Pebblebrook Hotel Trust 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Pebblebrook Hotel Trust is a Maryland real estate investment trust that conducts its operations so as to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Substantially all of the operations are conducted through Pebblebrook Hotel, L.P. (our "Operating Partnership"), a Delaware limited partnership of which Pebblebrook Hotel Trust is the sole general partner. In this report, we use the terms "the Company", "we" or "our" to refer to Pebblebrook Hotel Trust and its subsidiaries and "hotels" and "hotel properties" to refer to hotels and resorts, unless the context indicates otherwise. FORWARD-LOOKING STATEMENTS This report, together with other statements and information publicly disseminated by us, contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may", "will", "should", "potential", "could", "seek", "assume", "forecast", "believe", "expect", "intend", "anticipate", "estimate", "project" or similar expressions. Forward-looking statements in this report include, among others, statements about our business strategy, including acquisition and development strategies, industry trends, estimated revenues and expenses, estimated costs and durations of renovation or restoration projects, timing and extent of debt refinancings, estimated insurance recoveries, our ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and our ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. These factors include, but are not limited to, the following: • risks associated with the hotel industry, including competition, changes in visa and other travel policies by the U.S. government making it less convenient, more difficult or less desirable for international travelers to enter the U.S., increases in employment costs, energy costs and other operating costs, or decreases in demand caused by events beyond our control, including, without limitation, actual or threatened terrorist attacks, natural disasters, cyber attacks, any type of flu or disease-related pandemic, or downturns in general and local economic conditions; • world events impacting the ability or desire of people to travel may lead to a decline in demand for hotels; • the availability and terms of financing and capital and the general volatility of securities markets; • our dependence on third-party managers of our hotels, including our inability to implement strategic business decisions directly; • risks associated with the U.S. and global economies, the cyclical nature of hotel properties and the real estate industry, including environmental contamination and costs of complying with new or existing laws, including the Americans with Disabilities Act and similar laws; • interest rate increases; • our possible failure to qualify as a REIT under the Code and the risk of changes in laws affecting REITs; • the timing and availability of potential hotel acquisitions, our ability to identify and complete hotel acquisitions and our ability to complete hotel dispositions in accordance with our business strategy; • the possibility of uninsured losses; • risks associated with redevelopment and repositioning projects, including delays and cost overruns; and • the other factors discussed under Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2024. Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. 22 Table of Contents Overview Our first quarter operating results showed continuing gains in occupancy and ancillary revenue at our resorts and recently redeveloped properties. Our urban properties experienced a decline in total revenue per available room primarily as a result of the reduced travel to Los Angeles due to the wildfires and the renovation and brand conversion of Hyatt Centric Delfina Santa Monica. Our Washington D.C. properties benefited from the inauguration and San Francisco generated strong results driven by a positive convention calendar and rising business demand. With uncertainty around the impact of trade policy and broader economic conditions on business and international inbound travel, near-term forecasting has become more challenging. We remain focused on proactive revenue generation efforts and expense management. During the three months ended March 31, 2025, we had the following transactions and events: • We repurchased 1,186,797 common shares for an aggregate purchase price of $13.3 million, or an average of $11.23 per share, under our existing common share repurchase program. While we do not operate our hotel properties, both our asset management team and our executive management team monitor and work cooperatively with our hotel managers by advising and making recommendations in all aspects of our hotels’ operations, including property positioning and repositioning, revenue and expense management, operations analysis, physical design, renovation and capital improvements, guest experience and overall strategic direction. Through these efforts, we seek to improve property efficiencies, lower costs, maximize revenues and enhance property operating margins, which we expect will enhance returns to our shareholders. Key Indicators of Financial Condition and Operating Performance We measure hotel results of operations and the operating performance of our business by evaluating financial and non-financial metrics such as room revenue per available room ("RevPAR"); total revenue per available room ("Total RevPAR"); average daily rate ("ADR"); occupancy rate ("Occupancy"); funds from operations ("FFO"); Adjusted FFO; earnings before interest, income taxes, depreciation and amortization ("EBITDA"); and EBITDA for real estate ("EBITDA re " ); Adjusted EBITDA re ; and hotel-level EBITDA ("Hotel EBITDA"). We evaluate individual hotel and company-wide performance with comparisons to budgets, prior periods and competing properties. ADR, occupancy and RevPAR may be impacted by macroeconomic factors as well as regional and local economies and events. See Non-GAAP Financial Measures for further discussion of FFO, Adjusted FFO, EBITDA, EBITDA re, Adjusted EBITDA re and Hotel EBITDA. Hotel Operating Statistics The following table represents the key same-property hotel operating statistics for our hotels for the three months ended March 31, 2025 and 2024: For the three months ended March 31, 2025 2024 Same-Property Occupancy 61.9 % 61.1 % Same-Property ADR $ 301.48 $ 305.47 Same-Property RevPAR $ 186.57 $ 186.58 Same-Property Total RevPAR $ 301.22 $ 295.04 For the three months ended March 31, 2025 and 2024, the above table of hotel operating statistics includes information from all hotels owned as of March 31, 2025, except for Newport Harbor Island Resort due to its redevelopment. Non-GAAP Financial Measures Non-GAAP financial measures are measures of our historical or future financial performance that are different from measures calculated and presented in accordance with U.S. GAAP. We report FFO, Adjusted FFO, EBITDA, EBITDA re , Adjusted EBITDA re and Hotel EBITDA, which are non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance. 23 Table of Contents We calculate FFO in accordance with standards established by Nareit, formerly known as the National Association of Real Estate Investment Trusts, which defines FFO as net income (calculated in accordance with U.S. GAAP), excluding real estate related depreciation and amortization, gains (losses) from sales of real estate, impairments of real estate assets (including impairment of real estate related joint ventures), the cumulative effect of changes in accounting principles and adjustments for unconsolidated affiliates. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. By excluding the effect of real estate related depreciation and amortization including our share of the joint venture depreciation and amortization, gains (losses) from sales of real estate and impairments of real estate assets (including impairment of real estate related joint ventures), all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance, we believe that FFO provides investors a useful financial measure to evaluate our operating performance. Adjusted FFO is defined as FFO, as adjusted for transaction costs, non-cash ground rent on operating and capital leases, management/franchise contract transition costs, interest expense adjustment for acquired liabilities, finance lease adjustment, non-cash amortization of acquired intangibles, gain on insurance settlement, early extinguishment of debt, amortization of share-based compensation expense, issuance costs of redeemed preferred shares, hurricane-related costs, non-cash interest expense and deferred tax asset provision (benefit). We believe Adjusted FFO provides useful supplemental information regarding our ongoing operating performance. The following table reconciles net income (loss) to FFO, FFO available to common share and unit holders and Adjusted FFO available to common share and unit holders for the three months ended March 31, 2025 and 2024 (in thousands): For the three months ended March 31, 2025 2024 Net income (loss) $ (32,180) $ (27,520) Adjustments: Real estate depreciation and amortization 57,487 57,126 FFO $ 25,307 $ 29,606 Distribution to preferred shareholders and unit holders (11,795) (11,795) FFO available to common share and unit holders $ 13,512 $ 17,811 Transaction costs 2 4 Non-cash ground rent on operating and capital leases 1,839 1,873 Management/franchise contract transition costs 5 44 Interest expense adjustment for acquired liabilities 324 263 Finance lease adjustment 755 745 Non-cash amortization of acquired intangibles (472) (482) Early extinguishment of debt — 1,534 Amortization of share-based compensation expense 3,219 3,060 Hurricane-related costs — 150 Deferred tax provision (benefit) (3,105) — Unrealized loss on investment 2,662 — Adjusted FFO available to common share and unit holders $ 18,741 $ 25,002 EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. We calculate EBITDA re in accordance with standards established by Nareit. EBITDA re is defined as EBITDA as adjusted for gain on sale of hotel properties and impairment loss. Adjusted EBITDA re is defined as EBITDA re , as adjusted for transaction costs, non-cash ground rent on operating and capital leases, management/franchise contract transition costs, non-cash amortization of acquired intangibles, gain on insurance settlement, amortization of share-based compensation expense and hurricane-related costs. Hotel EBITDA is defined as Adjusted EBITDA re plus corporate general and administrative expenses less interest income, business interruption insurance income and other. We believe that EBITDA, EBITDA re , Adjusted EBITDA re and Hotel EBITDA provide investors useful financial measures to evaluate our operating performance, excluding the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization). 24 Table of Contents The following table reconciles net income (loss) to EBITDA, EBITDA re , Adjusted EBITDA re and Hotel EBITDA for the three months ended March 31, 2025 and 2024 (in thousands): For the three months ended March 31, 2025 2024 Net income (loss) $ (32,180) $ (27,520) Adjustments: Interest expense 27,133 26,421 Income tax expense (benefit) (3,162) 46 Depreciation and amortization 57,543 57,209 EBITDA and EBITDA re $ 49,334 $ 56,156 Transaction costs 2 4 Non-cash ground rent on operating and capital leases 1,839 1,873 Management/franchise contract transition costs 5 44 Non-cash amortization of acquired intangibles (472) (482) Amortization of share-based compensation expense 3,219 3,060 Hurricane-related costs — 150 Unrealized loss on investment 2,662 — Adjusted EBITDA re $ 56,589 $ 60,805 Business interruption insurance income (4,303) (3,980) Corporate general and administrative and other 8,541 9,279 Hotel EBITDA $ 60,827 $ 66,104 FFO, Adjusted FFO, EBITDA, EBITDA re , Adjusted EBITDA re and Hotel EBITDA do not represent cash generated from operating activities as determined by U.S. GAAP and should not be considered as alternatives to U.S. GAAP net income (loss), as indications of our financial performance, or to U.S. GAAP cash flow from operating activities, as measures of liquidity. In addition, FFO, Adjusted FFO, EBITDA, EBITDA re , Adjusted EBITDA re and Hotel EBITDA are not indicative of funds available to fund cash needs, including the ability to make cash distributions. Results of Operations At March 31, 2025 and 2024, our consolidated financial statements included the operations of 46 hotel properties, which have been included in our results of operations during the respective periods since their dates of acquisition or through their dates of disposition. Based on when a property was acquired or disposed of, operating results for certain properties are not comparable for the three months ended March 31, 2025 and 2024. As there were no properties acquired or disposed in 2025 or 2024, there were no "non-comparable properties" for the periods indicated. Comparison of the three months ended March 31, 2025 to the three months ended March 31, 2024 Revenues — Total revenues increased by $6.2 million primarily due to an increase at LaPlaya Beach Resort & Club, where the Beach House was closed in 2024 due to hurricane damage and substantially reopened in 2025, at Estancia La Jolla Hotel & Spa which was under renovation in 2024 and at Newport Harbor Island Resort which was closed for renovation in 2024. This increase was partially offset by lower revenue at Hyatt Centric Delfina Santa Monica which continued to ramp up from the brand conversion to Hyatt as well as the rooms renovation which was a part of this conversion. Hotel operating expenses — Total hotel operating expenses increased by $11.2 million primarily due to increased operations at LaPlaya Beach Resort & Club, Estancia La Jolla Hotel & Spa and Newport Harbor Island Resort, as well as an increase in wage rates and benefits at many of the properties. Depreciation and amortization — Depreciation and amortization expense increased by $0.3 million which is consistent with 2024. Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent increased by $0.9 million due to slightly higher property insurance premiums. General and administrative — General and administrative expenses increased by $1.0 million primarily due to an increase in legal costs in 2025. General and administrative expenses consist of employee compensation costs, legal and professional fees, insurance and other expenses. Business interruption insurance income — We recognized business interruption insurance income in 2025 and 2024 related to partial settlements with our insurance carriers for lost income at LaPlaya Beach Resort & Club. Other operating expenses — Other operating expenses decreased by $1.0 million primarily due to lower preopening and management transition costs. 25 Table of Contents Interest expense — Interest expense increased by $0.7 million due to interest being capitalized related to our Newport Harbor Island Resort renovation in 2024 and no interest capitalized in 2025 which was offset by lower interest rates in 2025. Other — Other changed from income of $0.3 million in the first quarter of 2024 to a loss of $1.0 million as a result of the partial write-down of the Company's investment in Fifth Wall Late-Stage Climate Technology Fund, L.P., offset by higher interest income in 2025 due to higher excess cash balances. Income tax (expense) benefit — The income tax benefit in 2025 was a result of a loss on Pebblebrook Hotel Lessee, Inc. in the first quarter of 2025. In the first quarter of 2024, the Company recorded a valuation allowance offsetting the income tax benefit. Non-controlling interests — Non-controlling interests represents the allocation of income or loss of the Operating Partnership to third-party common OP unit holders and to the preferred OP unit holders. Critical Accounting Policies Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024. New Accounting Pronouncements See Note 2. Summary of Significant Accounting Policies to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for recently issued accounting pronouncements that may affect us. Liquidity and Capital Resources Our primary sources of liquidity are cash provided by our operations, borrowings under our credit facilities, net proceeds from equity and debt offerings, and net proceeds from property sales. Our primary cash requirements in the short term (i.e., those requiring cash on or before March 31, 2026) will be to fund property lease obligations, interest and current principal on debt, capital improvements, dividends on common and preferred shares, and working capital of our property operations. We believe our cash and cash equivalents, restricted cash and the amount available on our senior unsecured revolving credit facility, which totaled $860.8 million as of March 31, 2025, along with cash generated from ongoing operations will be sufficient to satisfy our short-term cash requirements. As of March 31, 2025, we had no off-balance sheet arrangements. In order to maintain our qualification as a REIT, we must pay dividends to our shareholders of at least 90% of our taxable income. As a result of this requirement, we cannot rely on retained earnings to fund long-term liquidity requirements such as hotel property acquisitions, redevelopments and repayments of long-term debt. As such, we expect to continue to raise capital through equity and debt offerings to fund our growth. Our material cash requirements include the following contractual and other obligations. Debt Our outstanding debt consisted of floating- and fixed-rate unsecured term loans, convertible senior notes, senior unsecured notes and mortgage loans with varying maturities. Our total debt had an aggregate face value of $2.3 billion as of March 31, 2025, as summarized below: March 31, 2025 (in thousands) Revolving credit facilities $ — Term loans 916,652 Convertible senior notes 750,000 Senior unsecured notes 402,400 Mortgage loans 194,864 Total debt at face value $ 2,263,916 For further discussion on the components of our debt, see Note 5. Debt to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 26 Table of Conte nts We have the option to extend certain of our current debt maturities with the payment of extension fees. Assuming we exercise all extension options available in our debt agreements, we expect that future principal and interest payments associated with our remaining debt obligations outstanding as of March 31, 2025 will be $2.6 billion through their maturity, with $19.4 million of principal and $98.7 million of interest payable on or before March 31, 2026. We intend to pay amounts due with available cash, borrowings under our revolving credit facility, proceeds from property sales and/or to refinance amounts due with long-term debt. We are in compliance with all covenants governing our existing credit facilities, term loans, senior note facilities and mortgage loans. Our mortgage loans contain customary provisions regarding events of default, as well as customary cash management, cash trap and lockbox provisions. Cash trap provisions may be triggered if the hotel's performance is below a certain threshold. Once triggered, all of the cash flow generated by the hotel is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our lender. As of March 31, 2025, none of the mortgage loans were in a cash trap. Long-term operating and finance lease obligations Our properties that are subject to long-term operating or finance leases, as noted in Note 11. Commitments and Contingencies to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, may require minimum fixed rent payments, percentage rent payments based on a percentage of revenues in excess of certain thresholds or rent payments equal to the greater of a minimum fixed rent or percentage rent. Minimum fixed rent may be adjusted annually by increases in consumer price index ("CPI") and may be subject to minimum and maximum increases. Future fixed minimum payments associated with our long-term operating and finance leases total $1.8 billion as of March 31, 2025, with $23.5 million payable on or before March 31, 2026. Purchase commitments As of March 31, 2025, we had $5.0 million of outstanding purchase commitments, all of which will be paid on or before March 31, 2026. These purchase commitments represent outstanding purchase orders and contracts that have been executed for capital and renovation projects at our properties. See Capital Investments for discussion on planned capital investments. Preferred dividends and Series Z preferred operating partnership units We expect to pay aggregate annual dividends and distributions of approximately $47.2 million on our outstanding Series E, Series F, Series G and Series H Cumulative Redeemable Preferred Shares and Series Z Cumulative Perpetual Preferred Units on or before March 31, 2026 and in future years until the shares/units are redeemed. For further discussion on our preferred shares and preferred units, see Note 7. Equity to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Sources and Uses of Cash Our principal sources of cash are cash from operations, draws on our credit facilities, net proceeds from equity and debt offerings, and net proceeds from property sales. Our principal uses of cash are asset acquisitions, debt service payments, the redemption of equity securities, capital investments, operating costs, corporate expenses and dividends. Operating Activities. Our net cash provided by operating activities was $50.3 million for the three months ended March 31, 2025 and $46.0 million for the three months ended March 31, 2024. Fluctuations in our net cash provided by (used in) operating activities are primarily the result of changes in hotel revenues, operating cash requirements and corporate expenses. Investing Activities. Our net cash used in investing activities was $20.9 million for the three months ended March 31, 2025 and $38.5 million for the three months ended March 31, 2024. Fluctuations in our net cash provided by (used in) investing activities are primarily the result of capital improvements and additions to our properties. • During the three months ended March 31, 2025, we invested $20.7 million in improvements to our hotel properties. • During the three months ended March 31, 2024, we invested $49.5 million in improvements to our hotel properties and received $11.5 million in property insurance proceeds. Financing Activities. Our net cash used in financing activities was $28.9 million for the three months ended March 31, 2025 and $136.2 million for the three months ended March 31, 2024. Fluctuations in our net cash provided by (used in) financing activities are primarily the result of our issuance and repurchase of debt and equity securities and distributions paid on our preferred and common shares. • During the three months ended March 31, 2025, we repaid $0.5 million in debt, repurchased $14.6 million of common shares through our common share repurchase program and for tax withholding purposes in connection with vestings of share-based equity awards and paid $13.0 million in preferred and common distributions. 27 Table of Conte nts • During the three months ended March 31, 2024, we repaid $110.3 million in debt, repurchased $6.9 million of common shares through our common share repurchase program and for tax withholding purposes in connection with vestings of share-based equity awards, paid $5.5 million in deferred financing costs and paid $13.0 million in preferred and common distributions. Capital Investments We maintain and intend to continue maintaining all of our hotels in good repair and condition, in conformity with applicable laws and regulations, in accordance with franchisor standards when applicable and in accordance with agreed-upon requirements in our management agreements. Routine capital investments will be administered by the hotel management companies. However, we maintain approval rights over the capital investments as part of the annual budget process and as otherwise required from time to time. Certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guest rooms, meeting space and restaurants, in order to better compete with other hotels in our markets. In addition, after we acquire a hotel property, we are often required by the franchisor or brand manager, if any, to complete a property improvement plan ("PIP") in order to bring the hotel property up to the franchisor’s or brand’s standards. Generally, we expect to fund renovations and improvements with available cash, restricted cash, borrowings under our credit facility or proceeds from new debt or equity offerings. For the three months ended March 31, 2025, we invested $20.7 million in capital investments (or $16.7 million excluding the repair and remediation of LaPlaya Beach Resort & Club) to reposition and improve our properties, including the renovations of Hyatt Centric Delfina Santa Monica, Skamania Lodge, Argonaut Hotel and Paradise Point Resort & Spa. Depending on market conditions, and in some instances subject to approval from governmental authorities, we expect to invest a total of $65.0 million to $75.0 million in capital investments in 2025, which includes normal hotel capital refurbishments and repositioning projects at Hyatt Centric Delfina Santa Monica, Paradise Point Resort & Spa, Chaminade Resort & Spa and Argonaut Hotel and excludes capital expenditures related to the repair and remediation of LaPlaya Beach Resort & Club. Common Share Repurchase Programs and Preferred Share Repurchase Program Common Share Repurchase Programs On February 17, 2023, our Board of Trustees authorized a share repurchase program of up to $150.0 million of common shares. Under this program, we may repurchase common shares from time to time in transactions on the open market or by private agreement. We may suspend or discontinue this program at any time. Repurchased common shares cease to be outstanding and become authorized but unissued common shares. During the three months ended March 31, 2025, we repurchased 1,186,797 common shares for an aggregate purchase price of $13.3 million, or an average of approximately $11.23 per share. As of March 31, 2025, $117.6 million of common shares remained available for repurchase under this program. The timing, manner, price and amount of any repurchases will be determined by us in our discretion and will depend on a variety of factors, including legal requirements, price, liquidity and economic considerations, and market conditions. The program does not require us to repurchase any specific number of common shares. The program does not have an expiration date and may be suspended, modified or discontinued at any time. Preferred Share Repurchase Program On February 17, 2023, our Board of Trustees authorized a share repurchase program of up to $100.0 million of preferred shares. Under the terms of the program, we may repurchase up to an aggregate of $100.0 million of our 6.375% Series E Cumulative Redeemable Preferred Shares, 6.30% Series F Cumulative Redeemable Preferred Shares, 6.375% Series G Cumulative Redeemable Preferred Shares and 5.70% Series H Cumulative Redeemable Preferred Shares from time to time in transactions on the open market or by private agreement. During the three months ended March 31, 2025, no preferred shares were repurchased under this program. As of March 31, 2025, $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 us in our discretion and will depend on a variety of factors, including legal requirements, price, liquidity and economic considerations, and market conditions. The program does not require us to repurchase any specific number of preferred shares. The program does not have an expiration date and may be suspended, modified or discontinued at any time. 28 Table of Conte nts Inflation We rely on the performance of the hotels to increase revenues to keep pace with inflation. Generally, our hotel operators possess the ability to adjust room rates daily, except for group or corporate rates contractually committed to in advance, although competitive pressures may limit the ability of our operators to raise rates faster than inflation or even at the same rate. Seasonality Demand in the lodging industry is affected by recurring seasonal patterns which are greatly influenced by overall economic cycles, geographic locations, weather and customer mix at the hotels. Generally, our hotels have lower revenue, operating income and cash flow in the first quarter of each year and higher revenue, operating income and cash flow in the third quarter of each year. Derivative Instruments In the normal course of business, we are exposed to the effects of interest rate changes. We may enter into derivative instruments including interest rate swaps, caps and collars to manage or hedge interest rate risk. Derivative instruments are subject to fair value reporting at each reporting date and the increase or decrease in fair value is recorded in net income (loss) or accumulated other comprehensive income (loss), based on the applicable hedge accounting guidance. Derivatives expose the Company to credit risk in the event of non-performance by the counter parties under the terms of the interest rate hedge agreements. We believe we minimize the credit risk by transacting with major credit-worthy financial institutions. As of March 31, 2025, we have interest rate swap agreements with an aggregate notional amount of $855.0 million to hedge variable interest rates on our unsecured term loans. We have designated these pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges. For a further discussion of our derivative instruments, see Note 5. Debt to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.