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 most 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, 2021. 22 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. We also amended the agreements governing our existing credit facilities, term loan facilities and unsecured senior notes which, among other things, waived quarterly financial covenants until the second quarter of 2022, with substantially less restrictive covenants through the end of the first quarter of 2023. 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 July 1, 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 has had a significant negative impact on our operations and financial results and is expected to continue to have a negative impact on our results of operations, financial position and cash flows for the remainder of 2022. However, results have improved in the first quarter of 2022 relative to 2021 and this trend is expected to continue throughout 2022. The demand recovery has been led by strong leisure travel with a slower recovery in business and group travel. As a result of the strength in leisure travel, our resort properties are operating at or above pre-pandemic levels. Based on the amendments to our credit agreements, assumptions regarding the recovery of demand and the Company's liquidity of $694.4 million as of March 31, 2022, 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 . 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. 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 Measures for further discussion of FFO, EBITDA and EBIDTA re . Hotel Operating Statistics The following table represents the key same-property hotel operating statistics for our hotels for the three months ended March 31, 2022 and 2021: For the three months ended March 31, 2022 2021 Same-Property Occupancy 48.3 % 22.1 % Same-Property ADR $ 297.29 $ 250.47 Same-Property RevPAR $ 143.61 $ 55.33 Same-Property Total RevPAR $ 219.75 $ 89.02 The above table of hotel operating statistics includes information from all hotels owned as of March 31, 2022 for the first quarters of 2022 and 2021, except for Hotel Vitale, which was closed for renovations in the first quarter of 2022. 23 Table of Contents 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. The following table reconciles net income (loss) to FFO and FFO available to common share and unit holders for the three months ended March 31, 2022 and 2021 (in thousands): For the three months ended March 31, 2022 2021 Net income (loss) $ (100,216) $ (121,440) Adjustments: Real estate depreciation and amortization 59,010 55,333 Impairment loss 60,983 14,856 FFO $ 19,777 $ (51,251) Distribution to preferred shareholders (11,344) (8,139) FFO available to common share and unit holders $ 8,433 $ (59,390) 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 months ended March 31, 2022 and 2021 (in thousands): For the three months ended March 31, 2022 2021 Net income (loss) $ (100,216) $ (121,440) Adjustments: Interest expense 22,572 25,331 Income tax expense (benefit) — 3 Depreciation and amortization 59,100 55,443 EBITDA $ (18,544) $ (40,663) Impairment loss 60,983 14,856 EBITDA re $ 42,439 $ (25,807) 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. 24 Results of Operations At March 31, 2022 and 2021, 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 and through the dates of disposition, as applicable. Based on when a property was acquired or disposed, operating results for certain properties are not comparable for the three months ended March 31, 2022 and 2021. 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 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 three months ended March 31, 2022 to the three months ended March 31, 2021 Revenues — Total hotel revenues increased by $174.4 million, of which $38.4 million was due to non-comparable properties, and the remaining increase was primarily due to an increase in leisure travel demand during the spring break travel season, as well as some recoveries in business and group bookings. This increase in demand was the result of an increase in COVID-19 vaccination rates and an easing of governmental restrictions relative to the prior year. Also, 13 of our hotels' operations remained temporarily suspended throughout the first quarter of 2021. Hotel operating expenses — Total hotel operating expenses increased by $101.7 million, of which $21.0 million was due to non-comparable properties, and the remaining increase was primarily due to resuming operations at our comparable properties and returning demand in the first quarter of 2022. Depreciation and amortization — Depreciation and amortization expense increased by $3.7 million primarily due to our three non-comparable properties acquired in 2021. Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent increased by $1.9 million primarily due to an increase in ground rent at our three non-comparable properties acquired in 2021. General and administrative — General and administrative expenses increased by $2.1 million primarily due to an increase of $1.6 million in compensation expense. General and administrative expenses consist of employee compensation costs, legal and professional fees, insurance and other expenses. Impairment loss — For the three months ended March 31, 2022, we recognized an impairment loss of $61.0 million related to two hotels. For the three months ended March 31, 2021, we recognized an impairment loss of $14.9 million related to one hotel. Interest expense — Interest expense decreased by $2.8 million primarily due to slightly lower interest rates in 2022. Distributions to preferred shareholders — Distributions to preferred shareholders primarily 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. 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, 2021. New Accounting Pronouncements See Note 2. Summary of Significant Accounting Policies, to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for recently issued accounting pronouncements that may affect us. 25 Table of Content Liquidity and Capital Resources 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 hotel property sales. Our primary cash requirements in the short term (i.e., those requiring cash on or before March 31, 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 hotel property operations. We believe our cash and cash equivalents, restricted cash and the amount available on our senior unsecured revolving credit facility, which totaled $694.4 million as of March 31, 2022, along with cash generated from ongoing operations will be sufficient to satisfy our short-term cash requirements. As of March 31, 2022, 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 the COVID-19 pandemic on our liquidity, see Overview . Our material cash requirements include the following contractual and other obligations. Debt 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 March 31, 2022, as summarized in the following table. March 31, 2022 (in thousands) Revolving credit facilities $ — Term loans 1,433,068 Convertible senior notes 750,000 Senior unsecured notes 50,000 Mortgage loans 222,549 Total debt at face value $ 2,455,617 For further discussion on the components of our debt, see Note 5. Debt , to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 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 March 31, 2022 will be $2.6 billion through their maturity, with $162.3 million payable on or before March 31, 2023. In April 2022, we repaid the remaining $26.3 million principal balance on our Second Term Loan using cash on hand. 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. 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 loan associated with Estancia La Jolla Hotel & Spa triggered the cash trap provisions prior to our acquisition of this hotel property, and therefore excess cash flow from hotel operations from this hotel is being held by the lender in cash management accounts and is 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. Cash held in the lockbox is not available for distribution for general corporate use or distribution to the shareholders. Margaritaville Hollywood Beach Resort also triggered cash trap provisions prior to our acquisition, but was released from this provision during the first quarter of 2022. 26 Table of Content 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 I, Item 1 of this Quarterly Report on Form 10-Q, 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 March 31, 2022, with $20.5 million payable within the next 12 months. Purchase commitments As of March 31, 2022, we had $5.3 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 each future year until the shares are redeemed. For further discussion on our preferred shares, see Note 7. Equity , to our consolidated financial statements included 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, 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 $38.8 million for the three months ended March 31, 2022 and $(7.1) million for the three months ended March 31, 2021. Fluctuations in our net cash provided by (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 2022 as compared to 2021 is due to the resumption of operations at our hotels, as 13 of our hotels' operations remained temporarily suspended throughout the first quarter of 2021. Investing Activities. Our net cash provided by (used in) investing activities was $(20.0) million for the three months ended March 31, 2022 and $(9.7) million for the three months ended March 31, 2021. Fluctuations in our net cash provided by (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 three months ended March 31, 2022, we invested $19.9 million in improvements to our hotel properties. • During the three months ended March 31, 2021, we invested $9.6 million in improvements to our hotel properties. Financing Activities. Our net cash provided by (used in) financing activities was $(15.2) million for the three months ended March 31, 2022 and $5.1 million for the three months ended March 31, 2021. Fluctuations in our net cash provided by (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 three months ended March 31, 2022, we paid $12.7 million in preferred and common distributions. • During the three months ended March 31, 2021, we borrowed $263.8 million in other debt; repaid $40.0 million of revolving credit facilities borrowings and $177.0 million in other debt; paid $9.5 million in preferred and common distributions; purchased $21.0 million in Capped Call Transactions; and paid $9.6 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. 27 Table of Content 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 three months ended March 31, 2022, we invested $19.9 million in capital investments to reposition and improve our properties, including the renovations of Hotel Vitale and Hotel Ziggy (formerly Grafton on Sunset). Depending on market conditions, we expect to invest a total of $100.0 million to $120.0 million in capital investments in 2022, which includes approximately $50.0 million in redevelopment and repositioning projects at Hotel Vitale, Skamania Lodge, Solamar Hotel, Hilton San Diego Gaslamp Quarter and Jekyll Island Club Resort. 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. 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 three months ended March 31, 2022. As of March 31, 2022, $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. 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 three months ended March 31, 2022. As of March 31, 2022, $200.0 million of common shares remained available for issuance under the ATM program. 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. We expect that our portfolio will return to more normal historical seasonality trends in 2022. 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 we minimize the credit risk by transacting with major credit-worthy financial institutions. As of March 31, 2022, we have interest rate swap agreements with an aggregate notional amount of $1.1 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 I, Item 1 of this Quarterly Report on Form 10-Q. 28 Table of Content