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, 2024 December 31, 2023 (Unaudited) ASSETS Investment in hotel properties, net $ 5,400,440 $ 5,490,776 Cash and cash equivalents 133,965 183,747 Restricted cash 10,292 9,894 Hotel receivables (net of allowance for doubtful accounts of $ 428 and $ 689 , respectively) 61,039 43,912 Prepaid expenses and other assets 116,841 96,644 Total assets $ 5,722,577 $ 5,824,973 LIABILITIES AND EQUITY Debt $ 2,207,714 $ 2,319,801 Accounts payable, accrued expenses and other liabilities 243,904 238,644 Lease liabilities - operating leases 320,714 320,617 Deferred revenues 86,878 76,874 Accrued interest 9,612 6,830 Distribution payable 11,857 11,862 Total liabilities 2,880,679 2,974,628 Commitments and contingencies (Note 11) Shareholders’ equity: Preferred shares of beneficial interest, $ .01 par value (liquidation preference $ 690,000 at September 30, 2024 and December 31, 2023), 100,000,000 shares authorized; 27,600,000 shares issued and outstanding at September 30, 2024 and December 31, 2023 276 276 Common shares of beneficial interest, $ .01 par value, 500,000,000 shares authorized; 119,285,394 shares issued and outstanding at September 30, 2024 and 120,191,349 shares issued and outstanding at December 31, 2023 1,193 1,202 Additional paid-in capital 4,069,808 4,078,912 Accumulated other comprehensive income (loss) 11,263 24,374 Distributions in excess of retained earnings ( 1,330,539 ) ( 1,341,264 ) Total shareholders’ equity 2,752,001 2,763,500 Non-controlling interests 89,897 86,845 Total equity 2,841,898 2,850,345 Total liabilities and equity $ 5,722,577 $ 5,824,973 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, 2024 2023 2024 2023 Revenues: Room $ 262,755 $ 259,397 $ 714,633 $ 706,705 Food and beverage 95,998 91,661 278,613 261,172 Other operating 45,777 44,741 122,463 117,984 Total revenues 404,530 395,799 1,115,709 1,085,861 Expenses: Hotel operating expenses: Room 68,721 68,065 188,747 189,179 Food and beverage 71,346 69,091 203,281 196,748 Other direct and indirect 116,953 112,596 328,705 324,164 Total hotel operating expenses 257,020 249,752 720,733 710,091 Depreciation and amortization 57,546 63,272 172,051 179,598 Real estate taxes, personal property taxes, property insurance, and ground rent 35,274 32,905 92,681 91,380 General and administrative 11,814 11,549 35,937 32,739 Impairment 1,908 71,416 1,908 71,416 Gain on sale of hotel properties — — — ( 30,219 ) Business interruption insurance income ( 7,059 ) ( 10,881 ) ( 18,340 ) ( 32,985 ) Other operating expenses 963 3,829 4,083 9,876 Total operating expenses 357,466 421,842 1,009,053 1,031,896 Operating income (loss) 47,064 ( 26,043 ) 106,656 53,965 Interest expense ( 27,925 ) ( 31,022 ) ( 82,285 ) ( 87,996 ) Other 793 1,403 1,336 2,538 Income (loss) before income taxes 19,932 ( 55,662 ) 25,707 ( 31,493 ) Income tax (expense) benefit 25,213 ( 822 ) 24,157 ( 853 ) Net income (loss) 45,145 ( 56,484 ) 49,864 ( 32,346 ) Net income (loss) attributable to non-controlling interests 1,488 658 3,621 2,999 Net income (loss) attributable to the Company 43,657 ( 57,142 ) 46,243 ( 35,345 ) Distributions to preferred shareholders ( 10,631 ) ( 10,988 ) ( 31,894 ) ( 32,963 ) Net income (loss) attributable to common shareholders $ 33,026 $ ( 68,130 ) $ 14,349 $ ( 68,308 ) Net income (loss) per share available to common shareholders, basic $ 0.27 $ ( 0.57 ) $ 0.12 $ ( 0.56 ) Net income (loss) per share available to common shareholders, diluted $ 0.24 $ ( 0.57 ) $ 0.12 $ ( 0.56 ) Weighted-average number of common shares, basic 119,640,463 120,057,744 119,938,931 122,394,293 Weighted-average number of common shares, diluted 149,351,866 120,057,744 120,367,351 122,394,293 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, 2024 2023 2024 2023 Comprehensive Income: Net income (loss) $ 45,145 $ ( 56,484 ) $ 49,864 $ ( 32,346 ) Other comprehensive income (loss): Change in fair value of derivative instruments ( 12,177 ) 9,897 5,067 30,971 Amounts reclassified from other comprehensive income ( 5,995 ) ( 8,003 ) ( 18,299 ) ( 20,766 ) Comprehensive income (loss) 26,973 ( 54,590 ) 36,632 ( 22,141 ) Comprehensive income (loss) attributable to non-controlling interests 1,334 674 3,500 3,094 Comprehensive income (loss) attributable to the Company $ 25,639 $ ( 55,264 ) $ 33,132 $ ( 25,235 ) 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, 2024 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, 2024 27,600,000 $ 276 120,094,380 $ 1,201 $ 4,077,360 $ 29,281 $ ( 1,362,359 ) $ 2,745,759 $ 88,676 $ 2,834,435 Repurchase of common shares — — ( 854,993 ) ( 9 ) ( 9,991 ) — — ( 10,000 ) — ( 10,000 ) Share-based compensation — — 46,007 1 2,439 — — 2,440 1,061 3,501 Distributions on common shares/units — — — — — — ( 1,206 ) ( 1,206 ) ( 10 ) ( 1,216 ) Distributions on preferred shares/units — — — — — — ( 10,631 ) ( 10,631 ) ( 1,164 ) ( 11,795 ) Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — ( 12,023 ) — ( 12,023 ) ( 154 ) ( 12,177 ) Amounts reclassified from other comprehensive income — — — — — ( 5,995 ) — ( 5,995 ) — ( 5,995 ) Net income (loss) — — — — — — 43,657 43,657 1,488 45,145 Balance at September 30, 2024 27,600,000 $ 276 119,285,394 $ 1,193 $ 4,069,808 $ 11,263 $ ( 1,330,539 ) $ 2,752,001 $ 89,897 $ 2,841,898 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 nine months ended September 30, 2024 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, 2023 27,600,000 $ 276 120,191,349 $ 1,202 $ 4,078,912 $ 24,374 $ ( 1,341,264 ) $ 2,763,500 $ 86,845 $ 2,850,345 Issuance of common shares for Board of Trustees compensation — — 47,497 1 744 — — 745 — 745 Repurchase of common shares — — ( 1,242,644 ) ( 13 ) ( 16,838 ) — — ( 16,851 ) — ( 16,851 ) Share-based compensation — — 289,192 3 6,990 — — 6,993 3,091 10,084 Distributions on common shares/units — — — — — — ( 3,624 ) ( 3,624 ) ( 47 ) ( 3,671 ) Distributions on preferred shares/units — — — — — — ( 31,894 ) ( 31,894 ) ( 3,492 ) ( 35,386 ) Other comprehensive income (loss): Change in fair value of derivative instruments — — — — — 5,188 — 5,188 ( 121 ) 5,067 Amounts reclassified from other comprehensive income — — — — — ( 18,299 ) — ( 18,299 ) — ( 18,299 ) Net income (loss) — — — — — — 46,243 46,243 3,621 49,864 Balance at September 30, 2024 27,600,000 $ 276 119,285,394 $ 1,193 $ 4,069,808 $ 11,263 $ ( 1,330,539 ) $ 2,752,001 $ 89,897 $ 2,841,898 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 The accompanying notes are an integral part of these financial statements. 7 Table of Contents Pebblebrook Hotel Trust Consolidated Statements of Cash Flows (in thousands) (Unaudited) For the nine months ended September 30, 2024 2023 Operating activities: Net income (loss) $ 49,864 $ ( 32,346 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 172,051 179,598 Benefit for deferred income taxes ( 26,976 ) — Share-based compensation 10,084 9,231 Amortization of deferred financing costs, non-cash interest and other amortization 9,295 9,578 Gain on sale of hotel properties — ( 30,219 ) Impairment 1,908 71,416 Non-cash ground rent 7,385 7,426 Other adjustments ( 4,181 ) ( 7,348 ) Changes in assets and liabilities: Hotel receivables ( 16,866 ) ( 12,087 ) Prepaid expenses and other assets ( 13,899 ) ( 26,200 ) Accounts payable and accrued expenses 4,529 28,619 Deferred revenues 12,556 4,615 Net cash provided by (used in) operating activities 205,750 202,283 Investing activities: Improvements and additions to hotel properties ( 100,862 ) ( 140,057 ) Proceeds from sales of hotel properties — 224,384 Property insurance proceeds 21,737 14,361 Other investing activities ( 742 ) ( 2,414 ) Net cash provided by (used in) investing activities ( 79,867 ) 96,274 Financing activities: Payment of deferred financing costs ( 6,379 ) ( 2,423 ) Proceeds from debt — 140,000 Repayments of debt ( 111,377 ) ( 162,988 ) Repurchases of common shares ( 16,851 ) ( 92,753 ) Distributions — common shares/units ( 3,659 ) ( 3,756 ) Distributions — preferred shares/units ( 35,386 ) ( 36,455 ) Other financing activities ( 1,615 ) ( 840 ) Net cash provided by (used in) financing activities ( 175,267 ) ( 159,215 ) Net change in cash and cash equivalents and restricted cash ( 49,384 ) 139,342 Cash and cash equivalents and restricted cash, beginning of year 193,641 52,269 Cash and cash equivalents and restricted cash, end of period $ 144,257 $ 191,611 The accompanying notes are an integral part of these financial statements. 8 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, 2024, the Company owned interests in 46 hotels with a total of 11,933 gue st 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, 2024, 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, 2023. 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. 9 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. Global events as well as national and local events may impact travel trends and the operations of the Company's hotels. In addition, inflation and interest rates may also impact the overall economy as well as the availability of debt. 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 Disclosure Improvements In October 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative ("ASU 2023-06"). ASU 2023-06 incorporates 14 of the 27 disclosure requirements published in SEC Release No. 33-10532 - Disclosure Update and Simplification into various topics within the Accounting Standards Codification ("ASC"). ASU 2023-06's amendments represent clarifications to, or technical corrections of, current requirements. For SEC registrants, the effective date for each amendment will vary based on the date on which the SEC removes that related disclosure from its rules. If the SEC does not act to remove its related requirement by June 30, 2027, any related FASB amendments will be removed from the ASC and will not be effective. Early adoption is prohibited. The Company is currently assessing the potential impacts of ASU 2023-06 and does not expect it to have a material effect on its consolidated financial statements and disclosures. Segment Reporting In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements under ASU 2023-07 are also required for public entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. The Company is currently assessing the impacts of adopting ASU 2023-07 on its consolidated financial statements and disclosures. Income Taxes In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as information on income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied on a prospective basis, with the option to apply retrospectively. The Company is currently assessing the impacts of adopting ASU 2023-09 on its consolidated financial statements and disclosures. Stock Compensation In March 2024, the FASB issued ASU 2024-01, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards (“ASU 2024-01”), to clarify the scope application of profits interest and similar awards by adding illustrative guidance in ASC 718, Compensation—Stock Compensation ("ASC 718"). ASU 2024-01 clarifies how to determine whether profits interest and similar awards should be accounted for as a share-based payment arrangement (ASC 718) or as a cash bonus or profit-sharing arrangement (ASC 710, Compensation—General, or other guidance ) and applies to all reporting entities that account for profits interest awards as compensation to employees or non-employees. In addition to adding the illustrative guidance, ASU 2024-01 modified the language in paragraph 718-10-15-3 to improve its clarity and operability without changing the guidance. ASU 2024-01 is effective for fiscal years beginning after December 15, 2024, including interim periods within those annual periods. Early adoption is permitted. The amendments should be applied either retrospectively to all prior periods presented in the financial statements, or prospectively to profits interest and similar awards granted or modified on or after the adoption date. The Company is currently assessing the impacts of adopting ASU 2024-01 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, 2024. 10 Table of Contents Dispositions There were no dispositions of hotel properties during the nine months ended September 30, 2024. The following table summarizes disposition transactions during 2023 (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 Hotel Zoe Fisherman's Wharf San Francisco, CA November 14, 2023 68,500 Marina City Retail at Hotel Chicago Downtown, Autograph Collection Chicago, IL December 21, 2023 30,000 2023 Total $ 330,750 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 or held for sale. There was no impact for the three and nine months ended September 30, 2024. The sales of the hotel properties described above did not represent a strategic shift that had a major effect on the Company’s operations and financial results, and therefore, did not qualify as discontinued operations. Note 4. Investment in Hotel Properties Investment in hotel properties as of September 30, 2024 and December 31, 2023 consisted of the following (in thousands): September 30, 2024 December 31, 2023 Land $ 810,951 $ 810,633 Buildings and improvements 5,075,632 5,005,894 Furniture, fixtures and equipment 531,877 511,451 Finance lease asset 91,181 91,181 Construction in progress 15,826 27,123 $ 6,525,467 $ 6,446,282 Right-of-use asset, operating leases 353,552 360,761 Investment in hotel properties $ 6,879,019 $ 6,807,043 Less: Accumulated depreciation ( 1,478,579 ) ( 1,316,267 ) Investment in hotel properties, net $ 5,400,440 $ 5,490,776 Hurricane Ian On September 27, 2022, LaPlaya Beach Resort & Club ("LaPlaya") located in Naples, Florida, was impacted by the effects of Hurricane Ian. LaPlaya was closed in anticipation of the storm and required remediation and repairs from the damage and remained closed. In 2023, LaPlaya began reopening in stages as its buildings and facilities were repaired and repairs were substantially complete in the first quarter of 2024. The Company’s insurance policies provide coverage for property damage, business interruption and other costs that were incurred relating to damages sustained during Hurricane Ian. The Company has an insurance receivable for amounts it anticipates to collect from the insurance providers in excess of the applicable deductibles. For the nine months ended September 30, 2024 and 2023, the Company incurred $ 0.2 million and $ 5.1 million, respectively, 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, 2024, the Company received a total of $ 118.0 million in preliminary advances from the insurance providers. The Company continues to work with the insurance providers on the settlement of the property and business interruption claims. 11 Table of Contents Hurricane Helene On September 26, 2024, LaPlaya was impacted by the effects of Hurricane Helene. Two of its three guestroom buildings, Gulf Tower and Bay Tower, reopened and were operational. However, the Beach House was closed for repairs, with initial assessments indicating the primary impact was to the ground floor. The Company’s insurance policies provide coverage for property damage, business interruption and other costs that were incurred relating to damages sustained during Hurricane Helene in excess of the applicable deductibles. For the nine months ended September 30, 2024, the Company recognized a loss of $ 1.9 million for damage to LaPlaya, which is included in impairment on the Company’s consolidated statement of operations and comprehensive income. The Company recorded an insurance receivable for the remediation costs incurred and the estimate of the book value of the property and equipment written off in excess of the applicable deductibles. The Company is continuing to evaluate the financial impact of Hurricane Helene and its ability to recover, through insurance policies, any loss due to business interruption or damage to the hotel property. 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 nine months ended September 30, 2024, no impairment losses were incurred. During the 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. 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, 2024, the Company's lease liabilities consisted of operating lease liabilities of $ 320.7 million and financing lease liabilities of $ 43.8 million. As of December 31, 2023, the Company's lease liabilities consisted of operating lease liabilities of $ 320.6 million and financing lease liabilities of $ 43.4 million. The financing lease liabilities are included in accounts payable, accrued expenses and other liabilities on the Company's accompanying consolidated balance sheets. Note 5. Debt 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. On January 3, 2024, the Company entered into the First Amendment to the Credit Agreement which extended the maturity date of $ 356.7 million borrowed under Term Loan 2024 to January 2028. This extended indebtedness is referred to as Term Loan 2028. In connection with the extension, the Company also repaid $ 60.0 million of its borrowings under Term Loan 2024 with available cash. The remaining $ 43.3 million of Term Loan 2024's balance remained outstanding. On January 3, 2024, the Company also repaid $ 50.0 million of its outstanding Term Loan 2025 obligation with available cash. On October 3, 2024, the Company issued $ 400.0 million aggregate principal amount of its 6.375 % senior notes due October 15, 2029. The net proceeds were approximately $ 390.0 million after deducting discounts and offering expenses paid by the Company, of which $ 353.3 million was used to repay all $ 43.3 million of its borrowings under Term Loan 2024, $ 210.0 million of its borrowings under Term Loan 2025 and $ 100.0 million of its borrowings under Term Loan 2027. On November 1, 2024, the Company entered into the Third Amendment to the Credit Agreement which extended the maturity date of $ 185.2 million borrowed under Term Loan 2025 to January 2029. The Company also extended the maturity date of $ 602.0 million of its senior unsecured revolving credit facility from October 2026 to October 2028, with the option to extend the new maturity date for two six-month periods. 12 Table of Contents The Company's debt consisted of the following as of September 30, 2024 and December 31, 2023 (dollars in thousands): Balance Outstanding as of Interest Rate at September 30, 2024 Maturity Date September 30, 2024 December 31, 2023 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 7.05 % (1)(4) October 2024 43,348 460,000 Term Loan 2025 4.40 % (1) October 2025 410,000 460,000 Term Loan 2027 5.23 % (1) October 2027 460,000 460,000 Term Loan 2028 7.05 % (1) January 2028 356,652 — Term loan principal $ 1,270,000 $ 1,380,000 Convertible senior notes principal 1.75 % December 2026 $ 750,000 $ 750,000 Senior unsecured notes principal 4.93 % December 2025 $ 2,400 $ 2,400 Mortgage loans Margaritaville Hollywood Beach Resort 7.04 % (3) September 2026 140,000 140,000 Estancia La Jolla Hotel & Spa 5.07 % September 2028 56,120 57,497 Mortgage loans principal $ 196,120 $ 197,497 Total debt principal $ 2,218,520 $ 2,329,897 Unamortized debt premiums, discount and deferred financing costs, net ( 10,806 ) ( 10,096 ) Debt, net $ 2,207,714 $ 2,319,801 ______________________ (1) Borrowings bear interest at floating rates. Interest rate at September 30, 2024 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) This loan bears interest at a floating rate equal to daily SOFR plus a spread of 3.75 %. The interest rate at September 30, 2024 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. (4) Term Loan 2024 was repaid in October 2024 from proceeds of the senior notes offering. 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, 2024, the Company had no outstanding borrowings, $ 13.7 million of outstanding letters of credit and a borrowing capacity of $ 636.3 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. 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 $ 13.7 million and $ 13.6 million were outstanding as of September 30, 2024 and December 31, 2023, respectively. 13 Table of Contents As of September 30, 2024, 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, 2024, 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, 2024, 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 term loan facilities provided for in the Credit Agreement 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, 2024, 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, 2024 and December 31, 2023, 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, after December 20, 2023, upon certain circumstances. The redemption price will be equal to 100 % of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If certain make-whole fundamental changes occur, the conversion rate for the Convertible Notes may be increased. In connection with the Convertible Notes issuances, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the underwriters of the offerings of the Convertible Notes or their respective affiliates and other financial institutions. The Capped Call Transactions initially cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of common shares underlying the Convertible Notes. The Capped Call Transactions are expected generally to reduce the potential dilution to holders of common shares upon conversion of the Convertible Notes and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction and/or offset subject to a cap. The upper strike price of the Capped Call Transactions is $ 33.0225 per share. 14 Table of Contents Senior Unsecured Notes The Company has $ 2.4 million of senior unsecured notes outstanding bearing a fixed interest rate of 4.93 % per annum maturing in December 2025. The debt covenants of these notes are substantially similar to those of the Company's senior unsecured revolving credit facility. As of September 30, 2024, the Company was in compliance with all such debt covenants. Mortgage Loans 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. On September 7, 2023, the Company entered into a $ 140.0 million first-lien mortgage on the leasehold interest of Margaritaville Hollywood Beach Resort ("Margaritaville"), which 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. 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, 2024 and 2023 (in thousands): For the three months ended September 30, For the nine months ended September 30, 2024 2023 2024 2023 Unsecured revolving credit facilities $ 504 $ 504 $ 1,499 $ 1,570 Unsecured term loan facilities 18,239 18,777 56,366 53,750 Convertible senior notes 3,281 3,281 9,844 9,844 Senior unsecured notes 30 589 89 1,767 Mortgage debt 3,247 4,094 9,690 11,437 Amortization of deferred financing fees, (premiums) and discounts 1,541 2,755 6,149 6,486 Other 1,083 1,022 ( 1,352 ) 3,142 Total interest expense $ 27,925 $ 31,022 $ 82,285 $ 87,996 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, 2024 and December 31, 2023 was $ 711.0 million and $ 686.3 million, respectively. The fair value of the Company's variable rate debt approximates its carrying value . Derivative and Hedging Activities The Company enters into interest rate swap agreements to hedge against interest rate fluctuations. All of the Company's interest rate swaps are cash flow hedges. All unrealized gains and losses on these hedging instruments are reported in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. 15 Table of Contents The Company's interest rate swaps at September 30, 2024 and December 31, 2023 consisted of the following, by maturity date (dollars in thousands): Aggregate Notional Value as of Hedge Type Interest Rate Range (SOFR) Maturity September 30, 2024 December 31, 2023 Swap-cash flow 2.47 % - 2.50 % January 2024 $ — $ 300,000 Swap-cash flow 3.22 % - 3.25 % October 2025 200,000 200,000 Swap-cash flow 1.33 % - 1.36 % February 2026 290,000 290,000 Swap-cash flow 3.02 % - 3.03 % October 2026 200,000 200,000 Swap-cash flow 3.29 % October 2027 165,000 165,000 Total $ 855,000 $ 1,155,000 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, 2024, the Company's interest rate swap assets had an aggregate fair value of $ 11.3 million and its interest rate swap liabilities were immaterial. Interest rate swap assets are included in prepaid expenses and other assets and interest rate swap liabilities are included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. The Company expects approximately $ 10.5 million will be reclassified from accumulated other comprehensive income (loss) to interest expense within the next 12 months. Note 6. Revenue The Company presents revenue on a disaggregated basis in the accompanying consolidated statements of operations and comprehensive income. The following table presents revenues by geographic location for the three and nine months ended September 30, 2024 and 2023 (in thousands): For the three months ended September 30, For the nine months ended September 30, 2024 2023 2024 2023 San Diego, CA $ 101,639 $ 95,885 $ 258,117 $ 239,653 Boston, MA 77,605 75,650 203,483 194,908 Southern Florida/Georgia 46,390 43,174 196,281 173,183 Los Angeles, CA 49,574 51,303 142,382 144,445 San Francisco, CA 36,291 43,755 99,710 113,084 Portland, OR 25,574 24,538 60,101 61,510 Chicago, IL 25,513 22,233 57,033 57,036 Washington, D.C. 16,432 16,522 53,336 51,326 Seattle, WA — — — 5,551 Other (1) 25,512 22,739 45,266 45,165 Total Revenues $ 404,530 $ 395,799 $ 1,115,709 $ 1,085,861 ______________________ (1) Other includes: Newport, RI and Santa Cruz, CA . Payments from customers are primarily made when services are provided. Due to the short-term nature of the Company's contracts and the almost simultaneous receipt of payment, almost all of the contract liability balance at the beginning of the period is expected to be recognized as revenue over the following 12 months. Note 7. Equity Common Shares The Company is authorized to issue up to 500,000,000 common shares. Each outstanding common share entitles the holder to one vote on each matter submitted to a vote of shareholders. Holders of common shares are entitled to receive dividends when authorized by the Board of Trustees. 16 Table of Contents 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 repurchase 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, 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. During the nine months ended September 30, 2024, the Company repurchased 1,127,255 common shares for an aggregate purchase price of $ 15.0 million, or an average of approximately $ 13.31 per share. As of September 30, 2024, $ 131.0 million of common shares remained available for repurchase under this program. Common Dividends The Company declared the following dividends on common shares/units for the nine months ended September 30, 2024: Dividend per Share/Unit For the Quarter Ended Record Date Payable Date $ 0.01 March 31, 2024 March 29, 2024 April 15, 2024 $ 0.01 June 30, 2024 June 28, 2024 July 15, 2024 $ 0.01 September 30, 2024 September 30, 2024 October 15, 2024 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, 2024 and December 31, 2023: Security Type September 30, 2024 December 31, 2023 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 8,000,000 8,000,000 27,600,000 27,600,000 The Series E, Series F, Series G and Series H Cumulative Redeemable Preferred Shares (collectively, the “Preferred Shares”) rank senior to the common shares and on parity with each other with respect to payment of distributions. The Preferred Shares do not have any maturity date and are not subject to mandatory redemption. The Company may redeem the Series E and Series F Preferred Shares at any time. The Series G and Series H Preferred Shares may not be redeemed prior to May 13, 2026 and July 27, 2026, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. On or after such dates, the Company may, at its option, redeem the Preferred Shares, in each case in whole or from time to time in part, by payment of $ 25.00 per share, plus any accumulated, accrued and unpaid distributions through the date of redemption. Upon the occurrence of a change of control, as defined in the Company's declaration of trust, the result of which the common shares and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE 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 share 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 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. 17 Table of Contents During the nine months ended September 30, 2024, no Preferred Shares were repurchased under this program. As of September 30, 2024, $ 84.2 million of Preferred Shares remained available for repurchase under this program. 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 Preferred Shares. The program does not have an expiration date and may be suspended, modified or discontinued at any time. Preferred Dividends The Company declared the following dividends on preferred shares for the nine months ended September 30, 2024: Security Type Dividend per Share/Unit For the Quarter Ended Record Date Payable Date 6.375 % Series E $ 0.40 March 31, 2024 March 29, 2024 April 15, 2024 6.375 % Series E $ 0.40 June 30, 2024 June 28, 2024 July 15, 2024 6.375 % Series E $ 0.40 September 30, 2024 September 30, 2024 October 15, 2024 6.30 % Series F $ 0.39 March 31, 2024 March 29, 2024 April 15, 2024 6.30 % Series F $ 0.39 June 30, 2024 June 28, 2024 July 15, 2024 6.30 % Series F $ 0.39 September 30, 2024 September 30, 2024 October 15, 2024 6.375 % Series G $ 0.40 March 31, 2024 March 29, 2024 April 15, 2024 6.375 % Series G $ 0.40 June 30, 2024 June 28, 2024 July 15, 2024 6.375 % Series G $ 0.40 September 30, 2024 September 30, 2024 October 15, 2024 5.70 % Series H $ 0.36 March 31, 2024 March 29, 2024 April 15, 2024 5.70 % Series H $ 0.36 June 30, 2024 June 28, 2024 July 15, 2024 5.70 % Series H $ 0.36 September 30, 2024 September 30, 2024 October 15, 2024 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. In December 2023, these OP units were redeemed for common shares on a one -for-one basis. 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, 2024 and December 31, 2023, the Operating Partnership had 16,291 OP units held by third parties, excluding LTIP units. As of September 30, 2024, 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 executive officers. On February 15, 2024, the Board of Trustees granted 136,353 LTIP Class B units to executive officers. As of September 30, 2024, the Operating Partnership had 994,837 LTIP units outstanding, of which 470,920 LTIP units have vested. As of December 31, 2023, the Operating Partnership had 858,484 LTIP units outstanding, of which 277,136 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. 18 Table of Contents 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, 2024, 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, 2024, there were 1,177,236 common shares available for issuance under the Plan. 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 during the nine months ended September 30, 2024: Shares Weighted-Average Grant Date Fair Value Unvested at December 31, 2023 443,549 $ 19.88 Granted 139,134 $ 16.11 Vested ( 171,508 ) $ 21.20 Forfeited ( 3,127 ) $ 15.69 Unvested at September 30, 2024 408,048 $ 18.07 For the three and nine months ended September 30, 2024, 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, 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. Performance-Based Equity Awards On February 15, 2024, the Board of Trustees approved a target award of 322,950 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2027. The actual number of common shares that ultimately vest will be from 0 % to 200 % of the target award and will be determined in 2027 based on the performance criteria defined in the award agreements for the period of performance from January 1, 2024 through December 31, 2026. For the three and nine months ended September 30, 2024, the Company recognized approximately $ 1.5 million and $ 4.4 million, respectively, of share-based compensation expense related to performance-based equity awards in the accompanying consolidated statements of operations and comprehensive income. For the three and nine months ended September 30, 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. Long-Term Incentive Partnership Units As of September 30, 2024, 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. 19 Table of Contents On February 15, 2024, the Board of Trustees granted 136,353 LTIP Class B units to executive officers. These LTIP units will vest ratably on January 1, 2025, 2026 and 2027, 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 $ 16.13 per unit with an aggregate grant date fair value of $ 2.2 million. As of September 30, 2024, the Operating Partnership had 994,837 LTIP units outstanding, of which 470,920 LTIP units have vested. As of December 31, 2023, the Operating Partnership had 858,484 LTIP units outstanding, of which 277,136 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, 2024, the Company recognized approximately $ 1.1 million and $ 3.1 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. 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. 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 As a REIT, the Company generally is not subject to federal corporate income taxes on the portion of its taxable income that is distributed to shareholders. However, the Company is still subject to certain state and local taxes on its revenues, income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income of TRSs, including PHL, is subject to federal, state and local corporate income taxes at statutory tax rates. A valuation allowance on deferred tax assets is recorded when the Company has determined it more likely than not that future results will not generate sufficient taxable income to realize the deferred tax assets for each jurisdiction. The Company evaluates its deferred tax assets each reporting period to determine if it is more likely than not that those assets will be realized or if a valuation allowance is needed. During the third quarter of 2024, due to continued improvement in the Company's financial results coming out of the COVID-19 pandemic and the projected future taxable income of its TRS, the Company determined that the release of a significant portion of its federal and state valuation allowance was appropriate and was recorded as an income tax benefit in the consolidated statement of operations. The release of the valuation allowance of $ 32.8 million is partially offset by current income tax expense of $ 7.6 million and $ 8.7 million for the three and nine months ended September 30, 2024, respectively. 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, 2024 and December 31, 2023, the statute of limitations remains open for all major jurisdictions for tax years dating back to 2021 and 2020, respectively. 20 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, 2024 2023 2024 2023 Numerator: Net income (loss) attributable to common shareholders $ 33,026 $ ( 68,130 ) $ 14,349 $ ( 68,308 ) Less: Dividends paid on unvested share-based compensation ( 9 ) ( 10 ) ( 28 ) ( 31 ) Less: Undistributed earnings attributable to share-based compensation ( 247 ) — ( 83 ) — Net income (loss) available to common shareholders — basic $ 32,770 $ ( 68,140 ) $ 14,238 $ ( 68,339 ) Plus: Interest expense on convertible notes 3,281 — — — Net income (loss) available to common shareholders — diluted $ 36,051 $ ( 68,140 ) $ 14,238 $ ( 68,339 ) Denominator: Weighted-average number of common shares — basic 119,640,463 120,057,744 119,938,931 122,394,293 Effect of dilutive share-based compensation 270,228 — 428,420 — Effect of dilutive convertible notes 29,441,175 — — — Weighted-average number of common shares — diluted 149,351,866 120,057,744 120,367,351 122,394,293 Net income (loss) per share available to common shareholders — basic $ 0.27 $ ( 0.57 ) $ 0.12 $ ( 0.56 ) Net income (loss) per share available to common shareholders — diluted $ 0.24 $ ( 0.57 ) $ 0.12 $ ( 0.56 ) For the three and nine months ended September 30, 2024, 467,452 and 157,010 , respectively, 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, 1,110,184 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 nine months ended September 30, 2024, 29,441,175 common shares underlying the Convertible Notes were excluded from diluted shares as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2023, 29,441,175 common shares underlying the Convertible Notes were 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 10 years, not including renewals, and up to 28 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. 21 Table of Contents For the three and nine months ended September 30, 2024, combined base and incentive management fees were $ 11.8 million and $ 31.0 million, respectively. 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. 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, 2024 and December 31, 2023, the Company had $ 10.3 million and $ 9.9 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, 2024, 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 Harbor Court Hotel San Francisco Finance lease August 2052 Hotel Monaco Washington DC Operating lease November 2059 Argonaut Hotel Operating lease December 2059 Hotel Zephyr Fisherman's Wharf and Retail 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 Zeppelin San Francisco Operating and finance lease June 2089 (4) 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 ______________________ (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. 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. 22 Table of Contents The components of ground rent expense for the three and nine months ended September 30, 2024 and 2023 are as follows (in thousands): For the three months ended September 30, For the nine months ended September 30, 2024 2023 2024 2023 Fixed ground rent $ 4,795 $ 4,795 $ 14,387 $ 14,359 Variable ground rent 6,327 6,362 15,390 15,481 Total ground rent $ 11,122 $ 11,157 $ 29,777 $ 29,840 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, 2024 2023 Interest paid, net of capitalized interest $ 76,703 $ 74,111 Interest capitalized $ 4,710 $ — Income taxes paid (refunded) $ 2,043 $ ( 2,612 ) Non-Cash Investing and Financing Activities: Distributions payable on common shares/units $ 1,256 $ 1,255 Distributions payable on preferred shares/units $ 10,601 $ 10,902 Issuance of common shares for Board of Trustees compensation $ 745 $ 754 Accrued additions and improvements to hotel properties $ 4,500 $ 5,526 Write-off of fully amortized deferred financing costs $ 682 $ 630 23 Table of Contents