $ — $ — Term loans (2) 1,535,113 84,036 1,340,964 110,113 — Convertible senior notes (1) 822,188 13,125 26,250 26,250 756,563 Unsecured notes (1) 56,369 2,581 51,211 2,577 — Borrowings under credit facilities (3) — — — — — Hotel and ground leases (4) 1,696,503 18,487 37,136 37,775 1,603,105 Finance lease obligation (4) 52,115 909 1,877 1,962 47,367 Refundable membership initiation deposits (5) 27,328 203 — — 27,125 Purchase commitments (6) 12,398 12,398 — — — Corporate office leases 14,517 1,774 2,562 2,502 7,679 Total $ 4,388,947 $ 137,627 $ 1,628,302 $ 181,179 $ 2,441,839 ______________________ 40 Table of Content (1) Amounts include principal and interest. (2) Amounts include principal and interest. 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. (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 September 30, 2021. It is assumed that the outstanding borrowings will be repaid upon maturity with fixed interest-only payments until then. (4) Our leases may require minimum fixed rent payments, percentage rent payments based on a percentage of revenues in excess of certain thresholds or rent payments equal to the greater of a minimum fixed rent or percentage rent. Minimum fixed rent may be adjusted annually by increases in consumer price index ("CPI") and may be subject to minimum and maximum increases. The table above reflects only minimum fixed rent for all periods presented and does not include assumptions for CPI adjustments. (5) Represents refundable initiation membership deposits from club members at LaPlaya Beach Resort & Club. (6) Amounts represent purchase orders and contracts that have been executed for renovation projects at the properties. We are committed to these purchase orders and contracts and anticipate making similar arrangements in the future with the existing properties or any future properties that we may acquire. (7) Assumes the exercise of two one-year extension options. Off-Balance Sheet Arrangements As of September 30, 2021, we had no off-balance sheet arrangements. Inflation We rely on the performance of the hotels to increase revenues to keep pace with inflation. Generally, our hotel operators possess the ability to adjust room rates daily, except for group or corporate rates contractually committed to in advance, although competitive pressures may limit the ability of our operators to raise rates faster than inflation or even at the same rate. Seasonality Demand in the lodging industry is affected by recurring seasonal patterns which are greatly influenced by overall economic cycles, geographic locations, weather and customer mix at the hotels. Generally, our hotels have lower revenue, operating income and cash flow in the first quarter of each year and higher revenue, operating income and cash flow in the third quarter of each year. The historical trend has been disrupted as a result of COVID-19. Derivative Instruments In the normal course of business, we are exposed to the effects of interest rate changes. We may enter into derivative instruments including interest rate swaps, caps and collars to manage or hedge interest rate risk. Derivative instruments are subject to fair value reporting at each reporting date and the increase or decrease in fair value is recorded in net income (loss) or accumulated other comprehensive income (loss), based on the applicable hedge accounting guidance. Derivatives expose the Company to credit risk in the event of non-performance by the counter parties under the terms of the interest rate hedge agreements. We believe it minimizes the credit risk by transacting with major credit-worthy financial institutions. 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.