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 may continue to have, a significant negative 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 negatively affect 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, 2022. 25 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 Operating performance during this recovery period has been led by strong leisure travel which has driven revenue at our resorts to pre-pandemic levels. Corporate and group business are progressing steadily with our urban hotels, leading the portfolio's growth during the second quarter with strong occupancy gains in San Francisco, Los Angeles, Washington DC, Chicago, and Portland. We expect these trends to continue if the overall economic recovery continues and as international inbound travel continues to return. Recent inflation and the expectation of future inflation have caused labor and other costs to increase and have added additional uncertainty in consumer confidence and the continued growth in the economy. The Company continues to complete repairs and rebuilding at LaPlaya Beach Resort & Club. The property's Bay Tower and Gulf Tower have reopened, and resort amenities are reopening. Additional resort amenities will reopen through the year. The property's Beach House remains on track to substantially reopen by the end of 2023, however, delays in receiving equipment, material and inspections may adversely impact this timeline. During the six months ended June 30, 2023, we had the following transactions: • On February 22, 2023, we sold The Heathman Hotel in Portland, Oregon for $45.0 million. • On March 17, 2023, we sold the retail component of The Westin Michigan Avenue Chicago in Chicago, Illinois for $27.3 million. • On March 28, 2023, we sold Hotel Colonnade Coral Gables in Coral Gables, Florida for $63.0 million. • On May 9, 2023, we sold Hotel Monaco Seattle in Seattle, Washington for $63.3 million. • On May 24, 2023, we sold Hotel Vintage Seattle in Seattle, Washington for $33.7 million. • We repurchased 6,498,901 common shares under our common share repurchase programs at an average price of $14.01 per share. 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 and six months ended June 30, 2023 and 2022: For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 Same-Property Occupancy 73.2 % 70.0 % 65.5 % 59.2 % Same-Property ADR $ 307.64 $ 322.05 $ 302.02 $ 311.82 Same-Property RevPAR $ 225.25 $ 225.36 $ 197.95 $ 184.53 Same-Property Total RevPAR $ 343.66 $ 341.45 $ 305.00 $ 278.09 The above table of hotel operating statistics includes information from all hotels owned as of June 30, 2023, for the three months ended June 30, 2023 and 2022, except for 1 Hotel San Francisco, which was closed for renovations and LaPlaya Beach Resort & Club, due to its closure following Hurricane Ian. 26 Table of Contents The above table of hotel operating statistics includes information from all hotels owned as of June 30, 2023 for the six months ended June 30, 2023 and 2022, except for 1 Hotel San Francisco, which was closed for renovations, LaPlaya Beach Resort & Club, due to its closure following Hurricane Ian; and includes Hotel Monaco Seattle and Hotel Vintage Seattle for the first quarter only, due to their sales in May 2023. 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 and six months ended June 30, 2023 and 2022 (in thousands): For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 Net income (loss) $ 46,183 $ 28,797 $ 24,138 $ (71,419) Adjustments: Real estate depreciation and amortization 57,871 60,185 116,155 119,195 (Gain) loss on sale of hotel properties (23,584) — (30,219) — Impairment loss — 12,271 — 73,254 FFO $ 80,470 $ 101,253 $ 110,074 $ 121,030 Distribution to preferred shareholders and unit holders (12,151) (11,991) (24,303) (23,335) FFO available to common share and unit holders $ 68,319 $ 89,262 $ 85,771 $ 97,695 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). 27 Table of Contents The following table reconciles net income (loss) to EBITDA and EBITDA re for the three and six months ended June 30, 2023 and 2022 (in thousands): For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 Net income (loss) $ 46,183 $ 28,797 $ 24,138 $ (71,419) Adjustments: Interest expense 29,544 23,161 56,974 45,733 Income tax expense (benefit) 31 — 31 — Depreciation and amortization 57,957 60,274 116,326 119,374 EBITDA $ 133,715 $ 112,232 $ 197,469 $ 93,688 (Gain) loss on sale of hotel properties (23,584) — (30,219) — Impairment loss — 12,271 — 73,254 EBITDA re $ 110,131 $ 124,503 $ 167,250 $ 166,942 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. Results of Operations At June 30, 2023 and 2022, we had 47 and 54, respectively, properties and leasehold interests. All properties owned during these periods have been included in our results of operations during the respective periods since their dates of acquisition or through their dates of disposition, as applicable. Based on when a property was acquired or disposed, operating results for certain properties are not comparable for the three and six months ended June 30, 2023 and 2022. 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 The Marker San Francisco San Francisco, CA June 28, 2022 Sofitel Philadelphia at Rittenhouse Square Philadelphia, PA August 2, 2022 Hotel Spero San Francisco, CA August 25, 2022 Hotel Vintage Portland Portland, OR September 14, 2022 The Heathman Hotel Portland, OR February 22, 2023 Retail at The Westin Michigan Avenue Chicago Chicago, IL March 17, 2023 Hotel Colonnade Coral Gables Coral Gables, FL March 28, 2023 Hotel Monaco Seattle Seattle, WA May 9, 2023 Hotel Vintage Seattle Seattle, WA May 24, 2023 Property Location Acquisition Date Inn on Fifth Naples, FL May 11, 2022 Newport Harbor Island Resort Newport, RI June 23, 2022 Comparison of the three months ended June 30, 2023 to the three months ended June 30, 2022 Revenues — Total revenues decreased by $13.2 million, of which $11.2 million was due to non-comparable properties. The remaining decrease was a result of a decrease in revenue at LaPlaya Beach Resort & Club, which closed as a result of Hurricane Ian and has not fully reopened, and a decrease in revenue at Solamar Hotel due to its room renovation. These revenue declines were substantially offset by a significant increase in revenue at 1 Hotel San Francisco which was closed most of the second quarter of 2022 for renovations. Hotel operating expenses — Total hotel operating expenses increased by $17.6 million as a result of an increase in staffing, wage rates and benefits to accommodate rising occupancy, particularly at our urban properties. In addition, hotel operating expenses increased at 1 Hotel San Francisco, which was closed most of the second quarter of 2022 for renovations. Our overall increase in operating expenses were partially offset by a $7.3 million decrease due to our non-comparable properties. Depreciation and amortization — Depreciation and amortization expense decreased by $2.3 million primarily due to the 2022 and 2023 sales of our non-comparable properties, which was partially offset by an increase due to the 2022 acquisitions of two non-comparable properties. 28 Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent decreased by $3.4 million primarily due to a decrease in real estate taxes as a result of lower tax assessments. General and administrative — General and administrative expenses increased by $1.5 million primarily due to an increase in professional fees and employee stock compensation expense. General and administrative expenses consist of employee compensation costs, legal and professional fees, insurance and other expenses. Impairment — No impairment loss was recognized in 2023. We recognized an impairment loss of $12.3 million in 2022 related to two hotels. Gain on sale of hotel properties — We recognized a gain on sale of $23.6 million related to the sales of Hotel Monaco Seattle and Hotel Vintage Seattle in 2023. No gain on sale was recognized in 2022. Business interruption insurance income — We recognized business interruption insurance income of $14.0 million in 2023 related to a partial settlement with the insurance carriers for lost income at LaPlaya Beach Resort & Club. Interest expense — Interest expense increased by $6.4 million as a result of higher interest rates on floating rate debt. Non-controlling interests — Non-controlling interests represents the allocation of income or loss of the Operating Partnership to third-party common OP unit holders and to the preferred OP unit holders. Comparison of the six months ended June 30, 2023 to the six months ended June 30, 2022 Revenues — Total revenues increased by $34.5 million primarily due to an increase in revenue at many of our urban properties as business and group bookings have steadily increased as well as an increase in revenue at 1 Hotel San Francisco which was closed most of the first and second quarters of 2022 for renovations. These increases were partially offset by a significant decrease in revenue at LaPlaya Beach Resort & Club, which closed as a result of Hurricane Ian and has not fully reopened and a $4.9 million decrease at the non-comparable properties. Hotel operating expenses — Total hotel operating expenses increased by $57.6 million as a result of an increase in staffing, wage rates and benefits to accommodate rising occupancy, particularly at our urban properties. In addition, hotel operating expenses increased at 1 Hotel San Francisco, which was closed most of the first and second quarters of 2022 for renovations. Our overall increase in operating expenses were partially offset by a $6.2 million decrease due to our non-comparable properties. Depreciation and amortization — Depreciation and amortization expense decreased by $3.0 million primarily due to our sales of non-comparable properties in 2022 and 2023, which was partially offset by an increase due to our two non-comparable properties acquired in 2022. Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent decreased by $5.0 million primarily due to a decrease in real estate taxes as a result of lower tax assessments, offset by a $1.5 million increase in ground rent at our comparable properties. General and administrative — General and administrative expenses increased by $1.8 million primarily due to an increase in professional fees and employee stock compensation expense. General and administrative expenses consist of employee compensation costs, legal and professional fees, insurance and other expenses. Impairment — No impairment loss was recognized in 2023. We recognized an impairment loss of $73.3 million in 2022 related to two hotels. Gain on sale of hotel properties — We recognized a gain on sale of $30.2 million related to the sales of The Heathman Hotel, the retail component of The Westin Michigan Avenue Chicago, Hotel Colonnade Coral Gables, Hotel Monaco Seattle and Hotel Vintage Seattle in 2023. Business interruption insurance income — We recognized business interruption insurance income of $22.1 million in 2023 related to a partial settlement with the insurance carriers for lost income at LaPlaya Beach Resort & Club. Other operating expenses — Other operating expenses increased by $3.0 million primarily due to payroll and claims administration costs at LaPlaya Beach Resort & Club for which reimbursement from insurance policies is uncertain. Interest expense — Interest expense increased by $11.2 million as a result of higher interest rates on floating rate debt. Non-controlling interests — Non-controlling interests represents the allocation of income or loss of the Operating Partnership to third-party common OP unit holders and to the preferred OP unit holders. 29 Table of Content Critical Accounting Policies Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. 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. 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 property sales. Our primary cash requirements in the short term (i.e., those requiring cash on or before June 30, 2024) will be to fund property lease obligations, interest and current principal on debt, capital improvements, dividends on common and preferred shares, and working capital of our property operations. We believe our cash and cash equivalents, restricted cash and the amount available on our senior unsecured revolving credit facility, which totaled $823.7 million as of June 30, 2023, along with cash generated from ongoing operations will be sufficient to satisfy our short-term cash requirements. As of June 30, 2023, 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, redevelopments and repayments of long-term debt. As such, we expect to continue to raise capital through equity and debt offerings to fund our growth. 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 $2.4 billion as of June 30, 2023, as summarized below: June 30, 2023 (in thousands) Revolving credit facilities $ — Term loans 1,380,000 Convertible senior notes 750,000 Senior unsecured notes 50,000 Mortgage loans 219,991 Total debt at face value $ 2,399,991 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 June 30, 2023 will be $2.7 billion through their maturity, with $49.5 million of principal and $271.9 million of interest payable on or before June 30, 2024. We intend to pay amounts due with available cash, borrowings under our revolving credit facility, or refinance with long-term debt. 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 may be 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. As of June 30, 2023, none of the mortgage loans were in a cash trap. 30 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 June 30, 2023, with $20.9 million payable on or before June 30, 2024. Purchase commitments As of June 30, 2023, we had $8.6 million of outstanding purchase commitments, all of which will be paid on or before June 30, 2024. 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 and Series Z operating partnership units We expect to pay aggregate annual dividends and distributions of approximately $48.6 million on our outstanding Series E, Series F, Series G and Series H Cumulative Redeemable Preferred Shares and Series Z Cumulative Perpetual Preferred Units on or before June 30, 2024 and in future years until the shares/units are redeemed. For further discussion on our preferred shares and preferred units, 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 $120.2 million for the six months ended June 30, 2023, and $142.6 million for the six months ended June 30, 2022. 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 decrease in cash provided by (used in) operations in 2023 as compared to 2022 is primarily due to the disposition of four hotel properties and one retail component of a hotel property in 2023. Investing Activities. Our net cash provided by (used in) investing activities was $135.3 million for the six months ended June 30, 2023, and $(216.7) million for the six months ended June 30, 2022. 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 six months ended June 30, 2023, we invested $97.7 million in improvements to our hotel properties; received $224.4 million from the sale of four hotel properties and one retail component of a hotel property; and received $11.4 million in property insurance proceeds. • During the six months ended June 30, 2022, we invested $42.4 million in improvements to our hotel properties; received $73.0 million from the sale of one hotel property; and purchased two hotel properties using cash of $247.2 million. Financing Activities. Our net cash provided by (used in) financing activities was $(121.5) million for the six months ended June 30, 2023, and $44.6 million for the six months ended June 30, 2022. 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 six months ended June 30, 2023, we repurchased $92.8 million of common shares through our common share repurchase program and for tax withholding purposes in connection with vestings of share-based equity awards; and paid $26.8 million in preferred and common distributions. • During the six months ended June 30, 2022, we borrowed and repaid $180.0 million and $80.0 million, respectively, of revolving credit facility borrowings; repaid $27.1 million in other debt; and paid $25.3 million in preferred and common distributions. 31 Table of Content Capital Investments We maintain and intend to continue maintaining all of our hotels in good repair and condition, in conformity with applicable laws and regulations, in accordance with franchisor standards when applicable and in accordance with agreed-upon requirements in our management agreements. Routine capital investments will be administered by the hotel management companies. However, we maintain approval rights over the capital investments as part of the annual budget process and as otherwise required from time to time. Certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guest rooms, meeting space and restaurants, in order to better compete with other hotels in our markets. In addition, after we acquire a hotel property, we are often required by the franchisor or brand manager, if any, to complete a property improvement plan (“PIP”) in order to bring the hotel property up to the franchisor’s or brand’s standards. Generally, we expect to fund renovations and improvements with available cash, restricted cash, borrowings under our credit facility or proceeds from new debt or equity offerings. For the six months ended June 30, 2023, we invested $97.7 million in capital investments to reposition and improve our properties, including the renovations of Hilton San Diego Gaslamp Quarter, Jekyll Island Club Resort, Estancia La Jolla Hotel & Spa, Newport Harbor Island Resort, Viceroy Santa Monica Hotel, Skamania Lodge and Solamar Hotel, as well as capital expenditures related to the repair and remediation of LaPlaya Beach Resort & Club and Southernmost Beach Resort, which were damaged in Hurricane Ian. Depending on market conditions, and in some instances subject to approval from governmental authorities, we expect to invest a total of $145.0 million to $155.0 million in capital investments in 2023, which includes redevelopment and repositioning projects at Solamar Hotel, Hilton San Diego Gaslamp Quarter, Jekyll Island Club Resort, Estancia La Jolla Hotel & Spa, Newport Harbor Island Resort and Skamania Lodge, and excludes capital expenditures related to the repair and remediation of LaPlaya Beach Resort & Club and Southernmost Beach Resort which were damaged in Hurricane Ian. Common Share Repurchase Programs, Preferred Share Repurchase Program and ATM Program Common Share Repurchase Programs On July 27, 2017, our Board of Trustees authorized a share repurchase program of up to $100.0 million of our outstanding common shares. Under this program, we could have repurchased common shares from time to time in transactions on the open market or by private agreement. As of June 30, 2023, no common shares remained available for repurchase under this program. On February 17, 2023, our Board of Trustees authorized a share repurchase program of up to $150.0 million of our 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. Shares repurchased by the Company cease to be outstanding and become authorized but unissued common shares. As of June 30, 2023, $146.0 million of common shares remained available for repurchase under this program. During the six months ended June 30, 2023, we repurchased 6,498,901 common shares under the 2017 and 2023 repurchase programs, for an aggregate purchase price of $91.0 million, or an average of approximately $14.01 per share. The timing, manner, price and amount of any repurchases under the 2023 program will be determined by us in our discretion and will depend on a variety of factors, including legal requirements, price, liquidity and economic considerations, and market conditions. The program does not require us to repurchase any specific number of common shares. The program does not have an expiration date and may be suspended, modified or discontinued at any time. Preferred Share Repurchase Program On February 17, 2023, our Board of Trustees approved a repurchase program of up to $100.0 million of our outstanding preferred shares (the “Preferred Share Repurchase Program”). Under the terms of the program, we may repurchase up to an aggregate of $100.0 million of our 6.375% Series E Cumulative Redeemable Preferred Shares, 6.30% Series F Cumulative Redeemable Preferred Shares, 6.375% Series G Cumulative Redeemable Preferred Shares and 5.70% Series H Cumulative Redeemable Preferred Shares from time to time in transactions on the open market or by private agreement. The aggregate liquidation value of our preferred shares that may be repurchased pursuant to the Preferred Shares Repurchase Program is $715.0 million. During the six months ended June 30, 2023, no Preferred Shares were repurchased under this program. The timing, manner, price and amount of any repurchases will be determined by us in our discretion and will depend on a variety of factors, including legal requirements, price, liquidity and economic considerations, and market conditions. The program does not require us to repurchase any specific number of Preferred Shares. The program does not have an expiration date and may be suspended, modified or discontinued at any time. 32 Table of Content 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 was disrupted in 2020 and 2021 as a result of COVID-19, which directly adversely impacted demand, revenue, and operating income. However, most of the properties in our portfolio have returned to normal historical seasonality trends. 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 June 30, 2023, we have interest rate swap agreements with an aggregate notional amount of $1.0 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.