What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-23 · 169 added, 254 removed, 111 unchanged (79% of the section changed)

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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.

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

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

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

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

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

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

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

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

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

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

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

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

We cannot estimate when travel demand will recover.

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

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

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

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

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

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

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 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 December 31, 2021, all of our hotels and resorts were open, with the exception of Hotel Vitale, whose operations will remain suspended until the completion of its renovations and repositioning, which we expect to occur in the second quarter of 2022.

The COVID-19 pandemic had a significant negative impact on our operations and financial results throughout 2021.

Although results improved relative to 2020, we cannot estimate with certainty when travel demand will fully recover.

However, we anticipate further recovery in 2022.

Leisure travel in 2021 exceeded expectations, particularly at our warmer-weather and resort properties and we expect this trend to continue in 2022.

However, business travel continues to be substantially lower.

During 2021, we amended the agreements governing our existing credit facilities, term loan facilities and unsecured senior notes to, among other changes:

• waive quarterly financial covenants until the second quarter of 2022, with substantially less-restrictive covenants through the end of the first quarter of 2023;

• extend or provide the option for us to extend more than $1.0 billion of debt maturities including our revolving credit facility;

• increase pricing until the end of the covenant waiver period;

• impose certain restrictions during the covenant waiver period on share repurchases, dividends, capital improvements, and hotel property acquisitions.

Based on the amendments to our credit agreements, actions noted above, and assumptions regarding the recovery of demand, we believe we have sufficient liquidity to meet our obligations for the next 12 months.

For further discussion on our liquidity, see Liquidity and Capital Resources included in Part II, Item 7 of this Annual Report on Form 10-K.

During the year ended December 31, 2021, other significant transactions included:

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

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

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

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

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

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

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

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

Refer to "Note 5.

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

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

• On February 9, 2021, we issued, at a 5.5% premium to par, an additional $250.0 million aggregate principal amount of the convertible notes originally issued in December 2020.

• On April 1, 2021, we sold the Sir Francis Drake for $157.6 million.

• On May 13, 2021, we 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, we sold The Roger New York for $19.0 million.

• On July 22, 2021, we acquired the leasehold interest in Jekyll Island Club Resort for $94.0 million.

• On July 27, 2021, we 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, we redeemed all outstanding 6.375% Series D Cumulative Redeemable Preferred Shares.

• On August 22, 2021, we redeemed all outstanding 6.50% Series C Cumulative Redeemable Preferred Shares.

• On September 9, 2021, we sold Villa Florence San Francisco on Union Square for $87.5 million.

• On September 23, 2021, we acquired the leasehold interest in Margaritaville Hollywood Beach Resort for $270.0 million, including the assumption of a $161.5 million mortgage loan.

• On October 20, 2021, we acquired Avalon Bed & Breakfast and Duval Gardens for $20.0 million, with both properties consolidating into our Southernmost Beach Resort.

• On December 1, 2021, we acquired the leasehold interest in Estancia La Jolla Hotel & Spa for $108.0 million, including the assumption of a $61.7 million mortgage loan.

• We repaid $431.9 million of debt, consisting of $341.9 million of term loans, $50.0 million of senior unsecured notes and $40.0 million on the senior unsecured credit facility.

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

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

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

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

Hotel Operating Statistics

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Same-Property Total RevPAR $ 157.69 $ 95.15

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

While the operations of many of our hotels were temporarily suspended beginning in March 2020, the above table of hotel operating statistics includes information from all hotels owned as of December 31, 2021 except for the following:

Hotel Zena Washington DC 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 and fourth quarters of 2021 and 2020, as it was closed for renovation during the third and fourth quarters of 2021;

Jekyll Island Club Resort for the first and second quarters of 2021 and 2020;

Margaritaville Hollywood Beach Resort for the first, second and third quarters of 2021 and 2020;

Southernmost Beach Resort's 31 additional rooms following the acquisition of Avalon Bed & Breakfast and Duval Gardens for the first, second and third quarters of 2021 and 2020;

and Estancia La Jolla Hotel & Spa for all of 2021 and 2020.

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 as well as Villa Florence San Francisco on Union Square for the first and second quarters of 2021 and 2020.

Results of Operations

This section includes comparisons of certain 2021 financial information to the same information for 2020.

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

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

Year-to-year comparisons of the 2020 financial information to the same information for 2019 are contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 23, 2021.

At December 31, 2021 and 2020, we had 53 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 or through the dates of disposition.

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

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

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

The properties listed below are hereinafter referred to collectively as "non-comparable properties" for the years ended December 31, 2021 and 2020.

All other properties are referred to collectively as "comparable properties":

Property Location Disposition Date

The Liaison Capitol Hill Washington, D.C.

February 14, 2019

Hotel Palomar Washington DC Washington, D.C.

February 22, 2019

Onyx Hotel Boston, MA May 29, 2019

Hotel Amarano Burbank Burbank, CA July 16, 2019

Rouge Hotel Washington, D.C.

September 12, 2019

Hotel Madera Washington, D.C.

September 26, 2019

Topaz Hotel Washington, D.C.

November 22, 2019

InterContinental Buckhead Atlanta Buckhead, GA March 6, 2020

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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

Property Location Acquisition Date

Jekyll Island Club Resort Jekyll Island, GA July 22, 2021

Margaritaville Hollywood Beach Resort Hollywood, FL September 23, 2021

Estancia La Jolla Hotel & Spa La Jolla, CA December 1, 2021

Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

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

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

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

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

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

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

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

Revenues — Total revenues increased by $290.2 million, of which $2.9 million was due to the non-comparable properties and the remaining increase was attributable to the comparable properties as a result of an increase in demand from a rebound in leisure travel and easing of governmental restrictions throughout 2021.

Hotel operating expenses — Total hotel operating expenses increased by $117.2 million, primarily due to resuming operations at the comparable properties and returning demand.

Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent decreased by $2.7 million primarily due to a decline in property taxes as a result of successful appeals.

The decrease was partially offset by an increase in ground rent on ground leases that have percentage rent and the acquisition of three properties subject to ground leases.

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

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

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

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

There was no comparable transaction in 2019.

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

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

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

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

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

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

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

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

General and administrative expenses decreased by $7.0 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.

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 — We recognized an impairment loss of $14.9 million in 2021 related to one hotel and an impairment loss of $74.6 million in 2020 related to two hotels and the retail component of a hotel.

(Gain) loss on sale of hotel properties — We recognized a net gain on sale of $64.7 million in 2021 primarily due to the sale of Sir Francis Drake and a net gain on sale of $117.4 million in 2020 primarily due to the sale of InterContinental Buckhead Atlanta.

Other operating expenses — Other operating expenses decreased by $2.5 million primarily due to reductions in pre-opening, hotel management transition and franchise tax expenses.

Interest expense — Interest expense decreased by $7.5 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 interest on the convertible senior notes and 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 $3.7 million in 2020 primarily due to the deferred tax asset recognized in 2020 on the taxable REIT subsidiary's estimated loss.

In 2021, we 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.

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.

Non-GAAP Financial Measures

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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.

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.

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

The following table reconciles net income (loss) to FFO and FFO available to common share and unit holders for the years ended December 31, 2021, 2020 and 2019 (in thousands):

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Net income (loss) $ (186,372) $ (392,593) $ 115,725

Depreciation and amortization 224,124 234,591 108,265

Real estate depreciation and amortization 223,813 224,124 234,591

(Gain) loss on sale of hotel properties (64,729) (117,401) (2,819)

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Distribution to preferred shareholders (42,105) (32,556) (32,556)

Issuance costs of redeemed preferred shares (8,055) — —

FFO available to common share and unit holders $ (62,592) $ (243,870) $ 314,941

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Applying different estimates or assumptions may result in materially different amounts reported in our financial statements.

Hotel Properties

Investment in Hotel Properties

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Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions.

Acquisition costs related to business combinations are expensed as incurred.

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

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

Repair and maintenance costs are expensed as incurred.

Transaction costs are expensed for acquisitions that are considered business combinations and capitalized for asset acquisitions.

We review our 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.

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We will adjust our assumptions with respect to the remaining useful life of the hotel property when circumstances change, such as an expiring ground lease or it is more likely than not that the hotel property will be sold prior to its previously expected useful life.

New Accounting Pronouncements Not Yet Implemented

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

New Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K for recently issued accounting pronouncements that may affect us.

Liquidity and Capital Resources

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

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

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

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

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

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

Balance Outstanding as of

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

Our primary sources of liquidity are cash provided by our operations, borrowings under our credit facilities, net proceeds from equity and debt offerings, and net proceeds from property sales.

Our primary cash requirements in the short term (i.e., those requiring cash before January 1, 2023) will be to fund property lease obligations, interest and current principal on debt, capital improvements, dividends on common and preferred shares, and working capital of our property operations.

We believe our cash and cash equivalents, restricted cash and the amount available on our senior unsecured revolving credit facility, which totaled $730.1 million as of December 31, 2021, along with cash generated from ongoing operations will be sufficient to satisfy our short-term cash requirements.

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

In order to maintain our qualification as a REIT, we must pay dividends to our shareholders of at least 90% of our taxable income.

As a result of this requirement, we cannot rely on retained earnings to fund long-term liquidity requirements such as hotel property acquisitions, redevelopements and repayments of long-term debt.

As such, we expect to continue to raise capital through equity and debt offerings to fund our growth.

For a discussion on the impact of COVID-19 on our liquidity, see Overview .

Our material cash requirements include the following contractual and other obligations.

Our outstanding debt consisted of floating- and fixed-rate unsecured term loans, convertible senior notes, senior unsecured notes and mortgage loans with varying maturities.

Our total debt had an aggregate face value of $2.5 billion as of December 31, 2021, as summarized below.

December 31, 2021

(in thousands)

Revolving credit facilities $ —

Senior unsecured credit facility Floating (1)

January 2022 $ 40,000 $ 165,000

PHL unsecured credit facility Floating (2)

January 2022 — —

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

Unsecured term loans

First Term Loan Floating (3)

January 2023 300,000 300,000

Second Term Loan Floating (3)

April 2022 65,000 65,000

Fourth Term Loan Floating (3)

October 2024 110,000 110,000

Sixth Term Loan:

Tranche 2021 Floating (3)

November 2021 (4)

40,966 300,000

Tranche 2021 Extended Floating (3)

November 2022 173,034 —

Tranche 2022 Floating (3)

November 2022 286,000 400,000

Tranche 2023 Floating (3)

November 2023 400,000 400,000

Tranche 2024 Floating (3)

January 2024 400,000 400,000

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

Total term loans at stated value 1,775,000 1,975,000

Deferred financing costs, net (8,455) (10,343)

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

Convertible senior notes

Convertible senior notes 1.75% December 2026 500,000 —

Debt discount, net (113,099) —

Deferred financing costs, net (12,568) —

Total convertible senior notes $ 374,333 $ —

Senior unsecured notes

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

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

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

Deferred financing costs, net (407) (437)

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

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

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

(2) 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.

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

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

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

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

Unsecured Revolving Credit Facilities

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

Debt" to the accompanying consolidated financial statements.

Term loans 1,433,068

Convertible senior notes 750,000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The conversion rate is subject to adjustment in certain circumstances.

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

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

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

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

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

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

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

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

Senior unsecured notes 50,000

We have two unsecured notes outstanding, $60.0 million of senior unsecured notes bearing a fixed interest rate of 4.70% per annum and maturing in December 2023 (the "Series A Notes") and $40.0 million of senior unsecured notes bearing a fixed interest rate of 4.93% per annum and maturing in December 2025 (the "Series B Notes").

The terms of the Series A Notes and the Series B Notes are substantially similar to those of our senior unsecured revolving credit facility, as amended and restated.

Issuance of Shares of Beneficial Interest

Mortgage loans 222,873

Total debt at face value $ 2,455,941

For further discussion on the components of our debt, see Note 5, Debt , to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

We have the option to extend certain of our current debt maturities with the payment of extension fees.

Assuming we exercise all extension options available in our debt agreements, we expect that future principal and interest payments associated with our debt obligations outstanding as of December 31, 2021 will be $2.7 billion through their maturity, with $136.8 million payable before January 1, 2023.

We intend to pay amounts due with available cash, borrowings under our revolving credit facility, or refinance with long term debt.

In February 2021 and December 2021, we amended the agreements governing our existing credit facilities, term loan facilities and senior notes to, among other things, waive financial covenants until the second quarter of 2022 (with substantially less-restrictive covenants through the end of the first quarter of 2023), extend certain debt maturity dates and increase the interest rate spread.

For a further discussion of these amendments, see Note 5, Debt , to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

We are in compliance with all covenants governed by our existing credit facilities, term loan and senior note facilities.

Our mortgage loans contain customary provisions regarding events of default, as well as customary cash management, cash trap and lockbox provisions.

Cash trap provisions are triggered if the hotel's performance 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.

The mortgage loans associated with Margaritaville Hollywood Beach Resort and Estancia La Jolla Hotel & Spa both triggered the cash trap provisions prior to our acquisition of those hotel properties, and therefore cash from hotel operations is being held by the lender in the cash management accounts and reflected as restricted cash in our 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.

These loans 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.

We expect that we will exceed the thresholds necessary to exit the cash trap provisions of these agreements in 2022.

Hotel, ground and finance lease obligations

Our properties that are subject to hotel, ground or finance leases, as noted in Note 11 , Commitment and Contingencies , to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K, 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.

Future fixed minimum payments associated with our hotel, ground and finance leases total $1.8 billion as of December 31, 2021, with $20.4 million payable within the next 12 months.

Purchase commitments

As of December 31, 2021, we had $7.3 million of outstanding purchase commitments, all of which will be paid within the next 12 months.

These purchase commitments represent outstanding purchase orders and contracts that have been executed for capital and renovation projects at our properties.

See Capital Investments for discussion on planned capital investments.

Preferred dividends

We expect to pay aggregate annual dividends of approximately $45.4 million on our outstanding Series E, Series F, Series G and Series H Cumulative Redeemable Preferred Shares within the next 12 months and in future years until the shares are redeemed.

For further discussion on our preferred shares, see Note 7, Equity , to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Sources and Uses of Cash

Our principal sources of cash are cash from operations, draws on our credit facilities, net proceeds from equity and debt offerings, and net proceeds from property sales.

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

Operating activities.

Our net cash provided by (used in) operating activities was $70.8 million for the year ended December 31, 2021 and $(201.8) million for the year ended December 31, 2020.

Fluctuations in our net cash provided by or (used in) operating activities are primarily the result of changes in hotel revenues, operating cash requirements and corporate expenses.

The increase in cash provided by (used in) operations in 2021 as compared to 2020 is due to the resumption of operations at our hotels, as we temporarily suspended operations at 47 of our hotels and resorts in 2020.

Investing Activities.

Our net cash provided by (used in) investing activities was $(81.6) million for the year ended December 31, 2021 and $250.1 million for the year ended December 31, 2020.

Fluctuations in our net cash provided by or (used in) investing activities are primarily the result of acquisition and disposition activities, as well as capital improvements and additions to our properties.

• During the year ended December 31, 2021, we invested $83.8 million in improvements to our hotel properties, received $255.9 million from the sales of three hotel properties and purchased three hotel properties using cash of $253.5 million.

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

Financing Activities.

Our net cash provided by (used in) financing activities was $(33.3) million for the year ended December 31, 2021 and $31.1 million for the year ended December 31, 2020.

Fluctuations in our net cash provided by or (used in) financing activities are primarily the result of our issuance and repurchase of debt and equity securities and distributions paid on our preferred and common shares.

• During the year ended December 31, 2021, we received gross proceeds of $480.0 million from the issuance of our Series G and Series H Preferred Shares, which was partially offset by the payment $15.9 million in offering costs;

received proceeds from the issuance of convertible notes and other debt of $268.6 million;

repaid $392.2 million in other debt and $40.0 million of revolving credit facilities borrowings;

used $250.0 million to redeem all our Series C and Series D Preferred Shares;

paid $44.7 million in preferred and common distributions;

purchased $21.0 million in Capped Call Transactions;

and paid $14.5 million in financing fees.

• During the year ended December 31, 2020, we borrowed $760.1 million under the revolving credit facilities and $513.0 million in other debt;

repaid $885.1 million of revolving credit facilities borrowings and $213.0 million in other debt;

paid $86.5 million in preferred and common distributions;

purchased $38.3 million in Capped Call Transactions;

and paid $16.4 million in financing fees.

Capital Investments

We maintain and intend to continue maintaining all of our hotels in good repair and condition, in conformity with applicable laws and regulations, in accordance with franchisor standards when applicable and in accordance with 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.

Certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guest rooms, 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 any, 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 year ended December 31, 2021, we invested $83.8 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, and in some instances subject to approval from governmental authorities, we expect to invest an additional $100.0 million to $120.0 million in capital investments in 2022, which includes normal hotel capital refurbishments, return of investment projects and major capital projects.

In 2022 we intend to complete or commence the following capital projects:

• $40.0 million redevelopment of Paradise Point Resort & Spa into Paradise Point, a Margaritaville Island Resort San Diego, which will commence upon the approval of governmental authorities;

• $28.0 million transformation of Hotel Vitale into 1 Hotel San Francisco, which commenced in 2021 and is expected to reopen in the second quarter of 2022;

• $20.0 million to $22.0 million renovation of Hilton San Diego Gaslamp Quarter, which will commence in 2022 and is expected to be completed in the first quarter of 2023;

• $20.0 million to $22.0 million renovation of Jekyll Island Club Resort, which will commence in 2022 and is expected to be completed in the third quarter of 2023;

• $20.0 million redevelopment of Solamar Hotel into Margaritaville Hotel San Diego Gaslamp Quarter, which will commence in 2022 and is expected to be completed in the first quarter of 2023;

• $18.0 million to $21.0 million renovation of Estancia La Jolla Hotel & Spa, which will commence in 2022 and is expected to be completed in 2024.

Common Share Repurchase Program and ATM Program

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.

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

The credit agreements governing our existing indebtedness prohibit us from repurchasing common shares until we have certified compliance with certain financial covenants through June 30, 2022.

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

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

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 (Used in) and Provided by Operations.

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

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

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

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

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

Cash Provided by Investing Activities.

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

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

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

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

Cash Provided by and (Used in) Financing Activities.

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

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

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

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

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

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

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

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

Contractual Obligations and Off-Balance Sheet Arrangements

The table below summarizes our contractual obligations as of December 31, 2020 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

Payments due by period

Term loans (2)

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

Convertible senior notes (1)

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

Unsecured notes (1)

117,921 4,792 69,349 43,780 —

Borrowings under credit facilities (3)

41,056 1,014 40,042 — —

Hotel and ground leases (4)

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

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

Refundable membership initiation deposits (5)

29,260 203 — — 29,057

Purchase commitments (6)

2,971 2,971 — — —

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

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

____________________

(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 December 31, 2020.

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 and 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.

Off-Balance Sheet Arrangements

As of December 31, 2020, we had no off-balance sheet arrangements.

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 year ended December 31, 2021.

As of December 31, 2021, $200.0 million of common shares remained available for issuance under the ATM program.

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.

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.

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

For discussion on the seasonality of our hotels' operations, see Part I, Item 1 of this Annual Report on Form 10-K.

Derivative Instruments

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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.

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

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

In addition, as of December 31, 2020, the Company had interest rates swaps for an aggregate notional amount of $490.0 million which will become effective in the future as current swaps mature.

We believe we minimize the credit risk by transacting with major credit-worthy financial institutions.

As of December 31, 2021, we have interest rate swap agreements with an aggregate notional amount of $1.3 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.

For a further discussion of our derivative instruments see Note 5 , Debt , to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis