Pebblebrook Hotel Trust 10-Q

Item 1. Financial Statements. Pebblebrook Hotel Trust Consolidated Balance Sheets (in thousands, except share and per-share data) September 30, 2022 December 31, 2021 (Unaudited) ASSETS Investment in hotel properties, net $ 5,964,823 $ 6,079,333 Cash and cash equivalents 190,750 58,518 Restricted cash 19,371 33,729 Hotel receivables (net of allowance for doubtful accounts of $ 391 and $ 1,142 , respectively) 66,759 37,045 Prepaid expenses and other assets 94,683 52,565 Total assets $ 6,336,386 $ 6,261,190 LIABILITIES AND EQUITY Debt $ 2,418,770 $ 2,441,888 Accounts payable, accrued expenses and other liabilities 278,093 250,584 Lease liabilities - operating leases 320,323 319,426 Deferred revenues 72,808 69,064 Accrued interest 10,408 4,567 Distribution payable 12,559 11,756 Total liabilities 3,112,961 3,097,285 Commitments and contingencies (Note 11) Shareholders’ equity: Preferred shares of beneficial interest, $ .01 par value (liquidation preference $ 740,000 at September 30, 2022 and December 31, 2021), 100,000,000 shares authorized; 29,600,000 shares issued and outstanding at September 30, 2022 and December 31, 2021 296 296 Common shares of beneficial interest, $ .01 par value, 500,000,000 shares authorized; 130,905,132 shares issued and outstanding at September 30, 2022 and 130,813,750 shares issued and outstanding at December 31, 2021 1,309 1,308 Additional paid-in capital 4,273,603 4,268,042 Accumulated other comprehensive income (loss) 38,796 ( 19,442 ) Distributions in excess of retained earnings ( 1,178,289 ) ( 1,094,023 ) Total shareholders’ equity 3,135,715 3,156,181 Non-controlling interests 87,710 7,724 Total equity 3,223,425 3,163,905 Total liabilities and equity $ 6,336,386 $ 6,261,190 The accompanying notes are an integral part of these financial statements. 3 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Operations and Comprehensive Income (in thousands, except share and per-share data) (Unaudited) For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 Revenues: Room $ 277,971 $ 162,548 $ 707,997 $ 324,614 Food and beverage 98,080 48,900 261,228 95,223 Other operating 40,642 27,362 103,060 65,930 Total revenues 416,693 238,810 1,072,285 485,767 Expenses: Hotel operating expenses: Room 66,637 40,504 167,102 85,777 Food and beverage 69,296 34,925 179,859 68,121 Other direct and indirect 115,589 72,622 307,317 174,069 Total hotel operating expenses 251,522 148,051 654,278 327,967 Depreciation and amortization 60,372 55,492 179,746 165,636 Real estate taxes, personal property taxes, property insurance, and ground rent 34,641 26,204 98,118 84,230 General and administrative 10,281 9,433 29,675 26,803 Impairment loss 12,865 — 86,119 14,856 Gain on sale of hotel properties ( 6,194 ) ( 171 ) ( 6,194 ) ( 64,729 ) Other operating expenses 989 431 4,045 1,514 Total operating expenses 364,476 239,440 1,045,787 556,277 Operating income (loss) 52,217 ( 630 ) 26,498 ( 70,510 ) Interest expense ( 25,020 ) ( 22,930 ) ( 70,753 ) ( 73,065 ) Other 123 27 156 85 Income (loss) before income taxes 27,320 ( 23,533 ) ( 44,099 ) ( 143,490 ) Income tax (expense) benefit ( 1,015 ) ( 5 ) ( 1,015 ) ( 60 ) Net income (loss) 26,305 ( 23,538 ) ( 45,114 ) ( 143,550 ) Net income (loss) attributable to non-controlling interests 1,237 ( 125 ) 1,359 ( 1,085 ) Net income (loss) attributable to the Company 25,068 ( 23,413 ) ( 46,473 ) ( 142,465 ) Distributions to preferred shareholders ( 11,344 ) ( 12,528 ) ( 34,031 ) ( 30,761 ) Issuance costs of redeemed preferred shares — ( 8,043 ) — ( 8,043 ) Net income (loss) attributable to common shareholders $ 13,724 $ ( 43,984 ) $ ( 80,504 ) $ ( 181,269 ) Net income (loss) per share available to common shareholders, basic $ 0.10 $ ( 0.34 ) $ ( 0.62 ) $ ( 1.39 ) Net income (loss) per share available to common shareholders, diluted $ 0.10 $ ( 0.34 ) $ ( 0.62 ) $ ( 1.39 ) Weighted-average number of common shares, basic 130,905,132 130,813,750 130,904,772 130,801,187 Weighted-average number of common shares, diluted 131,149,783 130,813,750 130,904,772 130,801,187 4 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Operations and Comprehensive Income - Continued (in thousands, except share and per-share data) (Unaudited) For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 Comprehensive Income: Net income (loss) $ 26,305 $ ( 23,538 ) $ ( 45,114 ) $ ( 143,550 ) Other comprehensive income (loss): Change in fair value of derivative instruments 16,487 ( 323 ) 53,184 7,103 Amounts reclassified from other comprehensive income ( 1,337 ) 6,494 5,441 19,319 Comprehensive income (loss) 41,455 ( 17,367 ) 13,511 ( 117,128 ) Comprehensive income (loss) attributable to non-controlling interests 1,339 ( 84 ) 1,746 ( 912 ) Comprehensive income (loss) attributable to the Company $ 40,116 $ ( 17,283 ) $ 11,765 $ ( 116,216 ) The accompanying notes are an integral part of these financial statements. 5 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Equity (in thousands, except share data) (Unaudited) For the three months ended September 30, 2022 Preferred Shares Common Shares Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Distributions in Excess of Retained Earnings Total Shareholders' Equity Non-Controlling Interests Total Equity Shares Amount Shares Amount Balance at June 30, 2022 29,600,000 $ 296 130,905,132 $ 1,309 $ 4,271,169 $ 23,748 $ ( 1,190,693 ) $ 3,105,829 $ 86,847 $ 3,192,676 Issuance of shares, net of offering costs — — — — ( 48 ) — — ( 48 ) — ( 48 ) Issuance of operating partnership units — — — — — — — — — — Share-based compensation — — — — 2,482 — — 2,482 699 3,181 Distributions on common shares/units — — — — — — ( 1,320 ) ( 1,320 ) ( 11 ) ( 1,331 ) Distributions on preferred shares/units — — — — — — ( 11,344 ) ( 11,344 ) ( 1,164 ) ( 12,508 ) Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — 16,385 — 16,385 102 16,487 Amounts reclassified from other comprehensive income — — — — — ( 1,337 ) — ( 1,337 ) — ( 1,337 ) Net income (loss) — — — — — — 25,068 25,068 1,237 26,305 Balance at September 30, 2022 29,600,000 $ 296 130,905,132 $ 1,309 $ 4,273,603 $ 38,796 $ ( 1,178,289 ) $ 3,135,715 $ 87,710 $ 3,223,425 6 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Equity - Continued (in thousands, except share data) (Unaudited) For the three months ended September 30, 2021 Preferred Shares Common Shares Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Distributions in Excess of Retained Earnings Total Shareholders' Equity Non-Controlling Interests Total Equity Shares Amount Shares Amount Balance at June 30, 2021 29,600,000 $ 296 130,813,750 $ 1,308 $ 4,263,473 $ ( 39,820 ) $ ( 993,654 ) $ 3,231,603 $ 7,043 $ 3,238,646 Redemption of preferred shares ( 10,000,000 ) ( 100 ) — — ( 241,857 ) — ( 8,043 ) ( 250,000 ) — ( 250,000 ) Issuance of shares, net of offering costs 10,000,000 100 — — 241,676 — — 241,776 — 241,776 Share-based compensation — — — — 2,403 — — 2,403 697 3,100 Distributions on common shares/units — — — — — — ( 1,317 ) ( 1,317 ) ( 8 ) ( 1,325 ) Distributions on preferred shares — — — — — — ( 12,528 ) ( 12,528 ) — ( 12,528 ) Other adjustment — — — — — 393 — 393 ( 393 ) — Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — ( 496 ) — ( 496 ) 173 ( 323 ) Amounts reclassified from other comprehensive income — — — — — 6,494 — 6,494 — 6,494 Net income (loss) — — — — — — ( 23,413 ) ( 23,413 ) ( 125 ) ( 23,538 ) Balance at September 30, 2021 29,600,000 $ 296 130,813,750 $ 1,308 $ 4,265,695 $ ( 33,429 ) $ ( 1,038,955 ) $ 3,194,915 $ 7,387 $ 3,202,302 7 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Equity - Continued (in thousands, except share data) (Unaudited) For the nine months ended September 30, 2022 Preferred Shares Common Shares Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Distributions in Excess of Retained Earnings Total Shareholders' Equity Non-Controlling Interests Total Equity Shares Amount Shares Amount Balance at December 31, 2021 29,600,000 $ 296 130,813,750 $ 1,308 $ 4,268,042 $ ( 19,442 ) $ ( 1,094,023 ) $ 3,156,181 $ 7,724 $ 3,163,905 Issuance of shares, net of offering costs — — — — ( 123 ) — — ( 123 ) — ( 123 ) Issuance of operating partnership units — — — — — — — — 78,000 78,000 Issuance of common shares for Board of Trustees compensation — — 33,866 1 737 — — 738 — 738 Repurchase of common shares — — ( 49,787 ) ( 1 ) ( 1,112 ) — — ( 1,113 ) — ( 1,113 ) Share-based compensation — — 107,303 1 6,059 — — 6,060 2,095 8,155 Distributions on common shares/units — — — — — — ( 3,762 ) ( 3,762 ) ( 44 ) ( 3,806 ) Distributions on preferred shares/units — — — — — — ( 34,031 ) ( 34,031 ) ( 1,811 ) ( 35,842 ) Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — 52,797 — 52,797 387 53,184 Amounts reclassified from other comprehensive income — — — — — 5,441 — 5,441 — 5,441 Net income (loss) — — — — — — ( 46,473 ) ( 46,473 ) 1,359 ( 45,114 ) Balance at September 30, 2022 29,600,000 $ 296 130,905,132 $ 1,309 $ 4,273,603 $ 38,796 $ ( 1,178,289 ) $ 3,135,715 $ 87,710 $ 3,223,425 8 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Equity - Continued (in thousands, except share data) (Unaudited) For the nine months ended September 30, 2021 Preferred Shares Common Shares Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Distributions in Excess of Retained Earnings Total Shareholders' Equity Non-Controlling Interests Total Equity Shares Amount Shares Amount Balance at December 31, 2020 20,400,000 $ 204 130,673,300 $ 1,307 $ 4,169,870 $ ( 60,071 ) $ ( 853,973 ) $ 3,257,337 $ 6,989 $ 3,264,326 Redemption of preferred shares ( 10,000,000 ) ( 100 ) — — ( 241,857 ) — ( 8,043 ) ( 250,000 ) — ( 250,000 ) Issuance of shares, net of offering costs 19,200,000 192 — — 463,914 — — 464,106 — 464,106 Issuance of common shares for Board of Trustees compensation — — 27,711 1 515 — — 516 — 516 Repurchase of common shares — — ( 38,310 ) ( 1 ) ( 719 ) — — ( 720 ) — ( 720 ) Share-based compensation — — 151,049 1 8,046 — — 8,047 1,744 9,791 Distributions on common shares/units — — — — — — ( 3,713 ) ( 3,713 ) ( 41 ) ( 3,754 ) Distributions on preferred shares — — — — — — ( 30,761 ) ( 30,761 ) — ( 30,761 ) Cumulative effect adjustment from adoption of new accounting standard — — — — ( 113,099 ) — — ( 113,099 ) — ( 113,099 ) Purchases of capped calls in connection with convertible senior notes — — — — ( 20,975 ) — — ( 20,975 ) — ( 20,975 ) Other adjustment — — — — — 393 — 393 ( 393 ) — Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — 6,930 — 6,930 173 7,103 Amounts reclassified from other comprehensive income — — — — — 19,319 — 19,319 — 19,319 Net income (loss) — — — — — — ( 142,465 ) ( 142,465 ) ( 1,085 ) ( 143,550 ) Balance at September 30, 2021 29,600,000 $ 296 130,813,750 $ 1,308 $ 4,265,695 $ ( 33,429 ) $ ( 1,038,955 ) $ 3,194,915 $ 7,387 $ 3,202,302 The accompanying notes are an integral part of these financial statements. 9 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Cash Flows (in thousands) (Unaudited) For the nine months ended September 30, 2022 2021 Operating activities: Net income (loss) $ ( 45,114 ) $ ( 143,550 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 179,746 165,636 Share-based compensation 8,155 8,345 Amortization of deferred financing costs, non-cash interest and other amortization 9,961 12,668 Gain on sale of hotel properties ( 6,194 ) ( 64,729 ) Impairment loss 86,119 14,856 Non-cash ground rent 7,467 4,563 Other adjustments ( 3,914 ) ( 214 ) Changes in assets and liabilities: Hotel receivables ( 29,243 ) ( 21,657 ) Prepaid expenses and other assets ( 5,297 ) ( 540 ) Accounts payable and accrued expenses 50,280 57,685 Deferred revenues 2,447 11,190 Net cash provided by (used in) operating activities 254,413 44,253 Investing activities: Improvements and additions to hotel properties ( 68,266 ) ( 52,778 ) Proceeds from sales of hotel properties 248,908 255,927 Acquisition of hotel properties ( 247,163 ) ( 190,968 ) Deposits on hotel properties — ( 1,020 ) Other investing activities ( 111 ) ( 96 ) Net cash provided by (used in) investing activities ( 66,632 ) 11,065 Financing activities: Gross proceeds from issuance of preferred shares — 480,000 Payment of offering costs — common and preferred shares ( 123 ) ( 15,894 ) Payment of deferred financing costs ( 96 ) ( 10,082 ) Borrowings under revolving credit facilities 180,000 — Repayments under revolving credit facilities ( 180,000 ) ( 40,000 ) Proceeds from debt — 268,599 Repayments of debt ( 27,740 ) ( 388,000 ) Purchases of capped calls for convertible senior notes — ( 20,975 ) Repurchases of common shares ( 1,113 ) ( 720 ) Redemption of preferred shares — ( 250,000 ) Distributions — common shares/units ( 3,968 ) ( 3,957 ) Distributions — preferred shares/units ( 34,859 ) ( 26,049 ) Repayments of refundable membership deposits ( 2,008 ) ( 1,872 ) Net cash provided by (used in) financing activities ( 69,907 ) ( 8,950 ) Net change in cash and cash equivalents and restricted cash 117,874 46,368 Cash and cash equivalents and restricted cash, beginning of year 92,247 136,300 Cash and cash equivalents and restricted cash, end of period $ 210,121 $ 182,668 The accompanying notes are an integral part of these financial statements. 10 PEBBLEBROOK HOTEL TRUST NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Organization Pebblebrook Hotel Trust (the "Company") is an internally managed hotel investment company, formed as a Maryland real estate investment trust in October 2009 to opportunistically acquire and invest in hotel properties located primarily in major United States cities and resort properties located near our primary target urban markets and select destination resort markets, with an emphasis on major gateway coastal markets. As of September 30, 2022, the Company owned 51 hotels with a total of 12,756 guest rooms . The hotel properties are located in: Boston, Massachusetts; Chicago, Illinois; Hollywood, Florida; Jekyll Island, Georgia; Key West, Florida; Miami (Coral Gables), Florida; Los Angeles, California (Beverly Hills, Santa Monica, and West Hollywood); Naples, Florida; Newport, Rhode Island; Portland, Oregon; San Diego, California; San Francisco, California; Santa Cruz, California; Seattle, Washington; Stevenson, Washington; and Washington, D.C. Substantially all of the Company’s assets are held by, and all of the Company's operations are conducted through, Pebblebrook Hotel, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership. As of September 30, 2022, the Company owned 99.3 % of the common limited partnership units issued by the Operating Partnership ("common units"). The remaining 0.7 % of the common units are owned by the other limited partners of the Operating Partnership. For the Company to maintain its qualification as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), it cannot operate the hotels it owns. Therefore, the Operating Partnership and its subsidiaries lease the hotel properties to subsidiaries of Pebblebrook Hotel Lessee, Inc. (collectively with its subsidiaries, "PHL"), a taxable REIT subsidiary ("TRS"), which in turn engage third-party eligible independent contractors to manage the hotels. PHL is consolidated into the Company’s financial statements. COVID-19 Update The COVID-19 pandemic, which began in early 2020, has had a significant negative impact on the Company's operations and financial results and is expected to continue to have a negative impact on the hotel industry and the Company's results of operations, financial position and cash flows for the remainder of 2022. Results improved in 2021 and have continued to improve through the first nine months of 2022. The Company exited its debt covenant waiver period under its credit facilities as of the end of the second quarter of 2022, and is in compliance with the covenants in the credit facility agreements. There remains significant uncertainty regarding the trends and outlook as a result of new variants and individual and government responses. Note 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and in conformity with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) applicable to interim financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of equity and consolidated statements of cash flows for the periods presented. Interim results are not necessarily indicative of full-year performance, as a result of the impact of seasonal and other short-term variations and the acquisitions and or dispositions of hotel properties. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The Company and its subsidiaries are separate legal entities and maintain records and books of accounts separate and apart from each other. The consolidated financial statements include all of the accounts of the Company and its subsidiaries and are presented in accordance with U.S. GAAP. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior period's financial statements to conform to the current year presentation. 11 Table of Contents Use of Estimates The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management’s best judgment after considering past, current and expected events and economic conditions. Actual results could differ from these estimates. Risks and Uncertainties The state of the overall economy can significantly impact the hotels' operational performance and thus the Company's financial position. As discussed in Note 1. Organization , the COVID-19 pandemic has significantly impacted the hotels' operational performance. There has been a significant recovery in travel, however, the emergence of new variant strains or other factors that may impact travel demand may impact the Company's cash flow and ability to service debt or meet other financial obligations. New Accounting Pronouncements Reference Rate Reform In March 2020 and January 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , and ASU 2021-01, Reference Rate Reform (Topic 848) , respectively. ASU 2020-04 and ASU 2021-01 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. The guidance in ASU 2020-04 and ASU 2021-01 was effective upon issuance and, once adopted, may be applied prospectively to contract modifications and hedging relationships through December 31, 2022. In 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company will continue to evaluate the impact of the adoption of ASU 2020-04 and ASU 2021-01 on its consolidated financial statements and disclosures. Business Combinations In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and to payment terms and their effect on subsequent revenue recognized by the acquirer. The amendments in ASU 2021-08 require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. While the Company is continuing to assess the timing of adoption and the potential impacts of ASU 2021-08, it does not expect ASU 2021-08 to have a material effect on its consolidated financial statements and disclosures. Note 3. Acquisition and Disposition of Hotel Properties Acquisitions On May 11, 2022, the Company acquired the 119 -room Inn on Fifth in Naples, Florida for $ 156.0 million, excluding prorations and transactions costs. This transaction was funded with cash on hand, the issuance of 16,291 common units of limited partnership interest in the Operating Partnership and 3,104,400 preferred units of the Operating Partnership designated as 6.0 % Series Z Preferred Units. On June 23, 2022, the Company acquired the 257 -room Newport Harbor Island Resort (formerly Gurney's Newport Resort & Marina) in Newport, Rhode Island for $ 174.0 million, using cash on hand and proceeds from its senior unsecured revolving credit facility. The property was acquired as part of a reverse 1031 Exchange in which the Company engaged a qualified intermediary to establish a trust to hold the property pending completion of the sale of the subject property or properties related to the reverse 1031 Exchange. The trust was deemed to be a variable interest entity (VIE) for which the Company is the primary beneficiary, and therefore, the Company has consolidated the trust and property. 12 Table of Contents Dispositions The following table summarizes disposition transactions during 2022 and 2021 (in thousands): Hotel Property Name Location Sale Date Sale Price The Marker San Francisco San Francisco, CA June 28, 2022 $ 77,000 Sofitel Philadelphia at Rittenhouse Square Philadelphia, PA August 2, 2022 80,000 Hotel Spero San Francisco, CA August 25, 2022 71,000 Hotel Vintage Portland Portland, OR September 14, 2022 32,900 2022 Total $ 260,900 Sir Francis Drake San Francisco, CA April 1, 2021 $ 157,625 The Roger New York New York, NY June 10, 2021 19,000 Villa Florence San Francisco on Union Square San Francisco, CA September 9, 2021 87,500 2021 Total $ 264,125 For the three and nine months ended September 30, 2022, the accompanying consolidated statements of operations and comprehensive income included operating income (loss) of $ 0.6 million and $( 3.4 ) million, respectively, excluding impairment loss and gain on sale of hotel properties related to the hotel properties sold. For the three and nine months ended September 30, 2021, the accompanying consolidated statements of operations and comprehensive income included operating (loss) of $( 3.6 ) million and $( 19.0 ) million , respectively, excluding impairment loss and gain on sale of hotel properties related to the hotel properties sold. The sales of the hotel properties described above did not represent a strategic shift that had a major effect on the Company’s operations and financial results and, therefore, did not qualify as discontinued operations. Note 4. Investment in Hotel Properties Investment in hotel properties as of September 30, 2022 and December 31, 2021 consisted of the following (in thousands): September 30, 2022 December 31, 2021 Land $ 911,898 $ 926,330 Buildings and improvements 5,197,437 5,197,816 Furniture, fixtures and equipment 535,997 535,607 Finance lease asset 91,181 91,181 Construction in progress 21,369 15,869 $ 6,757,882 $ 6,766,803 Right-of-use asset, operating leases 372,791 378,939 Investment in hotel properties $ 7,130,673 $ 7,145,742 Less: Accumulated depreciation ( 1,165,850 ) ( 1,066,409 ) Investment in hotel properties, net $ 5,964,823 $ 6,079,333 13 Table of Contents On September 27, 2022, LaPlaya Beach Resort and LaPlaya Beach Club ("LaPlaya") and Inn on Fifth, both located in Naples, Florida, and Southernmost Beach Resort located in Key West, Florida were impacted by the effects of Hurricane Ian. Inn on Fifth and Southernmost Beach Resort did not suffer significant damage and have been reopened. LaPlaya was closed in anticipation of the storm and remains closed as a result of the damage sustained from Hurricane Ian. The Company expects LaPlaya to re-open in stages beginning in the fourth quarter of 2022. The Company’s insurance policies provide coverage for property damage, business interruption and reimbursement for other costs that were incurred relating to damages sustained during Hurricane Ian. Insurance proceeds are subject to deductibles. As of September 30, 2022, the Company recognized an impairment for the damage to LaPlaya and Southernmost Beach Resort, which resulted in an aggregate impairment loss of $ 12.9 million, which is included in impairment loss in the Company’s consolidated statement of operations and comprehensive income. The Company expects to incur additional costs related to the cleanup of the property and preparation of the property for reopening which are expected to be recovered through insurance proceeds. The Company is continuing to evaluate the financial impact of Hurricane Ian and its ability to recover, through insurance policies, any loss due to business interruption or damage to the hotel properties. Impairment The Company reviews its investment in hotel properties for impairment whenever events or circumstances indicate potential impairment. As a result of the ongoing effects of the COVID-19 pandemic on its expected future operating cash flows and estimated hold periods for certain properties, the Company determined certain impairment triggers had occurred and therefore, the Company assessed its investment in hotel properties for recoverability. Based on the analyses performed, for the nine months ended September 30, 2022, the Company recognized an impairment loss of $ 73.3 million related to two hotels as a result of their fair values being lower than their carrying values. The impairment loss was determined using Level 2 inputs under authoritative guidance for fair value measurements using information from marketing efforts for these properties. For the nine months ended September 30, 2021, the Company recognized an impairment loss of $ 14.9 million related to one hotel as a result of its fair value being lower than its carrying value. The impairment loss was determined using Level 2 inputs under authoritative guidance for fair value measurements using information from marketing efforts for this property. Right-of-use Assets and Lease Liabilities The Company recognized right-of-use assets and related liabilities related to its ground leases, all of which are operating leases. When the rate implicit in the lease could not be determined, the Company used incremental borrowing rates, which ranged from 4.7 % to 7.6 %. In addition, the term used includes any options to exercise extensions when it is reasonably certain the Company will exercise such options. See Note 11. Commitments and Contingencies for additional information about the ground leases. The right-of-use assets and liabilities are amortized to ground rent expense over the term of the underlying lease agreements. As of September 30, 2022, the Company's lease liabilities consisted of operating lease liabilities of $ 320.3 million and financing lease liabilities of $ 42.5 million. As of December 31, 2021, the Company's lease liabilities consisted of operating lease liabilities of $ 319.4 million and financing lease liabilities of $ 42.0 million. The financing lease liabilities are included in accounts payable, accrued expenses and other liabilities on the Company's accompanying consolidated balance sheets. Note 5. Debt In 2021, the Company amended the agreements governing its 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. 14 Table of Contents The Company's debt consisted of the following as of September 30, 2022 and December 31, 2021 (dollars in thousands): Balance Outstanding as of Interest Rate Maturity Date September 30, 2022 December 31, 2021 Revolving credit facilities Senior unsecured credit facility Floating (1)(2) March 2023 $ — $ — PHL unsecured credit facility Floating (3) March 2023 — — Total revolving credit facilities $ — $ — Unsecured term loans First Term Loan Floating (4) January 2023 26,000 26,000 First Term Loan Extended Floating (4) March 2024 274,000 274,000 Second Term Loan Floating (4) April 2022 — 26,327 Fourth Term Loan Floating (4) October 2024 110,000 110,000 Sixth Term Loan Tranche 2021 Extended Floating (4)(6) November 2022 82,071 82,071 Tranche 2022 Floating (4)(7) November 2022 114,670 114,670 Tranche 2023 Floating (4) November 2023 400,000 400,000 Tranche 2024 Floating (4) January 2024 400,000 400,000 Total Sixth Term Loan 996,741 996,741 Total term loans at stated value 1,406,741 1,433,068 Deferred financing costs, net ( 3,083 ) ( 5,812 ) Total term loans $ 1,403,658 $ 1,427,256 Convertible senior notes Convertible senior notes 1.75 % December 2026 750,000 750,000 Debt premium (discount), net 9,849 11,605 Deferred financing costs, net ( 13,746 ) ( 16,204 ) Total convertible senior notes $ 746,103 $ 745,401 Senior unsecured notes Series A Notes 5.15 % December 2023 47,600 47,600 Series B Notes 5.38 % December 2025 2,400 2,400 Total senior unsecured notes at stated value 50,000 50,000 Deferred financing costs, net ( 101 ) ( 162 ) Total senior unsecured notes $ 49,899 $ 49,838 Mortgage loans Margaritaville Hollywood Beach Resort Floating (5) May 2023 161,500 161,500 Estancia La Jolla Hotel & Spa 5.07 % September 2028 59,960 61,373 Total mortgage loans at stated value 221,460 222,873 Debt premium (discount), net ( 1,872 ) ( 2,735 ) Deferred financing costs, net ( 478 ) ( 745 ) Total mortgage loans $ 219,110 $ 219,393 Total debt $ 2,418,770 $ 2,441,888 ______________________ (1) Borrowings bear interest at floating rates equal to, at the Company's option, either (i) LIBOR plus an applicable margin or (ii) an Adjusted Base Rate (as defined in the applicable credit agreement) plus an applicable margin. (2) $ 39.0 million of the total borrowing capacity matured in January 2022. The Company has the option to extend the maturity date of March 2023 for the remaining $ 611.0 million for up to two six-month periods, pursuant to certain terms and conditions and payment of an extension fee. (3) Borrowings bear interest at floating rates equal to, at the Company's option, either (i) LIBOR plus an applicable margin or (ii) a Eurocurrency Rate (as defined in the applicable credit agreement) plus an applicable margin. (4) Borrowings under the term loan facilities bear interest at floating rates equal to, at the Company's option, either (i) LIBOR plus an applicable margin or (ii) a Base Rate plus an applicable margin. As of September 30, 2022, approximately $ 1.0 billion of the borrowings under the term loan facilities bore an effective weighted-average fixed interest rate of 3.86 %, after taking into account interest rate swap agreements, and approximately $ 366.7 million bore an effective weighted-average floating interest rate of 5.46 %. As of December 31, 2021, approximately $ 1.3 billion of the borrowings under the term loan facilities bore an effective weighted-average fixed interest rate of 4.06 %, after taking into account interest rate swap agreements, and approximately $ 113.1 million bore a weighted-average floating interest rate of 2.64 %. (5) In April 2022, the Company exercised the option to extend the maturity date to May 2023. The loan bears interest at a floating rate equal to one-month LIBOR plus a weighted-average spread of 2.37 %. The Company has the option to extend the maturity date to May 2024. (6) The Company has the option to extend the maturity date for $ 69.8 million of the principal balance by up to one year , subject to certain terms and conditions and payment of an extension fee. 15 Table of Contents (7) The Company has the option to extend the maturity date for $ 93.0 million of the principal balance by up to one year , subject to certain terms and conditions and payment of an extension fee. As discussed in Note 13. Subsequent Events, on October 13, 2022, the Company refinanced its senior unsecured revolving credit facility and all of its term loans. As a result, the Company has no significant debt maturities due within one year. Unsecured Revolving Credit Facilities As of September 30, 2022, the Company had a $ 611.0 million senior unsecured revolving credit facility with a maturity of March 2023, with options to extend the maturity date for up to two six-month periods , subject to certain terms and conditions and payment of an extension fee. As of September 30, 2022, the Company had no outstanding borrowings, $ 12.6 million of outstanding letters of credit and a borrowing capacity of $ 598.4 million remaining on its senior unsecured credit facility. Interest is paid on the periodic advances under the senior unsecured revolving credit facility at varying rates, based upon either LIBOR or the alternate base rate, plus an additional margin amount, or spread. The Company had the ability to further increase the aggregate borrowing capacity under the credit agreement up to $ 1.3 billion, subject to lender approval. Borrowings on the revolving credit facility bore interest at LIBOR plus 1.45 % to 2.25 %, depending on the Company’s leverage ratio. As a result of the amendments to the credit agreements, the spread on the borrowings was fixed at 2.40 % during the waiver period. Additionally, the Company was required to pay an unused commitment fee at an annual rate of 0.20 % or 0.30 % of the unused portion of the revolving credit facility, depending on the amount of borrowings outstanding. The credit agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a maximum percentage of secured debt to total asset value. As of September 30, 2022, the Company also had a $ 20.0 million unsecured revolving credit facility (the "PHL Credit Facility") to be used for PHL's working capital and general corporate purposes. This credit facility had substantially similar terms as the Company's senior unsecured revolving credit facility with a maturity of March 2023. Borrowings on the PHL Credit Facility bore interest at LIBOR plus 1.45 % to 2.25 %, depending on the Company's leverage ratio. As a result of the amendments described above, the spread of the borrowings was fixed at 2.40 % during the waiver period. The PHL Credit Facility was subject to debt covenants substantially similar to the covenants under the Company's credit agreement that governs the Company's senior unsecured revolving credit facility. As of September 30, 2022, the Company had no borrowings under the PHL Credit Facility and had a $ 20.0 million borrowing capacity remaining available under the PHL Credit Facility. Under the terms of the credit agreement for the unsecured revolving credit facility, one or more standby letters of credit, up to a maximum aggregate outstanding balance of $ 30.0 million, may be issued on behalf of the Company by the lenders under the unsecured revolving credit facility. The Company will incur a fee that shall be agreed upon with the issuing bank. Any outstanding standby letters of credit reduce the available borrowings on the senior unsecured revolving credit facility by a corresponding amount. Standby letters of credit of $ 12.6 million and $ 12.1 million were outstanding as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, the Company was in compliance with all debt covenants of the credit agreements that govern the unsecured revolving credit facilities. Unsecured Term Loan Facilities As of September 30, 2022, the Company had senior unsecured term loans with different maturities. Each unsecured term loan bore interest at a variable rate of a benchmark interest rate plus an applicable margin, depending on the Company's leverage ratio. Each of the term loan facilities was subject to debt covenants substantially similar to the covenants under the credit agreement that governs the revolving credit facility. As of September 30, 2022, the Company was in compliance with all debt covenants of its term loan facilities. The Company entered into interest rate swap agreements to fix the LIBOR rate on a portion of these unsecured term loan facilities. See Derivative and Hedging Activities for further discussion on the interest rate swaps. Convertible Senior Notes In December 2020, the Company issued $ 500.0 million aggregate principal amount of 1.75 % Convertible Senior Notes due December 2026 (the "Convertible Notes"). The net proceeds from this offering of the Convertible Notes were approximately $ 487.3 million after deducting the underwriting fees and other expenses paid by the Company. In February 2021, the Company issued an additional $ 250.0 million aggregate principal amount of Convertible Notes. These additional Convertible Notes were sold at a 5.5 % premium to par and generated net proceeds of approximately $ 257.2 million after deducting the underwriting fees and other expenses paid by the Company of $ 6.5 million, which was offset by a premium received in the amount of $ 13.8 million. The Convertible Notes are governed by an indenture (the “Base Indenture”) between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. The Convertible Notes bear interest at a rate of 1.75 % per annum, payable semi-annually in arrears on June 15th and December 15th of each year, beginning on June 15, 2021. The Convertible Notes will mature on December 15, 2026. 16 Table of Contents The Company separated the Convertible Notes issued in December 2020 into liability and equity components. The initial carrying amount of the liability component was $ 386.1 million and was calculated using a discount rate of 6.25 %. The discount rate was based on the terms of debt instruments that were similar to the Convertible Notes. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the principal amount of such Convertible Notes, or $ 113.9 million. The amount recorded in equity was not subject to remeasurement or amortization. The $ 113.9 million also represented the initial discount recorded on the Convertible Notes. As a result of the Company's early adoption of ASU 2020-06 on January 1, 2021, the Convertible Notes are now recorded as a single liability with no portion recorded in equity. The Company also ceased recording non-cash interest expense associated with the amortization of the debt discount. Prior to June 15, 2026, the Convertible Notes will be convertible upon certain circumstances. On and after June 15, 2026, holders may convert any of their Convertible Notes into the Company’s common shares of beneficial interest (“common shares”) at the applicable conversion rate at any time at their election two days prior to the maturity date. The initial conversion rate is 39.2549 common shares per $1,000 principal amount of Convertible Notes, which represents an initial conversion price of approximately $ 25.47 per share. The conversion rate is subject to adjustment in certain circumstances. As of September 30, 2022 and December 31, 2021, the if-converted value of the Convertible Notes did not exceed the principal amount. The Company may redeem for cash all or a portion of the Convertible Notes, at its option, on or after December 20, 2023 upon certain circumstances. The redemption price will be equal to 100 % of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If certain make-whole fundamental changes occur, the conversion rate for the Convertible Notes may be increased. In connection with the Convertible Notes issuances, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the underwriters of the offerings of the Convertible Notes or their respective affiliates and other financial institutions. The Capped Call Transactions initially cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of common shares underlying the Convertible Notes. The Capped Call Transactions are expected generally to reduce the potential dilution to holders of common shares upon conversion of the Convertible Notes and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction and/or offset subject to a cap. The upper strike price of the Capped Call Transactions is $ 33.0225 per share. The cost of the Capped Call Transactions entered into in December 2020 and February 2021 was $ 38.3 million and $ 21.0 million, respectively, and was recorded within additional paid-in capital. Senior Unsecured Notes The Company has $ 47.6 million of senior unsecured notes outstanding bearing a fixed interest rate of 4.70 % per annum and maturing in December 2023 (the "Series A Notes") and $ 2.4 million of senior unsecured notes outstanding bearing a fixed interest rate of 4.93 % per annum and maturing in December 2025 (the "Series B Notes"). In February 2021, as a result of the amendments described above, the interest rates of the Series A Notes and the Series B Notes increased to 5.15 % and 5.38 %, respectively. The debt covenants of the Series A Notes and the Series B Notes are substantially similar to those of the Company's senior unsecured revolving credit facility. As of September 30, 2022, the Company was in compliance with all such debt covenants. Mortgage Loans On September 23, 2021, the Company assumed a $ 161.5 million loan secured by a first-lien mortgage on the leasehold interest of Margaritaville Hollywood Beach Resort ("Margaritaville"). The loan requires interest-only payments based on a floating interest rate of one-month LIBOR plus a weighted-average spread of 2.37 %. The loan matures on May 9, 2023 and may be extended by one-year . If the loan is extended, the interest rate spread will increase by 20 basis points for the extension period only. The Company expects to exercise this extension. The loan is also subject to an interest rate cap agreement. On December 1, 2021, the Company assumed a $ 61.7 million loan secured by a first-lien mortgage on the leasehold interest of Estancia La Jolla Hotel & Spa ("Estancia"). The loan requires both principal and interest monthly payments based on a fixed interest rate of 5.07 %. The loan matures on September 1, 2028. 17 Table of Contents The Company's mortgage loans associated with Margaritaville and Estancia are non-recourse to the Company except for customary carve-outs to the general non-recourse liability. The 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. No event of default has occurred under the loan documents. Both mortgage loans triggered the cash trap provisions prior to their acquisition, but both properties reached profitability levels in 2022 that permitted the termination of the cash traps and all cash in the lockboxes has been released. Interest Expense The components of the Company's interest expense consisted of the following for the three and nine months ended September 30, 2022 and 2021 (in thousands): For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 Unsecured revolving credit facilities $ 788 $ 513 $ 2,067 $ 1,581 Unsecured term loan facilities 14,465 15,442 41,608 46,983 Convertible senior notes 3,282 3,282 9,844 9,381 Senior unsecured notes 645 645 1,935 2,917 Mortgage debt 2,657 88 6,531 88 Amortization of deferred financing fees, (premiums) and discounts 2,145 2,046 6,594 7,414 Other 1,038 914 2,174 4,701 Total interest expense $ 25,020 $ 22,930 $ 70,753 $ 73,065 Fair Value The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates, taking into consideration general market conditions and maturity of the debt with similar credit terms and is classified within Level 2 of the fair value hierarchy. The estimated fair value of the Company’s fixed rate debt (unsecured senior notes, convertible senior notes and the Estancia mortgage loan) as of September 30, 2022 and December 31, 2021 was $ 676.5 million and $ 747.8 million, respectively. The estimated fair value of the Company's variable rate debt approximates its book value. Derivative and Hedging Activities The Company enters into interest rate swap agreements to hedge against interest rate fluctuations. All of the Company's interest rate swaps are cash flow hedges. All unrealized gains and losses on these hedging instruments are reported in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company's interest rate swaps at September 30, 2022 and December 31, 2021 consisted of the following, by maturity date (dollars in thousands): Aggregate Notional Value as of Hedge Type Interest Rate Range Maturity September 30, 2022 December 31, 2021 Swap-cash flow 1.78 % - 1.79 % January 2022 $ — $ 180,000 Swap-cash flow 1.64 % - 1.68 % April 2022 — 100,000 Swap-cash flow 0.17 % January 2023 200,000 200,000 Swap-cash flow 1.99 % November 2023 250,000 250,000 Swap-cash flow 2.60 % January 2024 300,000 300,000 Swap-cash flow 1.43 % - 1.44 % February 2026 290,000 290,000 Total $ 1,040,000 $ 1,320,000 The Company records all derivative instruments at fair value in the accompanying consolidated balance sheets. Fair values of interest rate swaps and caps are determined using the standard market methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. Variable interest rates used in the calculation of projected receipts and payments on the swaps are based on an expectation of future interest rates derived from observable market interest rate curves (Overnight Index Swap curves) and volatilities (Level 2 inputs). Derivatives expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. The Company incorporates these counterparty credit risks in its fair value measurements. The Company believes it minimizes the credit risk by transacting with major creditworthy financial institutions. 18 Table of Contents As of September 30, 2022, the Company's derivative instruments were in an asset position with an aggregate fair value of $ 39.1 million. None of the Company's derivative instruments were in a liability position as of September 30, 2022. Derivative assets are included in prepaid expenses and other assets and derivative liabilities are included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. The Company expects approximately $ 21.2 million will be reclassified from accumulated other comprehensive income (loss) to interest expense within the next 12 months. Note 6. Revenue The Company presents revenue on a disaggregated basis in the accompanying consolidated statements of operations and comprehensive income. The following table presents revenues by geographic location for the three and nine months ended September 30, 2022 and 2021 (in thousands): For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 San Diego, CA $ 99,552 $ 63,524 $ 237,011 $ 119,668 Southern Florida/Georgia 53,543 30,928 219,068 104,901 Boston, MA 73,229 45,213 180,882 78,425 Los Angeles, CA 47,251 32,502 128,364 62,283 San Francisco, CA 40,753 16,524 87,070 28,653 Portland, OR 29,635 20,078 67,571 38,002 Other (1) 28,727 9,731 51,168 19,335 Chicago, IL 22,954 10,598 49,966 16,696 Washington, D.C. 13,901 6,275 37,148 12,441 Seattle, WA 7,148 3,437 14,037 5,363 $ 416,693 $ 238,810 $ 1,072,285 $ 485,767 ______________________ (1) Other includes: New York, NY, Philadelphia, PA, Newport, RI, and Santa Cruz, CA. Payments from customers are primarily made when services are provided. Due to the short-term nature of the Company's contracts and the almost simultaneous receipt of payment, almost all of the contract liability balance at the beginning of the period is expected to be recognized as revenue over the following 12 months. Note 7. Equity Common Shares The Company is authorized to issue up to 500,000,000 common shares. Each outstanding common share entitles the holder to one vote on each matter submitted to a vote of shareholders. Holders of common shares are entitled to receive dividends when authorized by the Board of Trustees. Share Repurchase Program On February 22, 2016, the Company announced that the Board of Trustees authorized a share repurchase program of up to $ 150.0 million of common shares. Under this program, the Company may repurchase common shares from time to time in transactions on the open market or by private agreement. The Company may suspend or discontinue this program at any time. Upon repurchase by the Company, common shares cease to be outstanding and become authorized but unissued common shares. For the nine months ended September 30, 2022, the Company had no repurchases under this program, and as of September 30, 2022, $ 56.6 million of common shares remained available for repurchase under this program. On July 27, 2017, the Company announced that the Board of Trustees authorized a new share repurchase program of up to $ 100.0 million of common shares. Under this program, the Company may repurchase common shares from time to time in transactions on the open market or by private agreement. The Company may suspend or discontinue this program at any time. This $ 100.0 million share repurchase program will commence upon completion of the Company's $ 150.0 million share repurchase program. ATM Program On April 29, 2021, the Company filed a prospectus supplement with the SEC to sell up to $ 200.0 million of common shares under an "at the market" offering program (the "ATM program"). No common shares were issued or sold under the ATM program during the nine months ended September 30, 2022. As of September 30, 2022, $ 200.0 million of common shares remained available for issuance under the ATM program. 19 Table of Contents Common Dividends The Company declared the following dividends on common shares/units for the nine months ended September 30, 2022: Dividend per Share/Unit For the Quarter Ended Record Date Payable Date $ 0.01 March 31, 2022 March 31, 2022 April 15, 2022 $ 0.01 June 30, 2022 June 30, 2022 July 15, 2022 $ 0.01 September 30, 2022 September 30, 2022 October 17, 2022 Preferred Shares The Company is authorized to issue up to 100,000,000 preferred shares of beneficial interest, $ 0.01 par value per share (“preferred shares”). In May 2021, the Company issued 9,200,000 6.375 % Series G Cumulative Redeemable Preferred Shares at a public offering price of $ 25.00 per share for net proceeds of $ 222.6 million. In July 2021, the Company issued 10,000,000 5.70 % Series H Cumulative Redeemable Preferred Shares at a public offering price of $ 25.00 per share for net proceeds of $ 242.1 million. In August 2021, the Company redeemed all outstanding 6.50 % Series C Cumulative Redeemable Preferred Shares and 6.375 % Series D Cumulative Redeemable Preferred Shares at the redemption amount of $ 25.00 per share plus accrued and unpaid dividends of $ 0.17 and $ 0.16 per share, respectively. The following Preferred Shares were outstanding as of September 30, 2022 and December 31, 2021: Security Type September 30, 2022 December 31, 2021 6.375 % Series E 4,400,000 4,400,000 6.30 % Series F 6,000,000 6,000,000 6.375 % Series G 9,200,000 9,200,000 5.70 % Series H 10,000,000 10,000,000 29,600,000 29,600,000 The Series E, Series F, Series G and Series H Cumulative Redeemable Preferred Shares (collectively, the “Preferred Shares”) rank senior to the common shares and on parity with each other with respect to payment of distributions. The Preferred Shares do not have any maturity date and are not subject to mandatory redemption. The Company may redeem the Series E and Series F Preferred Shares at any time. The Series G and Series H Preferred Shares may not be redeemed prior to May 13, 2026 and July 27, 2026, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. On or after such dates, the Company may, at its option, redeem the Preferred Shares, in each case in whole or from time to time in part, by payment of $ 25.00 per share, plus any accumulated, accrued and unpaid distributions through the date of redemption. Upon the occurrence of a change of control, as defined in the Company's declaration of trust, the result of which the common shares and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE MKT or Nasdaq, or any successor exchanges, the Company may, at its option, redeem the Preferred Shares in whole or in part within 120 days following the change of control by paying $ 25.00 per share, plus any accrued and unpaid distributions through the date of redemption. If the Company does not exercise its right to redeem the Preferred Shares upon a change of control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of common shares based on defined formulas subject to share caps. The share cap on each Series E Preferred Share is 1.9372 common shares, on each Series F Preferred Share is 2.0649 common shares, on each Series G Preferred Share is 2.1231 common shares, and on each Series H Preferred Share is 2.2311 common shares. 20 Table of Contents Preferred Dividends The Company declared the following dividends on preferred shares for the nine months ended September 30, 2022: Security Type Dividend per Share/Unit For the Quarter Ended Record Date Payable Date 6.375 % Series E $ 0.40 March 31, 2022 March 31, 2022 April 15, 2022 6.375 % Series E $ 0.40 June 30, 2022 June 30, 2022 July 15, 2022 6.375 % Series E $ 0.40 September 30, 2022 September 30, 2022 October 17, 2022 6.30 % Series F $ 0.39 March 31, 2022 March 31, 2022 April 15, 2022 6.30 % Series F $ 0.39 June 30, 2022 June 30, 2022 July 15, 2022 6.30 % Series F $ 0.39 September 30, 2022 September 30, 2022 October 17, 2022 6.375 % Series G $ 0.40 March 31, 2022 March 31, 2022 April 15, 2022 6.375 % Series G $ 0.40 June 30, 2022 June 30, 2022 July 15, 2022 6.375 % Series G $ 0.40 September 30, 2022 September 30, 2022 October 17, 2022 5.70 % Series H $ 0.36 March 31, 2022 March 31, 2022 April 15, 2022 5.70 % Series H $ 0.36 June 30, 2022 June 30, 2022 July 15, 2022 5.70 % Series H $ 0.36 September 30, 2022 September 30, 2022 October 17, 2022 Non-controlling Interest of Common Units in Operating Partnership Holders of Operating Partnership units ("OP units") have certain redemption rights that enable OP unit holders to cause the Operating Partnership to redeem their units in exchange for, at the Company’s option, cash per unit equal to the market price of common shares at the time of redemption or common shares on a one-for-one basis. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of share splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the Operating Partnership's limited partners or the Company's shareholders. On November 30, 2018, in connection with the merger with LaSalle Hotel Properties ("LaSalle"), the Company issued 133,605 OP units in the Operating Partnership to third-party limited partners of LaSalle's operating partnership. On May 11, 2022, in connection with the acquisition of the Inn on Fifth in Naples, Florida, the Company issued 16,291 OP units in the Operating Partnership. As of September 30, 2022 and December 31, 2021, the Operating Partnership had 149,896 and 133,605 OP units, respectively, held by third parties, excluding LTIP units. As of September 30, 2022, the Operating Partnership had two classes of long-term incentive partnership ("LTIP") units, LTIP Class A units and LTIP Class B units. All of the outstanding LTIP units are held by officers of the Company. As of September 30, 2022 and December 31, 2021, the Operating Partnership had 727,208 LTIP units outstanding. Of the 727,208 LTIP units outstanding at September 30, 2022, 127,111 LTIP units have vested. Only vested LTIP units may be converted to common OP units, which in turn can be tendered for redemption as described above. Non-controlling Interest of Preferred Units in Operating Partnership On May 11, 2022, in connection with the acquisition of the Inn on Fifth in Naples, Florida, the Company issued 3,104,400 preferred units in the Operating Partnership, designated as 6.0 % Series Z Cumulative Perpetual Preferred Units ("Series Z Preferred Units"). The Series Z Preferred Units rank senior to the common OP units and on parity with the Operating Partnership's Series E, Series F, Series G and Series H Preferred Units. Holders of Series Z Preferred Units are entitled to receive quarterly distributions at an annual rate of 6.0 % of the liquidation preference value of $ 25.00 per share. At any time, holders of Series Z Preferred Units may elect to convert some or all of their units into any other series of the Operating Partnership’s preferred units outstanding at that time. After the second anniversary of the issuance of the Series Z Preferred Units, holders may elect to redeem some or all of their units for, at the Company’s election, cash, common shares having an equivalent value or preferred shares on a one-for-one basis. After the fifth anniversary of their issuance, the Company may redeem the Series Z Preferred Units for cash, common shares having an equivalent value or preferred shares on a one-for-one basis. At any time following a change of control of the Company, holders of Series Z Preferred Units may elect to redeem some or all of their units for, at the Company’s election, cash or common shares having an equivalent value. As of September 30, 2022, the Operating Partnership had 3,104,400 Series Z Preferred Units outstanding. 21 Table of Contents Note 8. Share-Based Compensation Plan Available Shares The Company maintains the 2009 Equity Incentive Plan, as amended and restated (as amended, the "Plan"), to attract and retain independent trustees, executive officers and other key employees and service providers. On May 19, 2021, the Company’s shareholders approved an amendment to the Plan which increased the aggregate number of common shares that may be issued under the Plan as share awards, performance units, options, share appreciation rights and other equity-based awards by 1,675,000 . As of September 30, 2022, there were 1,725,000 common shares available for issuance under the Plan. Service Condition Share Awards The following table provides a summary of service condition restricted share activity as of September 30, 2022: Shares Weighted-Average Grant Date Fair Value Unvested at December 31, 2021 567,431 $ 22.53 Granted 136,940 $ 22.06 Vested ( 107,303 ) $ 26.23 Forfeited ( 36,503 ) $ 22.80 Unvested at September 30, 2022 560,565 $ 21.69 For the three and nine months ended September 30, 2022 the Company recognized approximately $ 1.1 million and $ 2.7 million, respectively, of share-based compensation expense related to these awards in the accompanying consolidated statements of operations and comprehensive income. For the three and nine months ended September 30, 2021 the Company recognized approximately $ 1.1 million and $ 3.0 million, respectively, of share-based compensation expense related to these awards in the accompanying consolidated statements of operations and comprehensive income. Performance-Based Equity Awards On May 16, 2022, the Board of Trustees approved a target award of 175,898 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2025. The actual number of common shares that ultimately vest will be from 0 % to 200 % of the target award and will be determined in 2025 based on the performance criteria defined in the award agreements for the period of performance from January 1, 2022 through December 31, 2024. For the three and nine months ended September 30, 2022, the Company recognized approximately $ 1.4 million and $ 3.4 million, respectively, of share-based compensation expense related to performance-based equity awards in the accompanying consolidated statements of operations and comprehensive income. For the three and nine months ended September 30, 2021, the Company recognized approximately $ 1.3 million and $ 3.6 million, respectively, of share-based compensation expense related to performance-based equity awards in the accompanying consolidated statements of operations and comprehensive income. Long-Term Incentive Partnership ("LTIP") Units As of September 30, 2022, the Operating Partnership had two classes of LTIP units, LTIP Class A units and LTIP Class B units. All of the outstanding LTIP units are held by officers of the Company. As of September 30, 2022 and December 31, 2021, the Operating Partnership had 727,208 LTIP units outstanding. Of the 727,208 LTIP units outstanding at September 30, 2022, 127,111 LTIP units have vested. Only vested LTIP units may be converted to common OP units, which in turn can be tendered for redemption as described in Note 7, Equity . For the three and nine months ended September 30, 2022, the Company recognized approximately $ 0.7 million and $ 2.1 million, respectively, in expense related to these LTIP units. For the three and nine months ended September 30, 2021, the Company recognized approximately $ 0.7 million and $ 1.7 million, respectively, in expense related to these LTIP units. The aggregate expense related to the LTIP unit grants is presented as non-controlling interest in the Company’s accompanying consolidated balance sheets. Note 9. Income Taxes PHL is subject to federal and state corporate income taxes at statutory tax rates. Given the continued negative impact of the COVID-19 pandemic on the Company's financial results and uncertainties about the Company's ability to utilize its net operating loss in future years, the Company has recorded a valuation allowance on its income tax benefit for the three and nine months ended September 30, 2022, and has recorded a valuation allowance on all deferred tax assets. 22 Table of Contents The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local jurisdictions, where applicable. As of September 30, 2022 and December 31, 2021, the statute of limitations remains open for all major jurisdictions for tax years dating back to 2018 and 2017, respectively. Note 10. Earnings (Loss) Per Share The following is a reconciliation of basic and diluted earnings (loss) per common share (in thousands, except share and per-share data): For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 Numerator: Net income (loss) attributable to common shareholders $ 13,724 $ ( 43,984 ) $ ( 80,504 ) $ ( 181,269 ) Less: Dividends paid on unvested share-based compensation ( 12 ) ( 12 ) ( 34 ) ( 35 ) Less: Undistributed earnings attributable to share-based compensation ( 109 ) — — — Net income (loss) available to common shareholders — basic $ 13,603 $ ( 43,996 ) $ ( 80,538 ) $ ( 181,304 ) Plus: Interest expense on convertible notes — — — — Net income (loss) available to common shareholders — diluted $ 13,603 $ ( 43,996 ) $ ( 80,538 ) $ ( 181,304 ) Denominator: Weighted-average number of common shares — basic 130,905,132 130,813,750 130,904,772 130,801,187 Effect of dilutive share-based compensation 244,651 — — — Effect of dilutive convertible notes — — — — Weighted-average number of common shares — diluted 131,149,783 130,813,750 130,904,772 130,801,187 Net income (loss) per share available to common shareholders — basic $ 0.10 $ ( 0.34 ) $ ( 0.62 ) $ ( 1.39 ) Net income (loss) per share available to common shareholders — diluted $ 0.10 $ ( 0.34 ) $ ( 0.62 ) $ ( 1.39 ) For the three and nine months ended September 30, 2022, 300,261 and 1,072,803 , respectively, shares of unvested service condition restricted shares and performance-based equity awards were excluded from diluted weighted-average common shares, as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2021, 1,035,369 shares of unvested service condition restricted shares and performance-based equity awards were excluded from diluted weighted-average common shares, as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2022, 29,441,175 common shares underlying the convertible notes have been excluded from diluted shares as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2021, 29,441,175 common shares underlying the convertible notes have been excluded from diluted shares as their effect would have been anti-dilutive. The LTIP and OP units held by the non-controlling interest holders have been excluded from the denominator of the diluted earnings per share as there would be no effect on the amounts since the limited partners' share of income (loss) would also be added or subtracted to derive net income (loss) available to common shareholders. Note 11. Commitments and Contingencies Hotel Management Agreements The Company’s hotel properties are operated pursuant to management agreements with various management companies. The remaining terms of these management agreements are up to 12 years, not including renewals, and up to 30 years, including renewals. The majority of the Company’s management agreements are terminable at will by the Company upon paying a termination fee and some are terminable by the Company upon sale of the property, with, in some cases, the payment of termination fees. Most of the agreements also provide the Company the ability to terminate based on failure to achieve defined operating performance thresholds. Termination fees range from zero to up to six times the annual base management and incentive management fees, depending on the agreement and the reason for termination. Certain of the Company’s management agreements are non-terminable except upon the manager’s breach of a material representation or the manager’s failure to meet performance thresholds as defined in the management agreement. The management agreements require the payment of a base management fee generally between 1 % and 4 % of hotel revenues. Under certain management agreements, the management companies are also eligible to receive an incentive management fee if hotel operating income, cash flows or other performance measures, as defined in the agreements, exceed certain performance thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on its investment in the hotel. 23 Table of Contents For the three and nine months ended September 30, 2022, com bined base and incentive management fees were $ 11.8 million and $ 31.6 million, respectively. For the three and nine months ended September 30, 2021, combined base and incentive management fees were $ 5.1 million and $ 11.8 million, respectively. Base and incentive management fees are included in other direct and indirect expenses in the Company's accompanying consolidated statements of operations and comprehensive income. Reserve Funds Certain of the Company’s agreements with its hotel managers, franchisors, ground lessors and lenders have provisions for the Company to provide funds, typically 4.0 % of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ furniture, fixtures and equipment. Restricted Cash At September 30, 2022 and December 31, 2021, the Company had $ 19.4 million and $ 33.7 million, respectively, in restricted cash, which consisted of funds held in cash management and lockbox accounts held by a lender, reserves for replacement of furniture and fixtures, and reserves to pay for real estate taxes, ground rent or property insurance under certain hotel management agreements or loan agreements. Hotel, Ground and Finance Leases As of September 30, 2022, the following hotels were subject to leases as follows: Lease Properties Lease Type Lease Expiration Date Restaurant at Southernmost Beach Resort Operating lease April 2029 Paradise Point Resort & Spa Operating lease May 2050 Hotel Monaco Washington DC Operating lease November 2059 Argonaut Hotel Operating lease December 2059 Hotel Zephyr Fisherman's Wharf Operating lease February 2062 Viceroy Santa Monica Hotel Operating lease September 2065 Estancia La Jolla Hotel & Spa Operating lease January 2066 San Diego Mission Bay Resort Operating lease July 2068 1 Hotel San Francisco (formerly Hotel Vitale) Operating lease March 2070 (1) Hyatt Regency Boston Harbor Operating lease April 2077 The Westin Copley Place, Boston Operating lease December 2077 (2) The Liberty, a Luxury Collection Hotel, Boston Operating lease May 2080 Jekyll Island Club Resort and Restaurant Operating lease January 2089 Hotel Zelos San Francisco Operating lease June 2097 Hotel Palomar Los Angeles Beverly Hills Operating lease January 2107 (3) Margaritaville Hollywood Beach Resort Operating lease July 2112 Hotel Zeppelin San Francisco Operating and finance lease June 2089 (4) Harbor Court Hotel San Francisco Finance lease August 2052 ______________________ (1) The expiration date assumes the exercise of a 14 -year extension option. (2) No payments are required through maturity. (3) The expiration date assumes the exercise of all 19 five-year extension options. (4) The expiration date assumes the exercise of a 30-year extension option. The Company's leases may require minimum fixed rent payments, percentage rent payments based on a percentage of revenues in excess of certain thresholds or rent payments equal to the greater of a minimum fixed rent or percentage rent. Minimum fixed rent may be adjusted annually by increases in the consumer price index and may be subject to minimum and maximum increases. Some leases also contain certain restrictions on modifications that can be made to the hotel structures due to their status as national historic landmarks. 24 Table of Contents The Company records expense on a straight-line basis for leases that provide for minimum rental payments that increase in pre-established amounts over the remaining terms of the leases. Ground rent expense is included in real estate taxes, personal property taxes, property insurance and ground rent in the Company's accompanying consolidated statements of operations and comprehensive income. The components of ground rent expense for the three and nine months ended September 30, 2022 and 2021 are as follows (in thousands): For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 Fixed ground rent $ 4,769 $ 3,929 $ 13,786 $ 12,532 Variable ground rent 6,049 2,917 14,517 6,275 Total ground rent $ 10,818 $ 6,846 $ 28,303 $ 18,807 Litigation The nature of the operations of hotels exposes the Company's hotels, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. The Company has insurance to cover certain potential material losses. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any material litigation threatened against the Company. Note 12. Supplemental Information to Statements of Cash Flows (in thousands) For the nine months ended September 30, 2022 2021 Interest paid, net of capitalized interest $ 58,043 $ 59,803 Interest capitalized $ 1,434 $ 675 Income taxes paid (refunded) $ ( 2,303 ) $ 75 Non-Cash Investing and Financing Activities: Convertible debt discount adjustment $ — $ 113,099 Distributions payable on common shares/units $ 1,357 $ 1,532 Distributions payable on preferred shares/units $ 11,202 $ 12,270 Issuance of common shares for Board of Trustees compensation $ 738 $ 516 Issuance of common shares for executive and employee bonuses $ — $ 1,446 Issuance of common units in connection with hotel acquisition $ 390 $ — Issuance of preferred units in connection with hotel acquisition $ 77,610 $ — Accrued additions and improvements to hotel properties $ 9,303 $ 3,205 Right of use assets obtained in exchange for lease liabilities $ 1,005 $ 48,302 Write-off of fully amortized deferred financing costs $ 5,878 $ 5,043 Mortgage loans assumed in connection with acquisition of hotel properties $ — $ 161,500 Below (above) market contracts assumed in connection with acquisition of hotel properties $ — $ 3,071 Note 13. Subsequent Events On October 13, 2022, the Company refinanced its senior unsecured revolving credit facility and all of its term loans. The $ 2.0 billion amended and restated senior unsecured credit agreement includes a $ 650.0 million senior unsecured revolving credit facility and three term loan facilities totaling $ 1.38 billion. The $ 650.0 million revolving credit facility matures in October 2026 and provides for two , six-month extension options. The three $ 460.0 million term loans mature in October 2024, October 2025 and October 2027, respectively. The Company used the proceeds of the new term loans and $ 26.7 million of cash on hand to repay the outstanding balances on the prior term loans. 25 Table of Contents