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 suspended operations at some of our hotels and resorts. Operations have recommenced and are improving, however, if continued improvement is interrupted, we may become out of compliance with maintenance covenants in certain of our debt facilities; •world events impacting the ability or desire of people to travel may lead to a decline in demand for hotels; •risks associated with the hotel industry, including competition, changes in visa and other travel policies by 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, natural disasters, cyber attacks, any type of flu or disease-related pandemic, or downturns in general and local economic conditions; •the availability and terms of financing and capital and the general volatility of securities markets; •our dependence on third-party managers of our hotels, including our inability to implement strategic business decisions directly; •risks associated with theU.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 and 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 the heading "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 endedDecember 31, 2020 . 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 spread throughoutthe United States and the world. As a result of this pandemic and subsequent government mandates, health official recommendations, corporate policy changes and individual responses, hotel demand was dramatically reduced. In response, we implemented significant cost controls and salary reductions and temporarily suspended operations at 47 of our hotels and resorts. In addition, to improve liquidity, we raised capital by issuing convertible notes and additional preferred shares. As demand returned over the past several months, the result of an increase in vaccinations and corresponding lifting of governmental restrictions and recommendations, we have reopened our hotels and resorts. As ofJune 30, 2021 , 49 of our hotels and resorts were open, with operations remaining suspended atVilla Florence San Francisco onUnion Square andHotel Vitale . Subsequent toJune 30, 2021 , we re-openedVilla Florence San Francisco onUnion Square and commenced a renovation ofHotel Vitale with the intent to reopen the property at the completion of the renovation in the fourth quarter of 2021. The COVID-19 pandemic has had a significant negative impact on our operations and financial results to date and we expect that it will continue to have a significant negative impact on our results of operations, financial position and cash flow in 2021. We cannot estimate when travel demand will fully recover. However, leisure travel as a result of pent-up leisure demand has exceeded expectations, particularly at our warmer weather and resort properties. InFebruary 2021 , we issued, at a 5.5% premium to par, an additional$250.0 million aggregate principal amount of the convertible notes originally issued inDecember 2020 . In connection with the pricing of the convertible notes, we entered into privately negotiated capped call transactions with certain of the underwriters, their respective affiliates and/or other counterparties. The net proceeds were used to reduce amounts outstanding under our senior unsecured revolving credit facility, unsecured term loans and for general corporate purposes. In February 2021,we amended the agreements governing our existing credit facilities, term loan facilities and senior notes to, among other items, waive financial covenants through the end of the first quarter of 2022, except for the minimum fixed charge coverage and minimum unsecured interest coverage ratio which were extended throughDecember 31, 2021 , and to increase the interest rate spread. For additional information regarding these amendments and the convertible notes, see Note 5, Debt, of the notes to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. In May 2021, we issued 9,200,000 6.375% Series G Cumulative Redeemable Preferred Shares at a public offering price of$25.00 per share for net proceeds of$222.6 million . We used the net proceeds to reduce amounts outstanding under our unsecured term loans and for general corporate purposes. Based on the amendments to our credit agreements described in Note 1, Organization, of the notes to our unaudited financial statements of this Quarterly Report on Form 10-Q, expense and cash burn rate reductions, and our ability to raise additional liquidity through equity issuances, we believe we have sufficient liquidity to meet our obligations for the next twelve months. 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" in Part I, Item 2 of this Quarterly Report on Form 10-Q for further discussion of FFO, EBITDA and EBIDTAre. 30 -------------------------------------------------------------------------------- Table of ContentsHotel Operating Statistics The following table represents the key same-property hotel operating statistics for our hotels for the three and six months endedJune 30, 2021 and 2020. For the three months ended June 30, For the six months ended June 30, 2021 2020 2021 2020 Same-Property Occupancy 38.6 % 3.5 % 28.5 % 30.7 % Same-Property ADR $ 247.46$ 264.01 $ 245.05 $ 250.45 Same-Property RevPAR $ 95.55$ 9.36 $ 69.95$ 76.98 Same-Property Total RevPAR $ 143.59$ 19.45 $ 106.54 $ 118.61 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, 2021 and 2020 includes information from all hotels owned as ofJune 30, 2021 , except forHotel Zena Washington DC (formerlyDonovan Hotel ), which was excluded because it was closed during the first and second quarters of 2020 for renovations. SirFrancis Drake and The Roger New York were also excluded from the above schedule due to our disposition of these hotels in the second quarter of 2021. 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, 2021 and 2020 (in thousands): For the three months ended June 30, For the six months ended June 30, 2021 2020 2021 2020 Net income (loss)$ 1,428 $
(130,914)
54,589 55,412 109,922 111,129
(Gain) loss on sale of hotel properties (64,558) - (64,558) (117,448)
Impairment loss - - 14,856 20,570
FFO $ (8,541) $ (75,502) $ (59,792) $ (74,595)
Distribution to preferred shareholders (10,094) (8,139) (18,233) (16,278)
FFO available to common share and unit
holders $ (18,635) $ (83,641) $ (78,025) $ (90,873)
31-------------------------------------------------------------------------------- Table of Contents 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). The following table reconciles net income (loss) to EBITDA and EBITDAre for the three and six months endedJune 30, 2021 and 2020 (in thousands): For the three months ended
2021 2020 2021 2020
Net income (loss) $ 1,428 $
(130,914)
24,804 24,091 50,135 47,682
Income tax expense (benefit) 52 (3,565) 55 (14,309)
Depreciation and amortization 54,701 55,520 110,144 111,348
EBITDA $ 80,985 $ (54,868) $ 40,322 $ 55,875
(Gain) loss on sale of hotel properties (64,558) - (64,558) (117,448)
Impairment loss - - 14,856 20,570
EBITDAre $ 16,427 $ (54,868) $ (9,380) $ (41,003)
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, 2021 and 2020, we had 51 and 54, 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 and six months ended
June 30, 2021 and 2020. 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
InterContinental Buckhead Atlanta Buckhead, GA March 6, 2020
Sofitel Washington DC Lafayette Square Washington, D.C. March 6, 2020
Union Station Hotel Nashville, Autograph Collection Nashville, TN July 29, 2020
Sir Francis Drake San Francisco, CA April 1, 2021
The Roger New York New York, NY June 10, 2021
Comparison of the three months ended June 30, 2021 to the three months ended
June 30, 2020
Revenues - Total hotel revenues increased by $140.7 million primarily due to an
increase in leisure travel demand during the summer travel season. This increase
in demand was the result of an increase in COVID-19 vaccination rates and
corresponding decreases in infection rates and easing of governmental
restrictions. Most of our hotels suspended operations in March 2020 and
operations remained suspended throughout the second quarter of 2020.
Hotel operating expenses - Total hotel operating expenses increased by $66.7
million primarily due to resuming operations at our comparable properties and
returning demand in the second quarter of 2021.
Real estate taxes, personal property taxes, property insurance and ground rent -
Real estate taxes, personal property taxes, property insurance and ground rent
increased by $2.0 million primarily due to an increase in percentage ground
rent, which is based on a percentage of revenues.
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General and administrative - General and administrative expenses increased by
$1.5 million primarily due to an increase in share-based compensation expense of
$1.3 million . General and administrative expenses consist of employee
compensation costs, legal and professional fees, insurance and other expenses.
(Gain) loss on sale of hotel properties - Gain on sale of hotel properties
increased by $64.6 million primarily due to the sale of Sir Francis Drake in the
second quarter of 2021.
Interest expense - Interest expense increased by $0.7 million primarily due to
the write-off of deferred financing fees associated with the partial repayment
of certain of the term loans during the second quarter of 2021.
Income tax (expense) benefit - Income tax (expense) benefit is immaterial in
2021 as a result of the taxable REIT subsidiary continuing to incur a loss and a
valuation allowance being recognized offsetting the deferred tax asset.
Non-controlling interests - Non-controlling interests represent the allocation
of income or loss of our Operating Partnership to the common units held by the
LTIP and OP unit holders.
Comparison of the six months ended June 30, 2021 to the six months ended
June 30, 2020
Revenues - Total hotel revenues decreased by $44.7 million , of which $29.3
million was due to the non-comparable properties and the balance was due to
lower demand in the first quarter of 2021 compared to the prior year offset by
an increase in revenues in the second quarter of 2021 as hotels reopened and
leisure demand returned particularly at the resort properties.
Hotel operating expenses - Total hotel operating expenses decreased by $62.1
million , of which $21.7 million was due to the non-comparable properties and the
balance was correlated to the decline in revenue noted above.
Depreciation and amortization - Depreciation and amortization expense decreased
by $1.2 million primarily due to a decrease in assets resulting from the sales
of three hotels in 2020 and two hotels in 2021. The decrease was partially
offset by an increase in depreciation and amortization expense related to
recently renovated hotels, including Hotel Zena Washington DC (formerly Donovan
Hotel ).
General and administrative - General and administrative expenses decreased by
$13.4 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 in 2020. General and administrative expenses consist of
employee compensation costs, legal and professional fees, insurance and other
expenses.
Impairment loss - We recognized an impairment loss of $14.9 million in 2021
related to one hotel. We recognized an impairment loss of $20.6 million in 2020
related to the retail component of a hotel.
(Gain) loss on sale of hotel properties - We recognized a net gain on sale of
$64.6 million in 2021 primarily due to the sale of Sir Francis Drake . We
recognized a net gain on sale of $117.4 million in 2020 primarily due to the
sale of Sofitel Washington DC Lafayette Square and InterContinental Buckhead
Atlanta .
(Gain) loss and other operating expenses - (Gain) loss and other operating
expenses decreased by $1.9 million primarily due to reductions in pre-opening,
hotel management transition and franchise tax expenses.
Interest expense - Interest expense increased by $2.5 million primarily due to
increased amortization and write-off of deferred financing fees as a result of
the partial repayment of certain of the term loans during 2021.
Income tax (expense) benefit - Income tax (expense) benefit was a benefit of
$14.3 million in 2020 which was due to the deferred tax asset recognized in 2020
on the taxable REIT subsidiary's estimated loss. In 2021, the Company has
recognized a valuation allowance offsetting the deferred tax asset on the
current year taxable REIT subsidiary's loss due to the uncertainty of utilizing
the deferred tax asset in the future.
Non-controlling interests - Non-controlling interests represent the allocation
of income or loss of our Operating Partnership to the common units held by the
LTIP and OP unit holders.
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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, 2020 .
Recent Accounting Standards
See Note 2, Summary of Significant Accounting Policies, to our unaudited
consolidated financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q for additional information relating to recently issued
accounting pronouncements.
New Accounting Pronouncements Not Yet Implemented
See Note 2, Summary of Significant Accounting Policies, to our unaudited
consolidated financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q for additional information relating to recently issued
accounting pronouncements.
Liquidity and Capital Resources
As of June 30, 2021 , we had liquidity of $967.2 million , which includes cash and
cash equivalents, restricted cash and the amount available on our senior
unsecured revolving credit facility. For further discussion on our liquidity and
the impact of COVID-19, see Overview included in Part I, Item 2 of this
Quarterly Report on Form 10-Q.
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Debt
Our debt consisted of the following as of June 30, 2021 and December 31, 2020
(dollars in thousands):
Balance Outstanding as of
December 31,
Interest Rate Maturity Date June 30, 2021 2020
Revolving credit facilities
Senior unsecured credit facility Floating (1), (2) January 2022 $ - $ 40,000
PHL unsecured credit facility Floating (3) January 2022 - -
Total revolving credit facilities $ - $ 40,000
Unsecured term loans
First Term Loan Floating (4) January 2023 300,000 300,000
Second Term Loan Floating (4) April 2022 32,126 65,000
Fourth Term Loan Floating (4) October 2024 110,000 110,000
Sixth Term Loan:
Tranche 2021 Floating (4) November 2021 4,798 40,966
Tranche 2021 Extended Floating (4) November 2022 100,148 173,034
Tranche 2022 Floating (4) November 2022 139,928 286,000
Tranche 2023 Floating (4) November 2023 400,000 400,000
Tranche 2024 Floating (4) January 2024 400,000 400,000
Total Sixth Term Loan 1,044,874 1,300,000
Total term loans at stated value 1,487,000 1,775,000
Deferred financing costs, net (6,822) (8,455)
Total term loans $ 1,480,178 $ 1,766,545
Convertible senior notes
Convertible senior notes 1.75% December 2026 750,000 500,000
Debt premium (discount), net 12,775 (113,099)
Deferred financing costs, net (17,835) (12,568)
Total convertible senior notes $ 744,940 $ 374,333
Senior unsecured notes
Series A Notes 5.15% (5) December 2023 47,600 60,000
Series B Notes 5.38% (6) December 2025 2,400 40,000
Total senior unsecured notes at stated
value 50,000 100,000
Deferred financing costs, net (202) (407)
Total senior unsecured notes $ 49,798 $ 99,593
Total debt $ 2,274,916 $ 2,280,471
(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) The Company has the option to extend the maturity date to January 2023 ,
pursuant to certain terms and conditions and payment of an extension fee.
(3) 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.
(4) 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, 2021 , approximately $1.4
billion of the borrowings under the term loan facilities bore an effective
weighted-average fixed interest rate of 4.12%, after taking into account
interest rate swap agreements, and approximately $57.0 million bore a
weighted-average floating interest rate of 2.67%. As of December 31, 2020 ,
approximately $1.4 billion of the borrowings under the term loan facilities bore
an effective weighted-average fixed interest rate of 4.19%, after taking into
account interest rate swap agreements, and approximately $345.0 million bore a
weighted-average floating interest rate of 2.46%.
(5) In February 2021 , the interest rate increased from 4.70% to 5.15%. The
increased interest rate is effective through the end of the waiver period.
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(6) In February 2021 , the interest rate increased from 4.93% to 5.38%. The
increased interest rate is effective through the end of the waiver period.
We intend to repay indebtedness incurred under our revolving credit facilities,
unsecured term loans, convertible senior notes and senior unsecured notes out of
our cash flows from operations and, as market conditions permit, from the net
proceeds from issuances of additional equity or debt securities and dispositions
of hotel properties.
For further discussion on the components of our overall debt, see Note 5, Debt,
to our unaudited consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q.
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.
As of June 30, 2021 , we had no outstanding borrowings, $5.8 million of
outstanding letters of credit and borrowing capacity of $644.2 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, or spread. 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, to our unaudited consolidated
financial statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q, the spread on the borrowings is fixed at 2.40% during the waiver period.
We have the ability to increase the aggregate borrowing capacity of our senior
unsecured revolving credit facility up to $1.3 billion , subject to lender
approval.
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, to our unaudited consolidated financial statements included in Part I,
Item 1 of this Quarterly Report on Form 10-Q, the spread on the borrowings is
fixed at 2.40% during the waiver period. As of June 30, 2021 , 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. For further discussion on our unsecured term loan
facilities, see Note 5, Debt, to our unaudited consolidated financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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 this 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 . The Company recorded coupon interest expense of $3.3 million and $6.1
million , respectively, for the three and six months ended June 30, 2021 .
Prior to June 15, 2026 , the Convertible Notes will be convertible only 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
June 30, 2021 and December 31, 2020 , the if-converted value of the Convertible
Notes did not exceed the principal amount.
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The Company may redeem for cash all or a portion of the Convertible Notes, at
its option, on or after December 20, 2023 upon certain circumstances. The
redemption price will be equal to 100% of the principal amount of the
Convertible Notes to be redeemed, plus accrued and unpaid interest to, but
excluding, the redemption date. If certain make-whole fundamental changes occur,
the conversion rate for the Convertible Notes may be increased.
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
Counterparties"). 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. The
cost of the Capped Call Transactions entered into in December 2020 and February
2021 was $38.3 million and $21.0 million , respectively, and was recorded within
additional paid-in capital.
Senior Unsecured Notes
The Company has $47.6 million of senior unsecured notes outstanding bearing a
fixed interest rate of 4.70% per annum and maturing in December 2023 (the
"Series A Notes") and $2.4 million of senior unsecured notes outstanding bearing
a fixed interest rate of 4.93% per annum and maturing in December 2025 (the
"Series B Notes"). As a result of the amendments described above, the interest
rates of the Series A Notes and the Series B Notes are fixed at 5.15% and 5.38%,
respectively, for the duration of the waiver period. The debt covenants of the
Series A Notes and the Series B Notes are substantially similar to those of the
Company's senior unsecured revolving credit facility. As of June 30, 2021 , the
Company was in compliance with all such debt covenants.
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,
2021 . As of June 30, 2021 , $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.
On April 29, 2021 , we filed a prospectus supplement with the SEC to sell up to
$200.0 million of common shares under an "at the market" offering program (the
"ATM program"). No common shares were issued or sold under the ATM program
during the six months ended June 30, 2021 . As of June 30, 2021 , $200.0 million
of common shares remained available for issuance under the ATM program.
In May 2021, we issued 9,200,000 6.375% Series G Cumulative Redeemable Preferred
Shares (the "Shares") at a public offering price of $25.00 per share for net
proceeds of $222.6 million . The Shares may be redeemed, at the Company's option,
on or after May 13, 2026 , 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.
For further discussion on our shares of beneficial interest, see Note 7, Equity,
to our unaudited consolidated financial statements 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, borrowings under
mortgage financings and other debt, draws on our credit facilities, proceeds
from offerings of our equity securities, debt 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) Operations. Our cash used in operating activities was $2.3
million for the six months ended June 30, 2021 . Our cash from operations
includes the operating activities of the 51 hotels we owned as of June 30, 2021 ,
offset by corporate expenses. 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. The negative cash flow from operations during the
six months ended June 30, 2021 and 2020 is due to the reduced operations at our
hotels as a result of COVID-19, including carrying costs on hotels that were
temporarily suspended.
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Cash Provided by Investing Activities. Our cash provided by investing activities
was $127.8 million for the six months ended June 30, 2021 . During the six months
ended June 30, 2021 , we invested $27.0 million in improvements to our hotel
properties, received $172.0 million from sales of hotel properties and placed
deposits totaling $17.1 million on two hotel properties. 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.
Cash Provided by Financing Activities. Our cash provided by financing activities
was $61.2 million for the six months ended June 30, 2021 . During the six months
ended June 30, 2021 , we repaid $40.0 million under the revolving credit
facilities, received gross proceeds from the issuance of preferred shares of
$230.0 million , paid $7.7 million in offering costs, received proceeds from the
issuance of convertible notes and other debt of $268.6 million , repaid $338.0
million in other debt, purchased $21.0 million in Capped Call Transactions,
repurchased $0.7 million of common shares for tax withholding purposes in
connection with vested share-based equity awards, paid $18.9 million in
distributions, paid $9.6 million in financing fees, and paid $1.5 million in
other transactions. 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 credit agreement amendments and paid $0.3 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 debt or equity offerings.
For the six months ended June 30, 2021 , we invested $27.0 million in capital
investments to reposition and improve our properties, primarily the renovation
of the L'Auberge Del Mar .
Depending on market conditions, we expect to invest an additional $40.0 million
to $60.0 million in capital investments during the remainder of 2021, including
a $25.0 million transformation of Hotel Vitale . The redevelopment is expected to
be completed at year-end, at which time the hotel will reopen as 1 Hotel San
Francisco . We also commenced a $15.0 million renovation at Southernmost Beach
Resort , which we expect will be completed in the fourth quarter.
However, as fundamentals improve, we will evaluate commencing additional
previously planned major renovations and repositioning projects later in 2021.
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Contractual Obligations and Off-Balance Sheet Arrangements
The table below summarizes our contractual obligations as of June 30, 2021 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) $ 1,601,865 $ 94,549 $ 1,396,402 $ 110,914 $ -
Convertible senior notes (1) 822,188 13,125 26,250 26,250 756,563
Unsecured notes (1) 56,369 2,581 51,211 2,577 -
Borrowings under credit - - - - -
facilities (3)
Hotel and ground leases (4) 1,236,192 17,270 34,702 35,121 1,149,099
Finance lease obligation 52,341 904 1,867 1,951 47,619
Refundable membership initiation 27,690 203 - - 27,487
deposits (5)
Purchase commitments (6) 8,523 8,523 - - -
Corporate office leases 14,807 1,852 2,997 2,346 7,612
Total $ 3,819,975 $ 139,007 $ 1,513,429 $ 179,159 $ 1,988,380
(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 of June 30,
2021 . It is assumed that the outstanding borrowings will be repaid upon maturity
with fixed interest-only payments until then.
(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 at
LaPlaya 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 of June 30, 2021 , 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. The
historical trend has been disrupted as a result of COVID-19.
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.
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Table of Content We have interest rate swap agreements with an aggregate notional amount of$1.4 billion to hedge variable interest rates on our unsecured term loans. We have designated these pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges. 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, 2021 ,$57.0 million of our aggregate indebtedness (2.5% 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$0.1 million , respectively. Item 4. Controls and Procedures. Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. Changes in Internal Control Over Financial Reporting There have been no changes to our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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