PEBBLEBROOK HOTEL TRUST 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 aMaryland 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 throughPebblebrook Hotel, L.P. (our "Operating Partnership"), aDelaware limited partnership of whichPebblebrook Hotel Trust is the sole general partner. In this report, we use the terms "the Company", "we" or "our" to refer toPebblebrook Hotel Trust and its subsidiaries, unless the context indicates otherwise. FORWARD-LOOKING STATEMENTS This report, together with other statements and information publicly disseminated by us, contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may", "will", "should", "potential", "could", "seek", "assume", "forecast", "believe", "expect", "intend", "anticipate", "estimate", "project" or similar expressions. Forward-looking statements in this report include, among others, statements about our business strategy, including acquisition and development strategies, industry trends, estimated revenues and expenses, estimated costs and durations of renovation or restoration projects, estimated insurance recoveries, our ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and our ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. These factors include, but are not limited to, the following: •the COVID-19 pandemic has had, and is expected to continue to have, a significant impact on our financial condition and operations, which impacts our ability to obtain acceptable financing to fund resulting reductions in cash from operations. The current and uncertain future impact of the COVID-19 pandemic, including its effect on the ability or desire of people to travel, is expected to continue to impact our results, operations, outlooks, plans, goals, growth, reputation, cash flows, liquidity, and share price; •as a result of the COVID-19 pandemic, we have suspended operations at most of our hotels and resorts, and if we are unable to recommence operations in the near-term, we may become out of compliance with maintenance covenants in certain of our debt facilities; •world events impacting the ability or desire of people to travel may lead to a decline in demand for hotels; •risks associated with the hotel industry, including competition, changes in visa and other travel policies by theU.S. government making it less convenient, more difficult or less desirable for international travelers to enter theU.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, cyber attacks, any type of flu or disease-related pandemic, or downturns in general and local economic conditions; •the availability and terms of financing and capital and the general volatility of securities markets; •our dependence on third-party managers of our hotels, including our inability to implement strategic business decisions directly; •risks associated with the global economy and real estate industry, including environmental contamination and costs of complying with 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 and our ability to identify and complete hotel acquisitions or 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 the heading "Risk Factors" in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 29 -------------------------------------------------------------------------------- Table of Contents Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Overview InMarch 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19") to be a global pandemic and the virus has continued to spread throughoutthe United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand was nearly eliminated. Following the government mandates and health official recommendations, we temporarily suspended operations at a majority of our hotels and resorts and dramatically reduced staffing and expenses at the hotels that remain operational. Travel restrictions have slowly eased in a few markets and leisure demand began to recover late in the second quarter. As ofJune 30, 2020 , 16 of our hotels were open with operations of the remaining 38 hotels still temporarily suspended. COVID-19 has had a negative impact on our operations and financial results to date and we expect that the COVID-19 pandemic will continue to have a significant negative impact on our results of operations, financial position and cash flow for the remainder of 2020 and into 2021. We cannot estimate when travel demand will recover. As a result of this uncertainty, inMarch 2020 , we fully drew down on our$650.0 million unsecured revolving credit facility, reduced the quarterly cash dividend on our common shares to one penny for the first quarter and second quarters of 2020 and likely the remainder of 2020, reduced planned capital expenditures, reduced the compensation of our executive officers, board of trustees and employees, and, working closely with our hotel operating partners, significantly reduced our hotels' operating expenses. OnJune 29, 2020 , we amended our existing credit facilities, term loan facilities and senior notes. Among other things, the amendments extended the maturity of a significant portion of a$300.0 million term loan fromNovember 2021 toNovember 2022 , waived existing financial covenants through the end of the first quarter of 2021 and provided substantially less restrictive financial covenants through the end of the second quarter of 2022. Refer to "Note 5. Debt" for additional information regarding the amendments. Based on these amendments and the expense and cash flow reductions, we believe that we will have sufficient liquidity to meet our obligations for the next twelve months. During the six months endedJune 30, 2020 , other significant transactions included: •Sold two hotel properties for an aggregate sales price of$331.0 million and recognized a gain of$117.4 million . •Recognized an impairment loss of$20.6 million for a retail component of a hotel. •Incurred expenses of approximately$8.9 million in connection with suspensions of operations at our hotels. •Cancelled LTIP Class B units and time-based service condition awards granted inFebruary 2020 and incurred full compensation expense of$16.0 million . While we do not operate our hotel properties, both our asset management team and our executive management team monitor and work cooperatively with our hotel managers by advising and making recommendations in all aspects of our hotels' operations, including property positioning and repositioning, revenue and expense management, operations analysis, physical design, renovation and capital improvements, guest experience and overall strategic direction. Through these efforts, we seek to improve property efficiencies, lower costs, maximize revenues and enhance property operating margins, which we expect will enhance returns to our shareholders.
Key Indicators of Financial Condition and Operating Performance
We measure hotel results of operations and the operating performance of our
business by evaluating financial and non-financial metrics such as room revenue
per available room ("RevPAR"); total revenue per available room ("Total
RevPAR"); average daily rate ("ADR"); occupancy rate ("Occupancy"); funds from
operations ("FFO"); earnings before interest, income taxes, depreciation and
amortization ("EBITDA"); and EBITDA for real estate ("EBITDAre"). 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 Matters" for further discussion of FFO, EBITDA and EBIDTAre.
The following table represents the key same-property hotel operating statistics
for our hotels for the three and six months ended
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For the six months ended
For the three months ended June 30, June 30,
2020 2019 2020 2019
Same-Property Occupancy 3.3 % 86.9 % 30.0 % 81.2 %
Same-Property ADR $ 266.47 $ 268.82 $ 250.86 $ 261.05
Same-Property RevPAR $ 8.92
$ 18.62 While the operations of many of our hotels were temporarily suspended beginning inMarch 2020 , the above schedule of hotel results for the three and six months endedJune 30 includes information from all hotels owned as ofJune 30, 2020 , except, for the first and second quarters in both 2020 and 2019,Hotel Zena Washington DC , formerly known asDonovan Hotel , because it was closed during the first and second quarters of 2020 for renovation. 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 withU.S. GAAP. We report FFO, EBITDA and EBITDAre, which are non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance. We calculate FFO in accordance with standards established by Nareit, formerly known as theNational Association of Real Estate Investment Trusts , which defines FFO as net income (calculated in accordance withU.S. GAAP), excluding real estate related depreciation and amortization, gains (losses) from sales of real estate, impairments of real estate assets (including impairment of real estate related joint ventures), the cumulative effect of changes in accounting principles and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. By excluding the effect of real estate related depreciation and amortization including our share of the joint venture depreciation and amortization, gains (losses) from sales of real estate and impairments of real estate assets (including impairment of real estate related joint ventures), all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance, we believe that FFO provides investors a useful financial measure to evaluate our operating performance. The following table reconciles net income (loss) to FFO and FFO available to common share and unit holders for the three and six months endedJune 30, 2020 and 2019 (in thousands): For the three months ended June For the six months ended 30, June 30, 2020 2019 2020 2019 Net income (loss) $
(130,914)
55,412 53,239 111,129 107,483
(Gain) loss on sale of hotel properties - - (117,448) -
Impairment loss - - 20,570 -
FFO $
(75,502)
(8,139) (8,139) (16,278) (16,278)
FFO available to common share and unit
holders $
(83,641)
EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. The white paper issued by Nareit entitled "Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate" defines EBITDAre as net income or loss (computed in accordance withU.S. GAAP), excluding interest expense, income tax, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change of control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate, and after comparable adjustments for our portion of these items related to unconsolidated affiliates. We believe that EBITDA and EBITDAre 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). 31 -------------------------------------------------------------------------------- Table of Contents The following table reconciles net income (loss) to EBITDA and EBITDAre for the three and six months endedJune 30, 2020 and 2019 (in thousands): For the three months ended June For the six months ended 30, June 30, 2020 2019 2020 2019 Net income (loss)$ (130,914) $ 60,518 $ (88,846) $ 66,173 Adjustments: Interest expense 24,091 28,719 47,682 58,047 Income tax expense (benefit) (3,565) 6,579 (14,309) 1,542 Depreciation and amortization 55,520 53,299 111,348 107,601 EBITDA$ (54,868)
- - (117,448) -
Impairment loss - - 20,570 -
EBITDAre $ (54,868) $ 149,115 $ (41,003) $ 233,363
FFO, EBITDA and EBITDAre do not represent cash generated from operating
activities as determined by U.S. GAAP and should not be considered as
alternatives to U.S. GAAP net income (loss), as indications of our financial
performance, or to U.S. GAAP cash flow from operating activities, as measures of
liquidity. In addition, FFO, EBITDA and EBITDAre are not indicative of funds
available to fund cash needs, including the ability to make cash distributions.
Results of Operations
At June 30, 2020 and 2019, we had 54 and 60, respectively, wholly owned
properties and leasehold interests. All properties owned during these periods
have been included in our results of operations during the respective periods
since their dates of acquisition and through the dates of disposition, as
applicable. Based on when a property was acquired or disposed, operating results
for certain properties are not comparable for the three months ended June 30,
2020 and 2019. The properties listed in the table below are hereinafter referred
to as "non-comparable properties" for the periods indicated and all other
properties are referred to as "comparable properties":
Property Location Disposition Date
The Liaison Capitol Hill Washington, D.C. February 14, 2019
Hotel Palomar Washington DC Washington, D.C. February 22, 2019
Onyx Hotel Boston, MA May 29, 2019
Hotel Amarano Burbank Burbank, CA July 16, 2019
Rouge Hotel Washington, D.C. September 12, 2019
Hotel Madera Washington, D.C. September 26, 2019
Topaz Hotel Washington, D.C. November 22, 2019
InterContinental Buckhead Atlanta Buckhead, GA Comparison of the three months endedJune 30, 2020 to the three months endedJune 30, 2019 Revenues - Total hotel revenues decreased by$419.5 million , of which was$32.0 million was due to the non-comparable properties and the remaining decline was due to the decline in demand and suspension of operations sinceMarch 2020 as a result of the COVID-19 pandemic. Hotel operating expenses - Total hotel operating expenses decreased by$210.4 million , of which$18.1 million was due to the non-comparable properties and the remaining decline was due to the decline in demand and suspension of operations sinceMarch 2020 as a result of the COVID-19 pandemic. Depreciation and amortization - Depreciation and amortization expense increased by$2.2 million , due to additional assets added from renovations and offset by sold hotels. 32 -------------------------------------------------------------------------------- Real estate taxes, personal property taxes, property insurance and ground rent - Real estate taxes, personal property taxes, property insurance and ground rent decreased by$3.5 million due to a decline in percentage ground rent which is based on a percentage of revenues. General and administrative - General and administrative expenses decreased by$1.5 million primarily due to a decline in share-based compensation costs and reduction in compensation and other administrative costs as a result of the cost cutting program put in place in response to the COVID-19 pandemic. General and administrative expenses consist of employee compensation costs, legal and professional fees, costs related to strategic transactions, insurance and other expenses. (Gain) loss and other operating expenses - (Gain) loss and other operating expenses increased$0.3 million due to increases in franchise tax expenses in 2020. In 2019, the Company incurred$0.8 million in hotel management transition expenses and had$0.5 million of business interruption insurance income. Interest expense - Interest expense decreased by$4.6 million as a result of using proceeds from property sales to reduce outstanding debt sinceJune 30, 2019 and a decrease in interest rates during the second quarter of 2020. Other - Other income increased by$0.3 million due to interest income from higher cash balances from the drawdown on the unsecured revolving credit facility to enhance liquidity. Income tax (expense) benefit - Income tax expense (benefit) changed from an expense of$(6.6) million to a benefit of$3.6 million due primarily to a decrease in taxable income of our TRS during the quarter resulting from the COVID-19 hotel suspensions compared to the same period in the prior year. Non-controlling interests - Non-controlling interests represent the allocation of income or loss of ourOperating Partnership to the common units held by the LTIP unit holders. Comparison of the six months endedJune 30, 2020 to the six months endedJune 30, 2019 Revenues - Total hotel revenues decreased by$517.6 million , of which$50.6 million was due to the non-comparable properties and the remaining decline was due to the decline in demand and suspension of operations sinceMarch 2020 as a result of the COVID-19 pandemic. Hotel operating expenses - Total hotel operating expenses decreased by$245.8 million , of which$30.8 million was due to the non-comparable properties and the remaining decline was due to the decline in demand and suspension of operations sinceMarch 2020 as a result of the COVID-19 pandemic offset by an increase of$8.9 million in expenses related to the suspended operations at the hotels. Depreciation and amortization - Depreciation and amortization expense increased by$3.7 million , due to additional assets added from renovations and offset by sold hotels. Real estate taxes, personal property taxes, property insurance and ground rent - Real estate taxes, personal property taxes, property insurance and ground rent decreased by$5.2 million due to a decline in percentage ground rent which is based on a percentage of revenues. General and administrative - General and administrative expenses increased by$9.9 million primarily due to$16.0 million in share-based compensation costs relating to the cancellation of the retention LTIP unit awards and time-based service condition awards. This was partially offset by transaction costs incurred in 2019 related to the LaSalle merger. General and administrative expenses consist of employee compensation costs, legal and professional fees, costs related to strategic transactions, insurance and other expenses. Impairment loss - We recognized an impairment loss of$20.6 million related to a retail component of a hotel. There was no comparable transaction in 2019. (Gain) loss on sale of hotel properties - (Gain) loss on sale of hotel properties increased by$117.4 million from the sale of two properties. There were no comparable transactions in 2019. (Gain) loss and other operating expenses - (Gain) loss and other operating expenses decreased by$1.9 million due primarily to the$4.0 million in hotel management transition expense incurred in 2019. Interest expense - Interest expense decreased by$10.4 million as a result of using proceeds from property sales to reduce outstanding debt sinceJune 30, 2019 and a decrease in interest rates during the second quarter of 2020. 33 -------------------------------------------------------------------------------- Other - Other income increased by$0.3 million due to interest income from higher cash balances from the drawdown on the unsecured revolving credit facility to enhance liquidity. Income tax (expense) benefit - Income tax (expense) benefit changed from an expense of$(1.5) million to a benefit of$14.3 million due primarily to an increase in taxable loss of our TRS as a result of suspended operations at our hotels during the six months endedJune 30, 2020 compared to the same period in the prior year. Non-controlling interests - Non-controlling interests represent the allocation of income or loss of ourOperating Partnership to the common units held by the LTIP unit holders. Critical Accounting Policies Our consolidated financial statements have been prepared in conformity withU.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 endedDecember 31, 2019 . Recent Accounting Standards See Note 2, "Summary of Significant Accounting Policies," to our consolidated interim financial statements for additional information relating to recently issued accounting pronouncements. New Accounting Pronouncements Not Yet Implemented See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements. Liquidity and Capital Resources InMarch 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19") to be a global pandemic and the virus has continued to spread throughoutthe United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand was nearly eliminated. Following the government mandates and health official recommendations, we temporarily suspended operations at a majority of our hotels and resorts and dramatically reduced staffing and expenses at the hotels that remained operational. As travel demand slowly recovered during the second quarter, as ofJune 30, 2020 , 16 of our hotels were open, while oeprations at the remaining 38 hotels were still temporarily suspended. COVID-19 has had a negative impact on our operations and financial results to date and we expect that the COVID-19 pandemic may ultimately have a significant impact on our results of operations, financial position and cash flow for the remainder of 2020. As a result, inMarch 2020 , we fully drew down on our$650.0 million unsecured revolving credit facility, reduced the quarterly cash dividend on our common shares to one penny for the first and second quarters of 2020 and likely the remainder of 2020, reduced planned capital expenditures, reduced the compensation of our executive officers, board of trustees and employees, and, working closely with our hotel operating partners, significantly reduced our hotels' operating expenses. OnJune 29, 2020 , we amended our existing credit facilities, term loan facilities and senior notes. Among other things, the amendments extended the maturity of a significant portion of a$300.0 million term loan fromNovember 2021 toNovember 2022 , waived existing financial covenants through the end of the first quarter of 2021 and provided substantially less restrictive financial covenants through the end of the second quarter of 2022. Refer to "Note 5. Debt" for additional information regarding the amendments. Based on these amendments and the expense and cash flow reductions, we believe that we will have sufficient liquidity to meet our obligations for the next twelve months. Our debt consisted of the following as ofJune 30, 2020 andDecember 31, 2019 (dollars in thousands): 34
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Balance Outstanding as of
Interest Rate Maturity Date June 30, 2020 December 31, 2019
Revolving credit facilities
Senior unsecured credit facility Floating (1) January 2022 $ 390,000 $ 165,000
PHL unsecured credit facility Floating (2) Janurary 2022 - -
Total revolving credit facilities $ 390,000 $ 165,000
Unsecured term loans
First Term Loan Floating (3) January 2023 300,000 300,000
Second Term Loan Floating (3) April 2022 65,000 65,000
Fourth Term Loan Floating (3) October 2024 110,000 110,000
Sixth Term Loan:
Tranche 2021 Floating (3) November 2021 57,400 300,000
Tranche 2021 Extended Floating (3) November 2022 242,600 -
Tranche 2022 Floating (3) November 2022 400,000 400,000
Tranche 2023 Floating (3) November 2023 400,000 400,000
Tranche 2024 Floating (3) January 2024 400,000 400,000
Total Sixth Term Loan 1,500,000 1,500,000
Total term loans at stated value 1,975,000 1,975,000
Deferred financing costs, net (11,567) (10,343)
Total term loans $ 1,963,433 $ 1,964,657
Senior unsecured notes
Series A Notes 4.70% December 2023 60,000 60,000
Series B Notes 4.93% December 2025 40,000 40,000
Total senior unsecured notes at stated value 100,000 100,000
Deferred financing costs, net (463) (437)
Total senior unsecured notes $ 99,537 $ 99,563
Total debt $ 2,452,970 $ 2,229,220
__________
(1) Borrowings bear interest at floating rates equal to, at our option, either
(i) LIBOR plus an applicable margin or (ii) an Adjusted Base Rate (as defined in
the applicable credit agreement) plus an applicable margin.
(2) Borrowings bear interest at floating rates equal to, at our option, either
(i) LIBOR plus an applicable margin or (ii) a Eurocurrency Rate (as defined in
the applicable credit agreement) plus an applicable margin.
(3) Borrowings under the term loan facilities bear interest at floating rates
equal to, at our option, either (i) LIBOR plus an applicable margin or (ii) a
Base Rate plus an applicable margin. As of June 30, 2020 , approximately $1.6
billion of the borrowings under the term loan facilities bore an effective
weighted-average fixed interest rate of 4.21%, after taking into account
interest rate swap agreements, and approximately $345.0 million bore a
weighted-average floating interest rate of 2.46%. As of December 31, 2019 ,
approximately $1.6 billion of the borrowings under the term loan facilities bore
a weighted-average fixed interest rate of 3.43%, after taking into account
interest rate swap agreements, and approximately $345.0 million bore a
weighted-average floating interest rate of 3.32%.
Unsecured Revolving Credit Facilities
We are party to a $650.0 million senior unsecured revolving credit facility
maturing in January 2022 , with options to extend the maturity date to January
2023 , pursuant to certain terms and conditions and payment of an extension fee.
In March 2020 , as part of our plans to enhance liquidity due to the actual and
anticipated impact of the COVID-19 pandemic, we fully drew down on this
revolving credit facility. As of June 30, 2020 , we had $390.0 million of
outstanding borrowings and borrowing capacity of $253.2 million remaining on our
senior unsecured revolving credit facility. Interest is paid on the periodic
advances under the senior unsecured revolving credit facility at varying rates,
based upon either LIBOR or the alternate base rate, plus an additional margin
amount. The interest rate depends upon our leverage ratio pursuant to the
provisions of the credit facility agreement. As a result of the amendments
described in "Note 5. Debt", the spread of the borrowings is fixed at
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2.25% during the waiver period. We have the ability to increase the aggregate
borrowing capacity of our senior unsecured revolving credit facility to up to
$1.3 billion , subject to lender approval. We intend to repay indebtedness
incurred under the senior unsecured revolving credit facility from time to time
out of cash flows from operations and, as market conditions permit, from the net
proceeds of issuances of additional equity and debt securities and from the net
proceeds of dispositions of hotel properties.
We also have a $25.0 million unsecured revolving credit facility (the "PHL
Credit Facility") to be used for PHL's working capital and general corporate
purposes. This credit facility has substantially similar terms as our senior
unsecured revolving credit facility and matures in January 2022 . Borrowings
under the PHL Credit Facility bear interest at LIBOR plus an applicable margin,
depending on our leverage ratio. As a result of the amendments described in
"Note 5. Debt", the spread of the borrowings is fixed at 2.25% during the waiver
period. As of June 30, 2020 , we had no borrowings under the PHL Credit Facility.
Unsecured Term Loan Facilities
We are party to senior unsecured term loans with different maturities. Each
unsecured term loan bears interest at a variable rate of a benchmark interest
rate plus an applicable margin, depending on our leverage ratio. We entered into
interest rate swap agreements to fix the LIBOR rate on a portion of these
unsecured term loans. Information about our senior unsecured term loans is found
in the table above and Note 5 to the accompanying consolidated financial
statements.
Senior Unsecured Notes
We have two unsecured notes outstanding, $60.0 million of senior unsecured notes
bearing a fixed interest rate of 4.70% per annum and maturing in December 2023
(the "Series A Notes") and $40.0 million of senior unsecured notes bearing a
fixed interest rate of 4.93% per annum and maturing in December 2025 (the
"Series B Notes"). The terms of the Series A Notes and the Series B Notes are
substantially similar to those of our senior unsecured revolving credit
facility, as amended and restated.
Issuance of Shares of Beneficial Interest
On February 22, 2016 , we announced that our board of trustees authorized a share
repurchase program of up to $150.0 million of the Company's outstanding common
shares. Under this program, we may repurchase common shares from time to time in
transactions on the open market or by private agreement. We may suspend or
discontinue this program at any time. No common shares were repurchased by the
Company under the share repurchase program during the six months ended June 30,
2020 . As of June 30, 2020 , $56.6 million of common shares remained available for
repurchase under this program.
On July 27, 2017 , we announced that our board of trustees authorized a new share
repurchase program of up to $100.0 million of the Company's outstanding common
shares. Under this program, we may repurchase common shares from time to time in
transactions on the open market or by private agreement. We may suspend or
discontinue this program at any time. This $100.0 million share repurchase
program will commence upon the completion of our $150.0 million share repurchase
program.
Sources and Uses of Cash
Our principal sources of cash are cash from operations, borrowings under
mortgage financings and other debt, draws on our credit facilities, proceeds
from offerings of our equity securities and hotel property sales. Our principal
uses of cash are asset acquisitions, debt service, capital investments,
operating costs, corporate expenses and dividends.
Cash (Used in) and Provided by Operations. Our cash used in operating activities
was $(86.6) million for the six months ended June 30, 2020 . Our cash from
operations includes the operating activities of the 54 hotels we owned as of
June 30, 2020 , offset by corporate expenses. Our cash provided by operating
activities was $194.1 million for the six months ended June 30, 2019 . Our cash
from operations includes the operating activities of the 60 hotels we owned as
of June 30, 2019 .
Cash Provided by Investing Activities. Our cash provided by investing activities
was $230.4 million for the six months ended June 30, 2020 . During the six months
ended June 30, 2020 , we invested $89.6 million in improvements to our hotel
properties and received $320.0 million from sales of hotel properties. Our cash
provided by investing activities was $226.0 million for the six months ended
June 30, 2019 . During the six months ended June 30, 2019 , we invested $75.9
million in improvements to our hotel properties and received $302.3 million from
sales of hotel properties.
Cash Provided by and Used In Financing Activities. Our cash provided by
financing activities was $152.1 million for the six months ended June 30, 2020 .
During the six months ended June 30, 2020 , we borrowed $760.1 million under the
revolving credit facilities, repaid $535.1 million under the revolving credit
facilities, borrowed and repaid $13.0 million in other debt, repurchased $1.3
million of common shares for tax withholding purposes in connection with vested
share-based equity awards, paid $67.6 million in distributions, paid $3.6
million in financing fees related to the debt amendments, and paid $0.4 million
in other transactions. For the six months ended June 30, 2019 , cash used in
financing activities was $457.7 million . During the six
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months ended June 30, 2019 , we borrowed $56.9 million under the revolving credit
facilities, repaid $226.9 million under the revolving credit facilities, repaid
$181.2 million of debt, repurchased $4.0 million of common shares for tax
withholding purposes in connection with vested share-based equity awards, paid
$101.6 million in distributions and paid $0.9 million in other transactions.
Capital Investments
We maintain and intend to continue maintaining all of our hotels, including each
hotel that we acquire in the future, in good repair and condition and in
conformity with applicable laws and regulations and when applicable, in
accordance with the franchisor's standards and the 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.
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 guestrooms,
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 there is one, 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 mortgage debt or equity offerings.
For the six months ended June 30, 2020 , we invested $89.6 million in capital
investments to reposition and improve our properties, which included the
completed renovations of The Westin San Diego Gaslamp Quarter and Embassy Suites
San Diego Bay - Downtown. The projects we completed in the second quarter of
2020 or shortly thereafter include:
•a $25.0 million renovation and repositioning at Donovan Hotel . This renovation
is substantially complete and the hotel will be relaunched as Hotel Zena
Washington D.C ., a member of our "Unofficial Z Collection" proprietary brand;
and
•a $10.5 million renovation of the Viceroy Santa Monica Hotel that is
substantially complete.
We expect total capital investments to be approximately $35.0 million to $40.0
million for the remainder of 2020.
Contractual Obligations and Off-Balance Sheet Arrangements
The table below summarizes our contractual obligations as of June 30, 2020 and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods (in thousands):
Payments due by period
Less More
than 1 1 to 3 3 to 5 than 5
Total year years years years
Term loans (2) $ 2,166,530 $ 73,247 $ 1,168,633 $ 924,650 $ -
Unsecured notes (1) 120,716 4,792 9,584 65,354 40,986
Borrowings under credit
facilities (3) 405,275 9,885 395,390 - -
Hotel and ground leases (4) 1,225,982 16,894 33,945 34,178 1,140,965
Capital lease obligation 65,136 1,289 2,668 2,748 58,431
Refundable membership initiation
deposits (5) 30,340 223 - - 30,117
Purchase commitments (6) 6,899 6,899 - - -
Corporate office leases 16,359 1,817
3,637 2,528 8,377
Total $ 4,037,237 $ 115,046 $ 1,613,857 $ 1,029,458 $ 1,278,876 ____________________
(1)Amounts include principal and interest. (2)Amounts include principal and interest. Borrowings under the term loan facilities bear interest at floating rates equal to, at our option, either (i) LIBOR plus an applicable margin or (ii) a Base Rate plus an applicable margin. (3)Amounts include principal and interest under the two revolving credit facilities. Interest expense is calculated based on the weighted-average interest rate for all outstanding credit facility borrowings as ofJune 30, 2020 . It is assumed that the outstanding borrowings will be repaid upon maturity with fixed interest-only payments until then. 37 -------------------------------------------------------------------------------- Table of Contents (4)Our 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 consumer price index ("CPI") and may be subject to minimum and maximum increases. The table above reflects only minimum fixed rent for all periods presented and does not include assumptions for CPI adjustments. (5)Represents refundable initiation membership deposits from club members atLaPlaya Beach Resort and Club . (6)Amounts represent purchase orders and contracts that have been executed for renovation projects at the properties. We are committed to these purchase orders and contracts and anticipate making similar arrangements in the future with the existing properties or any future properties that we may acquire. Off-Balance Sheet Arrangements As ofJune 30, 2020 , we had no off-balance sheet arrangements. 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. The Company believes it minimizes the credit risk by transacting with major credit-worthy financial institutions. The Company has interest rate swap agreements with an aggregate notional amount of$1.6 billion to hedge variable interest rates on our unsecured term loans. In addition, as ofJune 30, 2020 , the Company had interest rates swaps for an aggregate notional amount of$290.0 million which will become effective in the future as current swaps mature. We have designated these pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges. For the three and six months endedJune 30, 2020 , there was$(0.4) million and$(54.7) million in unrealized (loss) gain, respectively, recorded in accumulated other comprehensive income (loss). For the three and six months endedJune 30, 2019 , there was$(21.1) million and$(30.1) million in unrealized (loss) gain, respectively, recorded in accumulated other comprehensive income (loss). Item 3. Quantitative and Qualitative Disclosures about Market Risk. Interest Rate Sensitivity We are exposed to market risk from changes in interest rates. We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs by closely monitoring our variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous. From time to time, we may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements are intended to lessen the impact of rising interest rates, they also expose us to the risks that the other parties to the agreements will not perform, that we could incur significant costs associated with the settlement of the agreements, and that the agreements will be unenforceable and the underlying transactions will fail to qualify as highly effective cash flow hedges under guidance included in ASC 815 "Derivatives and Hedging." As ofJune 30, 2020 ,$735.0 million of the Company's aggregate indebtedness (30.0% of total indebtedness) was subject to variable interest rates, excluding amounts outstanding under the term loan facilities that have been effectively swapped into fixed rates. If interest rates on our variable rate debt increase or decrease by 0.1 percent, our annual interest expense will increase or decrease by approximately$0.7 million , respectively. 38
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