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, 2023 December 31, 2022 (Unaudited) ASSETS Investment in hotel properties, net $ 5,553,122 $ 5,874,876 Hotels held for sale 65,453 44,861 Cash and cash equivalents 182,665 41,040 Restricted cash 8,946 11,229 Hotel receivables (net of allowance for doubtful accounts of $ 519 and $ 431 , respectively) 56,842 45,258 Prepaid expenses and other assets 131,800 116,276 Total assets $ 5,998,828 $ 6,133,540 LIABILITIES AND EQUITY Debt $ 2,366,945 $ 2,387,293 Accounts payable, accrued expenses and other liabilities 272,745 250,518 Lease liabilities - operating leases 320,571 320,402 Deferred revenues 74,576 73,603 Accrued interest 10,720 4,535 Liabilities related to hotels held for sale 1,647 428 Distribution payable 12,156 12,218 Total liabilities 3,059,360 3,048,997 Commitments and contingencies (Note 11) Shareholders’ equity: Preferred shares of beneficial interest, $ .01 par value (liquidation preference $ 715,000 at September 30, 2023 and December 31, 2022), 100,000,000 shares authorized; 28,600,000 shares issued and outstanding at September 30, 2023 and December 31, 2022 286 286 Common shares of beneficial interest, $ .01 par value, 500,000,000 shares authorized; 120,057,744 shares issued and outstanding at September 30, 2023 and 126,345,293 shares issued and outstanding at December 31, 2022 1,201 1,263 Additional paid-in capital 4,097,130 4,182,359 Accumulated other comprehensive income (loss) 45,834 35,724 Distributions in excess of retained earnings ( 1,295,089 ) ( 1,223,117 ) Total shareholders’ equity 2,849,362 2,996,515 Non-controlling interests 90,106 88,028 Total equity 2,939,468 3,084,543 Total liabilities and equity $ 5,998,828 $ 6,133,540 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, 2023 2022 2023 2022 Revenues: Room $ 259,397 $ 277,971 $ 706,705 $ 707,997 Food and beverage 91,661 98,080 261,172 261,228 Other operating 44,741 40,642 117,984 103,060 Total revenues 395,799 416,693 1,085,861 1,072,285 Expenses: Hotel operating expenses: Room 68,065 66,637 189,179 167,102 Food and beverage 69,091 69,296 196,748 179,859 Other direct and indirect 112,596 115,589 324,164 307,317 Total hotel operating expenses 249,752 251,522 710,091 654,278 Depreciation and amortization 63,272 60,372 179,598 179,746 Real estate taxes, personal property taxes, property insurance, and ground rent 32,905 34,641 91,380 98,118 General and administrative 11,549 10,281 32,739 29,675 Impairment 71,416 12,865 71,416 86,119 Gain on sale of hotel properties — ( 6,194 ) ( 30,219 ) ( 6,194 ) Business interruption insurance income ( 10,881 ) — ( 32,985 ) — Other operating expenses 3,829 989 9,876 4,045 Total operating expenses 421,842 364,476 1,031,896 1,045,787 Operating income (loss) ( 26,043 ) 52,217 53,965 26,498 Interest expense ( 31,022 ) ( 25,020 ) ( 87,996 ) ( 70,753 ) Other 1,403 123 2,538 156 Income (loss) before income taxes ( 55,662 ) 27,320 ( 31,493 ) ( 44,099 ) Income tax (expense) benefit ( 822 ) ( 1,015 ) ( 853 ) ( 1,015 ) Net income (loss) ( 56,484 ) 26,305 ( 32,346 ) ( 45,114 ) Net income (loss) attributable to non-controlling interests 658 1,237 2,999 1,359 Net income (loss) attributable to the Company ( 57,142 ) 25,068 ( 35,345 ) ( 46,473 ) Distributions to preferred shareholders ( 10,988 ) ( 11,344 ) ( 32,963 ) ( 34,031 ) Net income (loss) attributable to common shareholders $ ( 68,130 ) $ 13,724 $ ( 68,308 ) $ ( 80,504 ) Net income (loss) per share available to common shareholders, basic $ ( 0.57 ) $ 0.10 $ ( 0.56 ) $ ( 0.62 ) Net income (loss) per share available to common shareholders, diluted $ ( 0.57 ) $ 0.10 $ ( 0.56 ) $ ( 0.62 ) Weighted-average number of common shares, basic 120,057,744 130,905,132 122,394,293 130,904,772 Weighted-average number of common shares, diluted 120,057,744 131,149,783 122,394,293 130,904,772 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, 2023 2022 2023 2022 Comprehensive Income: Net income (loss) $ ( 56,484 ) $ 26,305 $ ( 32,346 ) $ ( 45,114 ) Other comprehensive income (loss): Change in fair value of derivative instruments 9,897 16,487 30,971 53,184 Amounts reclassified from other comprehensive income ( 8,003 ) ( 1,337 ) ( 20,766 ) 5,441 Comprehensive income (loss) ( 54,590 ) 41,455 ( 22,141 ) 13,511 Comprehensive income (loss) attributable to non-controlling interests 674 1,339 3,094 1,746 Comprehensive income (loss) attributable to the Company $ ( 55,264 ) $ 40,116 $ ( 25,235 ) $ 11,765 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, 2023 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, 2023 28,600,000 $ 286 120,057,744 $ 1,201 $ 4,094,680 $ 43,956 $ ( 1,225,748 ) $ 2,914,375 $ 89,737 $ 3,004,112 Share-based compensation — — — — 2,450 — — 2,450 870 3,320 Distributions on common shares/units — — — — — — ( 1,211 ) ( 1,211 ) ( 11 ) ( 1,222 ) Distributions on preferred shares/units — — — — — — ( 10,988 ) ( 10,988 ) ( 1,164 ) ( 12,152 ) Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — 9,881 — 9,881 16 9,897 Amounts reclassified from other comprehensive income — — — — — ( 8,003 ) — ( 8,003 ) — ( 8,003 ) Net income (loss) — — — — — — ( 57,142 ) ( 57,142 ) 658 ( 56,484 ) Balance at September 30, 2023 28,600,000 $ 286 120,057,744 $ 1,201 $ 4,097,130 $ 45,834 $ ( 1,295,089 ) $ 2,849,362 $ 90,106 $ 2,939,468 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, 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 ) 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 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, 2023 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, 2022 28,600,000 $ 286 126,345,293 $ 1,263 $ 4,182,359 $ 35,724 $ ( 1,223,117 ) $ 2,996,515 $ 88,028 $ 3,084,543 Issuance of common shares for Board of Trustees compensation — — 55,480 1 753 — — 754 — 754 Repurchase of common shares — — ( 6,578,436 ) ( 65 ) ( 92,688 ) — — ( 92,753 ) — ( 92,753 ) Share-based compensation — — 235,407 2 6,706 — — 6,708 2,523 9,231 Distributions on common shares/units — — — — — — ( 3,664 ) ( 3,664 ) ( 47 ) ( 3,711 ) Distributions on preferred shares/units — — — — — — ( 32,963 ) ( 32,963 ) ( 3,492 ) ( 36,455 ) Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — 30,876 — 30,876 95 30,971 Amounts reclassified from other comprehensive income — — — — — ( 20,766 ) — ( 20,766 ) — ( 20,766 ) Net income (loss) — — — — — — ( 35,345 ) ( 35,345 ) 2,999 ( 32,346 ) Balance at September 30, 2023 28,600,000 $ 286 120,057,744 $ 1,201 $ 4,097,130 $ 45,834 $ ( 1,295,089 ) $ 2,849,362 $ 90,106 $ 2,939,468 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, 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 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, 2023 2022 Operating activities: Net income (loss) $ ( 32,346 ) $ ( 45,114 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 179,598 179,746 Share-based compensation 9,231 8,155 Amortization of deferred financing costs, non-cash interest and other amortization 9,578 9,961 Gain on sale of hotel properties ( 30,219 ) ( 6,194 ) Impairment 71,416 86,119 Non-cash ground rent 7,426 7,467 Other adjustments ( 7,348 ) ( 3,914 ) Changes in assets and liabilities: Hotel receivables ( 12,087 ) ( 29,243 ) Prepaid expenses and other assets ( 26,200 ) ( 5,297 ) Accounts payable and accrued expenses 28,619 50,280 Deferred revenues 4,615 2,447 Net cash provided by (used in) operating activities 202,283 254,413 Investing activities: Improvements and additions to hotel properties ( 140,057 ) ( 68,266 ) Proceeds from sales of hotel properties 224,384 248,908 Acquisition of hotel properties — ( 247,163 ) Property insurance proceeds 14,361 — Other investing activities ( 2,414 ) ( 111 ) Net cash provided by (used in) investing activities 96,274 ( 66,632 ) Financing activities: Payment of offering costs — common and preferred shares — ( 123 ) Payment of deferred financing costs ( 2,423 ) ( 96 ) Borrowings under revolving credit facilities — 180,000 Repayments under revolving credit facilities — ( 180,000 ) Proceeds from debt 140,000 — Repayments of debt ( 162,988 ) ( 27,740 ) Repurchases of common shares ( 92,753 ) ( 1,113 ) Distributions — common shares/units ( 3,756 ) ( 3,968 ) Distributions — preferred shares/units ( 36,455 ) ( 34,859 ) Repayments of refundable membership deposits ( 840 ) ( 2,008 ) Net cash provided by (used in) financing activities ( 159,215 ) ( 69,907 ) Net change in cash and cash equivalents and restricted cash 139,342 117,874 Cash and cash equivalents and restricted cash, beginning of year 52,269 92,247 Cash and cash equivalents and restricted cash, end of period $ 191,611 $ 210,121 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 U.S. 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, 2023, the Company owned interests in 47 hotels with a total of 12,142 g uest rooms . The hotel properties are located in: Boston, Massachusetts; Chicago, Illinois; Hollywood, Florida; Jekyll Island, Georgia; Key West, 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; 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, 2023, the Company owned 99.2 % of the common limited partnership units issued by the Operating Partnership ("common units"). The remaining 0.8 % 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. 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, 2022. The Company and its subsidiaries are separate legal entities and maintain records and books of account 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. Investments in entities that the Company does not control, but over which the Company has the ability to exercise significant influence regarding operating and financial policies, are accounted for under the equity method. Certain reclassifications have been made to the prior period's financial statements to conform to the current year presentation. 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. 11 Table of Contents Risks and Uncertainties The state of the overall economy can significantly impact hotel operational performance and thus the Company's financial position. It is uncertain what the future affects of the COVID-19 pandemic will have on the overall economy or travel. In addition, the rise in inflation and corresponding increase in interest rates may also impact the overall economy. A decline in travel or a significant increase in costs may impact the Company's cash flow and ability to service debt or meet other financial obligations. New Accounting Pronouncements There were no new accounting pronouncements issued during the nine months ended September 30, 2023 that the Company believes will have a material impact on its consolidated financial statements and disclosures. Note 3. Acquisition and Disposition of Hotel Properties Acquisitions There were no acquisitions of hotel properties during the nine months ended September 30, 2023. Dispositions The following table summarizes disposition transactions during the nine months ended September 30, 2023 and 2022 (in thousands): Hotel Property Name Location Sale Date Sale Price The Heathman Hotel Portland, OR February 22, 2023 $ 45,000 Retail at The Westin Michigan Avenue Chicago Chicago, IL March 17, 2023 27,300 Hotel Colonnade Coral Gables Coral Gables, FL March 28, 2023 63,000 Hotel Monaco Seattle Seattle, WA May 9, 2023 63,250 Hotel Vintage Seattle Seattle, WA May 24, 2023 33,700 2023 Total $ 232,250 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 For the three and nine months ended September 30, 2023, the accompanying consolidated statements of operations and comprehensive income included operating income (loss) of $ 0.9 million and $( 0.8 ) million, respectively, excluding impairment loss and gain on sale of hotel properties related to the hotel properties sold and held for sale. For the three and nine months ended September 30, 2022, the accompanying consolidated statements of operations and comprehensive income included operating income (loss) of $ 1.9 million and $( 3.4 ) million, respectively, excluding impairment loss and gain on sale of hotel properties related to the hotel properties sold and held for sale. 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. Held for Sale As of September 30, 2023, the Company had entered into an agreement to sell Hotel Zoe Fisherman's Wharf for a sale price of $ 68.5 million. This hotel was classified as held for sale and, as a result, the Company classified all of the assets and liabilities related to this hotel as assets and liabilities held for sale in the accompanying consolidated balance sheets and ceased depreciating its assets. The Company expects to complete the sale in the fourth quarter of 2023. However, no assurances can be given that the sale will be completed on these terms or at all. 12 Table of Contents Note 4. Investment in Hotel Properties Investment in hotel properties as of September 30, 2023 and December 31, 2022 consisted of the following (in thousands): September 30, 2023 December 31, 2022 Land $ 824,872 $ 897,756 Buildings and improvements 5,008,765 5,170,976 Furniture, fixtures and equipment 512,746 504,518 Finance lease asset 91,181 91,181 Construction in progress 19,249 11,961 $ 6,456,813 $ 6,676,392 Right-of-use asset, operating leases 363,165 370,383 Investment in hotel properties $ 6,819,978 $ 7,046,775 Less: Accumulated depreciation ( 1,266,856 ) ( 1,171,899 ) Investment in hotel properties, net $ 5,553,122 $ 5,874,876 Hurricane Ian On September 27, 2022, LaPlaya Beach Resort & 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 or disruption. LaPlaya was closed in anticipation of the storm and required remediation and repairs from the damage and remained closed. In 2023, LaPlaya began to reopen in stages as the buildings and facilities were repaired. The Company expects LaPlaya's remediation and repair to be substantially completed in the first quarter of 2024. 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 and the Company has recorded a receivable for the expenditures to date which it anticipates to collect from the insurance providers in excess of the deductibles. In 2022, the Company recognized an aggregate impairment loss of $ 7.9 million for the damage to LaPlaya and Southernmost Beach Resort. During the nine months ended September 30, 2023, the Company incurred $ 5.1 million of costs related to payroll, repair and claims administration for which reimbursement from insurance policies is uncertain and therefore is included in other operating expenses in the Company's consolidated statements of operations and comprehensive income. Through September 30, 2023, the Company has cumulatively received $ 55.1 million in preliminary advances from the insurance providers and continues to work with the insurance providers on the settlement of the property and business interruption claims. Impairment The Company reviews its investment in hotel properties for impairment whenever events or circumstances indicate potential impairment. The Company periodically adjusts its estimate of future operating cash flows and estimated hold periods for certain properties. As a result of this review, the Company may identify an impairment trigger has occurred and assess its investment in hotel properties for recoverability. During the three and nine months ended September 30, 2023, the Company recognized an impairment loss of $ 71.4 million related to three hotels as a result of their fair values being lower than their carrying values. During the three months ended September 30, 2022, no impairment loss was recognized. During 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 losses were determined using Level 2 inputs under authoritative guidance for fair value measurements using purchase and sale agreements and information from marketing efforts for these properties. 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 option. 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, 2023, the Company's lease liabilities consisted of operating lease liabilities of $ 320.6 million and financing lease liabilities of $ 43.2 million. As of December 31, 2022, the Company's lease liabilities consisted of operating lease liabilities of $ 320.4 million and financing lease liabilities of $ 42.7 million. The financing lease liabilities are included in accounts payable, accrued expenses and other liabilities on the Company's accompanying consolidated balance sheets. 13 Table of Contents Note 5. Debt On October 13, 2022, the Company entered into the Fifth Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent and certain other agents and lenders ("Credit Agreement"). The Credit Agreement provides for a $ 650.0 million senior unsecured revolving credit facility and three $ 460.0 million unsecured term loan facilities totaling $ 1.38 billion. The Company may request additional lender commitments to increase the aggregate borrowing capacity under the Credit Agreement up to an additional $ 970.0 million. The Company's debt consisted of the following as of September 30, 2023 and December 31, 2022 (dollars in thousands): Balance Outstanding as of Interest Rate at September 30, 2023 Maturity Date September 30, 2023 December 31, 2022 Revolving credit facilities Senior unsecured credit facility — (1)(2) October 2026 $ — $ — PHL unsecured credit facility — (1) October 2026 — — Total revolving credit facilities $ — $ — Unsecured term loans Term Loan 2024 7.50 % (1)(5) October 2024 460,000 460,000 Term Loan 2025 5.16 % (1) October 2025 460,000 460,000 Term Loan 2027 3.84 % (1) October 2027 460,000 460,000 Term loan principal $ 1,380,000 $ 1,380,000 Convertible senior notes principal 1.75 % December 2026 $ 750,000 $ 750,000 Senior unsecured notes Series A Notes 4.70 % (3) December 2023 47,600 47,600 Series B Notes 4.93 % December 2025 2,400 2,400 Senior unsecured notes principal $ 50,000 $ 50,000 Mortgage loans Margaritaville Hollywood Beach Resort 7.04 % (4) September 2026 140,000 161,500 Estancia La Jolla Hotel & Spa 5.07 % September 2028 57,997 59,485 Mortgage loans principal $ 197,997 $ 220,985 Total debt principal $ 2,377,997 $ 2,400,985 Unamortized debt premiums, discount and deferred financing costs, net ( 11,052 ) ( 13,692 ) Debt, Net $ 2,366,945 $ 2,387,293 ______________________ (1) Borrowings bear interest at floating rates. Interest rate at September 30, 2023 gives effect to interest rate hedges. (2) The Company has the option to extend the maturity date for up to two six-month periods, pursuant to certain terms and conditions and payment of an extension fee. (3) The Company intends to payoff the Series A Notes using available cash or borrowings under the revolving credit facility at maturity. (4) This loan was refinanced during the third quarter of 2023 and now bears interest at a floating rate equal to daily SOFR plus a spread of 3.75 %. The interest rate at September 30, 2023 gives effect to an interest rate swap. The Company has the option to extend the maturity date for up to two one-year periods, pursuant to certain terms and conditions and payment of an extension fee. (5) The Company intends to refinance or payoff this loan using available cash or borrowings under the revolving credit facility at maturity. Unsecured Revolving Credit Facilities The $ 650.0 million senior unsecured revolving credit facility provided for in the Credit Agreement matures in October 2026 and provides for two six-month extension options, subject to certain terms and conditions and payment of an extension fee. All borrowings under the senior unsecured revolving credit facility bear interest at a rate per annum equal to, at the option of the Company, (i) the Secured Overnight Financing Rate ("SOFR") plus 0.10 % (the “SOFR Adjustment”) plus a margin that is based upon the Company’s leverage ratio or (ii) the Base Rate (as defined by the Credit Agreement) plus a margin that is based on the Company’s leverage ratio. The margins for revolving credit facility loans range in amount from 1.45 % to 2.50 % for SOFR-based loans and 0.45 % to 1.50 % for Base Rate-based loans, depending on the Company’s leverage ratio. As of September 30, 2023, the Company had no outstanding borrowings, $ 12.6 million of outstanding letters of credit and a borrowing capacity of $ 637.4 million remaining on the senior unsecured revolving credit facility. The Company is required to pay an unused commitment fee at an annual rate of 0.20 % or 0.30 % of the unused portion of the senior unsecured 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. 14 Table of Contents Under the terms of the Credit Agreement, 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 senior unsecured revolving facility. The Company pays a fee for outstanding standby letters of credit at a rate per annum equal to the applicable margin based upon the Company's leverage ratio. 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 were outstanding as of September 30, 2023 and December 31, 2022. As of September 30, 2023, the Company also has a $ 20.0 million unsecured revolving credit facility (the "PHL Credit Facility") to be used for PHL's working capital and general corporate purposes. On October 13, 2022, PHL amended and restated the agreement governing the PHL Credit Facility to extend the maturity to October 2026. The PHL Credit Facility has substantially similar terms as the Company's senior unsecured revolving credit facility. Borrowings on the PHL Credit Facility bear interest at a rate per annum equal to, at the option of the Company, (i) SOFR plus the SOFR Adjustment plus a margin that is based upon the Company’s leverage ratio or (ii) the Base Rate (as defined by the Credit Agreement) plus a margin that is based on the Company’s leverage ratio. The PHL Credit Facility is subject to debt covenants substantially similar to the covenants under the Credit Agreement, which governs the Company's senior unsecured revolving credit facility. As of September 30, 2023, the Company had no borrowings under the PHL Credit Facility and had $ 20.0 million borrowing capacity remaining available under the PHL Credit Facility. As of September 30, 2023, the Company was in compliance with all debt covenants of the credit agreements that govern the unsecured revolving credit facilities. Unsecured Term Loan Facilities The three $ 460.0 million term loans provided for in the Credit Agreement mature in October 2024, October 2025 and October 2027, respectively. The term loans bear interest at a rate per annum equal to, at the option of the Company, (i) SOFR plus the SOFR Adjustment plus a margin that is based upon the Company’s leverage ratio or (ii) the Base Rate (as defined by the Credit Agreement) plus a margin that is based on the Company’s leverage ratio. The margins for term loans range in amount from 1.40 % to 2.45 % for SOFR-based loans and 0.40 % to 1.45 % for Base Rate-based loans, depending on the Company's leverage ratio. The term loans are subject to the debt covenants in the Credit Agreement. As of September 30, 2023, the Company was in compliance with all debt covenants of its term loans. The Company entered into interest rate swap agreements to fix the SOFR 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 the 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. 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, 2023 and December 31, 2022, 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. 15 Table of Contents 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. 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"). 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, 2023, 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"). During the third quarter of 2023, the Company paid down $ 21.5 million of this loan and refinanced the remaining $ 140.0 million balance. The new loan requires interest-only payments based on a floating rate equal to daily SOFR plus a spread of 3.75 %. This loan matures on September 7, 2026 and may be extended for up to two one-year periods, subject to certain terms and conditions and payment of an extension fee. 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. 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 the lender. These properties are not in a cash trap and no event of default has occurred under the loan documents. Interest Expense The components of the Company's interest expense consisted of the following for the three and nine months ended September 30, 2023 and 2022 (in thousands): For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Unsecured revolving credit facilities $ 504 $ 788 $ 1,570 $ 2,067 Unsecured term loan facilities 18,777 14,465 53,750 41,608 Convertible senior notes 3,281 3,282 9,844 9,844 Senior unsecured notes 589 645 1,767 1,935 Mortgage debt 4,094 2,657 11,437 6,531 Amortization of deferred financing fees, (premiums) and discounts 2,755 2,145 6,486 6,594 Other 1,022 1,038 3,142 2,174 Total interest expense $ 31,022 $ 25,020 $ 87,996 $ 70,753 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, 2023 and December 31, 2022 was $ 699.8 million and $ 700.5 million, respectively. 16 Table of Contents 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, 2023 and December 31, 2022 consisted of the following, by maturity date (dollars in thousands): Aggregate Notional Value as of Hedge Type Interest Rate Range (SOFR) Maturity September 30, 2023 December 31, 2022 Swap-cash flow 0.05 % - 0.07 % January 2023 $ — $ 200,000 Swap-cash flow 1.84 % - 1.87 % November 2023 250,000 250,000 Swap-cash flow 2.47 % - 2.50 % January 2024 300,000 300,000 Swap-cash flow 1.33 % - 1.36 % February 2026 290,000 290,000 Swap-cash flow 3.29 % October 2027 165,000 — Total $ 1,005,000 $ 1,040,000 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. As of September 30, 2023, the Company's derivative instruments were in an asset position with an aggregate fair value of $ 46.2 million. None of the Company's derivative instruments was in a liability position as of September 30, 2023. 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 $ 25.6 million will be reclassified from accumulated other comprehensive income (loss) to interest expense within the next 12 months. In January 2023, the Company entered into interest rate swap agreements with an aggregate notional amount of $ 400.0 million, which will be effective in November 2023. 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, 2023 and 2022 (in thousands): For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 San Diego, CA $ 95,885 $ 99,552 $ 239,653 $ 237,011 Boston, MA 75,650 73,229 194,908 180,882 Southern Florida/Georgia 43,174 53,543 173,183 219,068 Los Angeles, CA 51,303 47,251 144,445 128,364 San Francisco, CA 43,755 40,753 113,084 87,070 Portland, OR 24,538 29,635 61,510 67,571 Chicago, IL 22,233 22,954 57,036 49,966 Washington, D.C. 16,522 13,901 51,326 37,148 Seattle, WA — 7,148 5,551 14,037 Other (1) 22,739 28,727 45,165 51,168 Total Revenues $ 395,799 $ 416,693 $ 1,085,861 $ 1,072,285 ______________________ (1) Other includes: Philadelphia, PA, Newport, RI, and Santa Cruz, CA . 17 Table of Contents 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. Common Share Repurchase Programs On July 27, 2017, the Company's Board of Trustees authorized a share repurchase program of up to $ 100.0 million of common shares. Under this program, the Company could have repurchased common shares from time to time in transactions on the open market or by private agreement. As of September 30, 2023, no common shares remained available for repurchase under this program. On February 17, 2023, the Company's 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. Common shares repurchased by the Company cease to be outstanding and become authorized but unissued common shares. As of September 30, 2023, $ 146.0 million of common shares remained available for repurchase under this program. During the nine months ended September 30, 2023, the Company 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. Common Dividends The Company declared the following dividends on common shares/units for the nine months ended September 30, 2023: Dividend per Share/Unit For the Quarter Ended Record Date Payable Date $ 0.01 March 31, 2023 March 31, 2023 April 17, 2023 $ 0.01 June 30, 2023 June 30, 2023 July 17, 2023 $ 0.01 September 30, 2023 September 29, 2023 October 16, 2023 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”). The following preferred shares were outstanding as of September 30, 2023 and December 31, 2022: Security Type September 30, 2023 December 31, 2022 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 9,000,000 9,000,000 28,600,000 28,600,000 18 Table of Contents 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 American 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. Preferred Share Repurchase Program On February 17, 2023, the Company's Board of Trustees authorized a repurchase program of up to $ 100.0 million of the Preferred Shares. Under the terms of the program, the Company may repurchase up to an aggregate of $ 100.0 million of the Preferred Shares. The timing, manner, price and amount of any repurchases will be determined by the Company in its 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 the Company to repurchase any specific number of shares. The program does not have an expiration date and may be suspended, modified or discontinued at any time. During the nine months ended September 30, 2023, no Preferred Shares were repurchased under this program. Preferred Dividends The Company declared the following dividends on preferred shares for the nine months ended September 30, 2023: Security Type Dividend per Share/Unit For the Quarter Ended Record Date Payable Date 6.375 % Series E $ 0.40 March 31, 2023 March 31, 2023 April 17, 2023 6.375 % Series E $ 0.40 June 30, 2023 June 30, 2023 July 17, 2023 6.375 % Series E $ 0.40 September 30, 2023 September 29, 2023 October 16, 2023 6.30 % Series F $ 0.39 March 31, 2023 March 31, 2023 April 17, 2023 6.30 % Series F $ 0.39 June 30, 2023 June 30, 2023 July 17, 2023 6.30 % Series F $ 0.39 September 30, 2023 September 29, 2023 October 16, 2023 6.375 % Series G $ 0.40 March 31, 2023 March 31, 2023 April 17, 2023 6.375 % Series G $ 0.40 June 30, 2023 June 30, 2023 July 17, 2023 6.375 % Series G $ 0.40 September 30, 2023 September 29, 2023 October 16, 2023 5.70 % Series H $ 0.36 March 31, 2023 March 31, 2023 April 17, 2023 5.70 % Series H $ 0.36 June 30, 2023 June 30, 2023 July 17, 2023 5.70 % Series H $ 0.36 September 30, 2023 September 29, 2023 October 16, 2023 19 Table of Contents 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 Inn on Fifth in Naples, Florida, the Company issued 16,291 OP units in the Operating Partnership. As of September 30, 2023 and December 31, 2022, the Operating Partnership had 149,896 OP units held by third parties, excluding LTIP units. As of September 30, 2023, the Operating Partnership had two classes of long-term incentive partnership units ("LTIP units"), LTIP Class A units and LTIP Class B units. All of the outstanding LTIP units are held by officers of the Company. On February 17, 2023, the Board of Trustees granted 131,276 LTIP Class B units to its executive officers. These LTIP units will vest ratably on January 1, 2024, 2025 and 2026, contingent upon continued employment with the Company. The fair value of each award was determined based on the closing price of the Company’s common shares on the grant date of $ 15.04 per unit with an aggregate grant date fair value of $ 2.0 million. As of September 30, 2023, the Operating Partnership had 858,484 LTIP units outstanding, of which 277,136 LTIP units have vested. As of December 31, 2022, the Operating Partnership had 727,208 LTIP units outstanding, of which 127,111 LTIP units have vested. Only vested LTIP units may be converted to 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 Inn on Fifth, 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 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, 2023, the Operating Partnership had 3,104,400 Series Z Preferred Units outstanding. 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. The Plan provides for the grant of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards. Share awards under the Plan vest over a period determined by the Board of Trustees, generally over three to five years . The Company pays or accrues for dividends on share-based awards. All outstanding share awards are subject to full or partial accelerated vesting upon a change in control and upon death or disability or certain other employment termination events as set forth in the award agreements. As of September 30, 2023, there were 1,498,820 common shares available for issuance under the Plan. 20 Table of Contents Service Condition Share Awards From time to time, the Company awards restricted common shares under the Plan to members of the Board of Trustees, officers and employees. These shares generally vest over three to five years based on continued service or employment. The following table provides a summary of service condition restricted share activity as of nine months ended September 30, 2023: Shares Weighted-Average Grant Date Fair Value Unvested at December 31, 2022 567,317 $ 21.60 Granted 113,084 $ 15.04 Vested ( 183,721 ) $ 23.14 Forfeited ( 52,563 ) $ 16.74 Unvested at September 30, 2023 444,117 $ 19.87 For the three and nine months ended September 30, 2023, the Company recognized approximately $ 0.9 million and $ 2.6 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, 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. Performance-Based Equity Awards On February 17, 2023, the Board of Trustees approved a target award of 314,235 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2026. The actual number of common shares that ultimately vest will be from 0 % to 200 % of the target award and will be determined in 2026 based on the performance criteria defined in the award agreements for the period of performance from January 1, 2023 through December 31, 2025. For the three and nine months ended September 30, 2023, the Company recognized approximately $ 1.5 million and $ 4.1 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, 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. Long-Term Incentive Partnership Units As of September 30, 2023, 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. On February 17, 2023, the Board of Trustees granted 131,276 LTIP Class B units to its executive officers. These LTIP units will vest ratably on January 1, 2024, 2025 and 2026, contingent upon continued employment with the Company. The fair value of each award was determined based on the closing price of the Company’s common shares on the grant date of $ 15.04 per unit with an aggregate grant date fair value of $ 2.0 million. As of September 30, 2023, the Operating Partnership had 858,484 LTIP units outstanding, of which 277,136 LTIP units have vested. As of December 31, 2022, the Operating Partnership had 727,208 LTIP units outstanding, of which 127,111 LTIP units have vested. Only vested LTIP units may be converted to 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, 2023, the Company recognized approximately $ 0.9 million and $ 2.5 million, respectively, in expense related to these LTIP units. 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. 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 all deferred tax assets. 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, 2023 and December 31, 2022, the statute of limitations remains open for all major jurisdictions for tax years dating back to 2020 and 2019, respectively. 21 Table of Contents 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, 2023 2022 2023 2022 Numerator: Net income (loss) attributable to common shareholders $ ( 68,130 ) $ 13,724 $ ( 68,308 ) $ ( 80,504 ) Less: Dividends paid on unvested share-based compensation ( 10 ) ( 12 ) ( 31 ) ( 34 ) Less: Undistributed earnings attributable to share-based compensation — ( 109 ) — — Net income (loss) available to common shareholders — basic $ ( 68,140 ) $ 13,603 $ ( 68,339 ) $ ( 80,538 ) Plus: Interest expense on convertible notes — — — — Net income (loss) available to common shareholders — diluted $ ( 68,140 ) $ 13,603 $ ( 68,339 ) $ ( 80,538 ) Denominator: Weighted-average number of common shares — basic 120,057,744 130,905,132 122,394,293 130,904,772 Effect of dilutive share-based compensation — 244,651 — — Effect of dilutive convertible notes — — — — Weighted-average number of common shares — diluted 120,057,744 131,149,783 122,394,293 130,904,772 Net income (loss) per share available to common shareholders — basic $ ( 0.57 ) $ 0.10 $ ( 0.56 ) $ ( 0.62 ) Net income (loss) per share available to common shareholders — diluted $ ( 0.57 ) $ 0.10 $ ( 0.56 ) $ ( 0.62 ) For the three and nine months ended September 30, 2023, 1,110,184 and 1,110,184 , respectively, of unvested service condition restricted shares and performance-based equity awards were excluded from diluted weighted-average number of common shares, as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2022, 300,261 and 1,072,803 , respectively, of unvested service condition restricted shares and performance-based equity awards were excluded from diluted weighted-average number of common shares, as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2023, 29,441,175 and 29,441,175 , respectively, of 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, 2022, 29,441,175 and 29,441,175 of common shares underlying the Convertible Notes have been excluded from diluted shares, as their effect would have been anti-dilutive. The LTIP units 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 11 years, not including renewals, and up to 29 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 three 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. 22 Table of Contents For the three and nine months ended September 30, 2023, combined base and incentive management fees were $ 11.1 million and $ 29.9 million, respectively. 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. 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, 2023 and December 31, 2022, the Company had $ 8.9 million and $ 11.2 million, respectively, in restricted cash, which consisted of funds held in cash management 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, 2023, 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 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. 23 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, 2023 and 2022 are as follows (in thousands): For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Fixed ground rent $ 4,795 $ 4,769 $ 14,359 $ 13,786 Variable ground rent 6,362 6,049 15,481 14,517 Total ground rent $ 11,157 $ 10,818 $ 29,840 $ 28,303 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, 2023 2022 Interest paid, net of capitalized interest $ 74,111 $ 58,043 Interest capitalized $ — $ 1,434 Income taxes paid (refunded) $ ( 2,612 ) $ ( 2,303 ) Non-Cash Investing and Financing Activities: Distributions payable on common shares/units $ 1,255 $ 1,357 Distributions payable on preferred shares/units $ 10,902 $ 11,202 Issuance of common shares for Board of Trustees compensation $ 754 $ 738 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 $ 5,526 $ 9,303 Right of use assets obtained in exchange for lease liabilities $ — $ 1,005 Write-off of fully amortized deferred financing costs $ 630 $ 5,878 24 Table of Contents