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 REIT under 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. 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, health official recommendations, corporate travel policy changes and individual responses, hotel demand was dramatically reduced. Following government mandates and health official recommendations, we temporarily suspended operations at 47 of our hotels and resorts and dramatically reduced staffing and expenses at the hotels that remained operational. Throughout the summer months, hotel industry demand improved from its historical lows seen in the second quarter, particularly as leisure customers sought to travel to drive-to hotels and resorts that could offer more space and outdoor experiences. Our monthly revenue increased slowly through October as we reopened several of our hotels and resorts between May and October. November and December had declining revenue at most of our opened hotels, except ourSouth Florida properties, as leisure demand declined and business travel did not return in a meaningful manner. OurSouth Florida properties experienced slightly increasing revenue late in the year which is consistent with the seasonal pattern for these warm weather resort properties. We anticipate leisure travel will return as vaccine distribution becomes more widely available, followed by business travel. We still anticipate group demand will be the slowest to return until there is more certainty around the health and immunity solution for the country. As ofDecember 31, 2020 , 37 of our hotels and resorts were open with operations of the remaining 16 hotels still temporarily suspended. We anticipate reopening additional hotels as demand returns and we determine that we would lose less money with the hotels open versus remaining closed. 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 recover. As a result of uncertainty at the beginning of the pandemic, 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 per share, reduced planned capital expenditures, reduced the compensation of our executive officers, trustees and employees, and, working closely with our hotel operating partners, significantly reduced our hotels' operating expenses. OnJune 29, 2020 , we amended the agreements governing our existing credit facilities, term loan facilities and senior notes. Among other things, the amendments extended the maturity of a significant portion of our term loan due inNovember 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. In addition, we repaid approximately$250.0 million on our unsecured revolving credit facility. InDecember 2020 , we issued$500.0 million of convertible notes and used the proceeds to repay an additional$250.0 million of our unsecured revolving credit facility and$200.0 million of our unsecured term loans. As ofDecember 31, 2020 , we had$40.0 million of outstanding borrowings$6.8 million of outstanding letters of credit and borrowing capacity of$603.2 million remaining on our senior unsecured credit facility. During the year endedDecember 31, 2020 , other significant transactions included: •Sold three hotel properties for an aggregate sales price of$387.0 million and recognized a gain of$117.4 million ; •Recognized an impairment loss of$74.6 million related to two hotels and the retail component of a hotel; and 41 -------------------------------------------------------------------------------- •Cancelled LTIP Class B units and time-based service condition awards granted inFebruary 2020 and incurred full compensation expense of$16.0 million . InFebruary 2021 , we issued an additional$250.0 million of convertible notes under the same terms as theDecember 2020 offering. The notes were sold at a 5.5% premium to par. In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with certain of the underwriters, their respective affiliates and/or other counterparties. We used the net proceeds to reduce amounts outstanding under our senior unsecured revolving credit facility, unsecured term loans, and for general corporate purposes. InFebruary 2021 , we further amended the agreements governing our existing credit facilities, term loan facilities and senior notes to, among other items, increase the interest rate spread and 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 . Refer to "Note 5. Debt" for additional information regarding these amendments and convertible debt. Based on these amendments and expense and cash burn rate reductions, we believe that we will 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" for further discussion of FFO, EBITDA and EBIDTAre.Hotel Operating Statistics The following table represents the key same-property hotel operating statistics for our hotels for the years endedDecember 31, 2020 and 2019. For the year ended December 31, 2020 2019 Same-Property Occupancy 25.0 % 82.3 % Same-Property ADR$ 232.61 $ 258.10 Same-Property RevPAR$ 58.13 $ 212.51 Same-Property Total RevPAR $
89.14
While the operations of many of our hotels were temporarily suspended beginning inMarch 2020 , the above schedule of hotel results for the years endedDecember 31 includes information from all hotels owned as ofDecember 31, 2020 , except forHotel Zena Washington DC (formerlyDonovan Hotel ) for the first, second and fourth quarters in both 2020 and 2019, because it was closed for renovations in the fourth quarter of 2019 and the first and second quarters of 2020. Results of Operations This section includes comparisons of certain 2020 financial information to the same information for 2019. Year-to-year comparisons of the 2019 financial information to the same information for 2018 are contained in Item 7 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSEC onFebruary 20, 2020 . 42 -------------------------------------------------------------------------------- AtDecember 31, 2020 and 2019, we had 53 and 56 wholly owned properties and leasehold interests, respectively. All properties owned during these periods have been included in our results of operations during the respective periods since their dates of acquisition or through the dates of disposition. Based on when a property was acquired or disposed, operating results for certain properties are not comparable. The properties listed below are hereinafter referred to as "non-comparable properties" for the years endedDecember 31, 2020 and 2019. All other properties are considered and 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 March 6, 2020 Sofitel Washington DC Lafayette Square Washington, D.C. March 6, 2020Union Station Hotel Nashville , Autograph Collection Nashville, TN July 29, 2020 43
-------------------------------------------------------------------------------- Comparison of the year endedDecember 31, 2020 to the year endedDecember 31, 2019 Revenues - Total revenues decreased by$1,169.3 million , of which$105.3 million was due to the non-comparable properties and the remaining decline was due to the decline in demand and suspension of operations resulting from the COVID-19 pandemic at most of our hotels during the year. As ofDecember 31, 2020 , 37 hotels and resorts were open and operations at 16 hotels have been suspended. Both occupancy and average daily rates at the opened hotels continue to be significantly below historical averages. Hotel operating expenses - Total hotel operating expenses decreased by$594.7 million , of which$63.8 million was due to the non-comparable properties and the remaining decline was due to the significant cost mitigation efforts implemented at the hotels to respond to the significant loss of demand and suspension of operations as a result of the COVID-19 pandemic. Depreciation and amortization - Depreciation and amortization expense decreased by$10.3 million primarily due to a decrease in assets resulting from the sales of 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$10.7 million due to a decline in ground rent on ground leases whose rent is based on a percentage of revenues and a decline in real estate taxes of approximately$5.0 million from properties that were sold. These declines were offset by an increase in real estate taxes primarily at properties that have not been reassessed for the current level of activity or are under appeal. General and administrative - General and administrative expenses consist of employee compensation costs, legal and professional fees, insurance and other expenses. General and administrative expenses increased by$11.1 million primarily due to the non-cash expense of$16.0 million in share-based compensation costs relating to the cancellation of the retention LTIP unit awards and time-based service condition awards and an increase in legal fees, offset by the cost cutting program put in place in response to COVID-19 which reduced primarily employee and trustee compensation and audit fees. Transaction costs - Transaction costs increased by$1.9 million due to additional transfer taxes paid in connection with the LaSalle merger. Impairment loss - We recognized an impairment loss of$74.6 million related to two hotels and the 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 from a$2.8 million gain to a$117.4 million gain. In 2019, we recognized a gain of$2.8 million from the sale of seven hotel properties. In 2020, we recognized a gain of$117.4 million from the sale of three hotel properties. (Gain) loss and other operating expenses - (Gain) loss and other operating expenses decreased by$4.5 million due primarily to the$5.9 million in hotel management transition expense incurred in 2019. Interest expense - Interest expense deceased by$4.4 million primarily as a result of a decrease in interest rates in 2020. Other - Other increased by$0.5 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$5.2 million to a benefit of$3.7 million due primarily to the taxable losses of our TRS as a result of suspended or decreased operations at our hotels compared to 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 and OP unit holders. 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 44 -------------------------------------------------------------------------------- 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 years endedDecember 31, 2020 , 2019 and 2018 (in thousands): For the year ended December 31, 2020 2019 2018 Net income (loss)
224,124 234,591 108,265
(Gain) loss on sale of hotel properties (117,401) (2,819) 2,147
Impairment loss 74,556 - -
FFO
(32,556) (32,556) (17,466)
FFO available to common share and unit holders 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 years endedDecember 31, 2020 , 2019 and 2018 (in thousands): For the year ended December 31, 2020 2019 2018 Net income (loss)$ (392,593) $ 115,725 $ 13,385 Adjustments: Interest expense 104,098 108,474 53,923 Income tax expense (benefit) (3,697) 5,172 1,742 Depreciation and amortization 224,560 234,880 108,475 EBITDA
(117,401) (2,819) 2,147
Impairment loss 74,556 - -
EBITDAre $ (110,477) $ 461,432 $ 179,672
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.
Critical Accounting Policies
We consider these policies critical because they require estimates about matters
that are inherently uncertain, involve various assumptions and require
significant management judgment, and because they are important for
understanding and evaluating our reported financial results. These judgments
affect the reported amounts of assets and liabilities and our disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Applying different estimates or assumptions may result in materially different
amounts reported in our financial statements.
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Hotel Properties
Investment in Hotel Properties
Estimation and judgment are required to determine the fair values of our
acquired hotel properties. Upon acquiring a business or hotel property, we
measure and recognize the fair value of the acquired land, land improvements,
building, furniture, fixtures and equipment, identifiable intangible assets or
liabilities, other assets and assumed liabilities. Identifiable intangible
assets or liabilities typically arise from contractual arrangements assumed in
connection with the transaction, including terms that are above or below market
compared to an estimated market agreement at the acquisition date. We determine
the acquisition-date fair values of all assets and assumed liabilities using a
combination of the market, cost and income approaches. These valuation
methodologies are based on significant Level 2 and Level 3 inputs in the fair
value hierarchy, such as estimates of future income growth, capitalization
rates, discount rates, capital expenditures and cash flow projections, including
hotel revenues and net operating income, at the respective hotel properties.
Estimates of future cash flows are based on a number of factors including
historical operating results, known and anticipated trends, and market and
economic conditions. Acquisition costs related to business combinations are
expensed as incurred.
Hotel renovations and/or replacements of assets that improve or extend the life
of the asset are capitalized and depreciated over their estimated useful lives.
Furniture, fixtures and equipment under finance leases are carried at the
present value of the minimum lease payments. Repair and maintenance costs are
expensed as incurred.
Impairment
We review our investments in hotel properties for impairment whenever events or
changes in circumstances indicate that the carrying value of the hotel
properties may not be recoverable. Events or circumstances that may cause a
review include, but are not limited to, when a hotel property experiences a
current or projected loss from operations, when it becomes more likely than not
that a hotel property will be sold before the end of its useful life, adverse
changes in the demand for lodging at the properties due to declining national or
local economic conditions and/or new hotel construction in markets where the
hotels are located. When such conditions exist, we perform an analysis to
determine if the estimated undiscounted future cash flows from operations and
the proceeds from the ultimate disposition of a hotel exceed its carrying value.
If the estimated undiscounted future cash flows are less than the carrying
amount of the asset, an adjustment to reduce the carrying amount to the related
hotel's estimated fair market value is recorded and an impairment loss
recognized. In the evaluation of impairment of our hotel properties, we make
many assumptions and estimates including projected cash flows both from
operations and eventual disposition, expected useful life and holding period,
future required capital expenditures, and fair values, including consideration
of capitalization rates, discount rates, and comparable selling prices. We will
adjust our assumptions with respect to the remaining useful life of the hotel
property when circumstances change, such as an expiring ground lease or it is
more likely than not that the hotel property will be sold prior to its
previously expected useful life.
New Accounting Pronouncements Not Yet Implemented
See Note 2, "Summary of Significant Accounting Policies," to our consolidated
financial statements for additional information relating to recently issued
accounting pronouncements.
Liquidity and Capital Resources
In March 2020 , the World Health Organization declared COVID-19 to be a global
pandemic and the virus has continued to spread throughout the United States and
the world. As a result of this pandemic and subsequent government mandates,
health official recommendations corporate travel policy changes and individual
responses, hotel demand was dramatically reduced. As of December 31, 2020 , 37 of
our hotels and resorts were open with operations of the remaining 16 hotels
still temporarily suspended. This has had a material impact on the Company's
liquidity. Refer to the Overview in Item 7., "Management's Discussion and
Analysis of Financial Condition and Results of Operations," for additional
information.
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Our debt consisted of the following as of December 31, 2020 and 2019 (dollars in
thousands):
Balance Outstanding as of
December 31,
Interest Rate Maturity Date December 31, 2020 2019
Revolving credit facilities
Senior unsecured credit facility Floating (1) January 2022 $ 40,000 $ 165,000
PHL unsecured credit facility Floating (2) January 2022 - -
Total revolving credit facilities $ 40,000 $ 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 (4) 40,966 300,000
Tranche 2021 Extended Floating (3) November 2022 173,034 -
Tranche 2022 Floating (3) November 2022 286,000 400,000
Tranche 2023 Floating (3) November 2023 400,000 400,000
Tranche 2024 Floating (3) January 2024 400,000 400,000
Total Sixth Term Loan 1,300,000 1,500,000
Total term loans at stated value 1,775,000 1,975,000
Deferred financing costs, net (8,455) (10,343) Total term loans$ 1,766,545 $ 1,964,657 Convertible senior notes Convertible senior notes 1.75% December 2026 500,000 - Debt discount, net (113,099) - Deferred financing costs, net (12,568) - Total convertible senior notes $ 374,333 $ - 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 (407) (437) Total senior unsecured notes $ 99,593$ 99,563 Total debt$ 2,280,471 $ 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 ofDecember 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%. As ofDecember 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%. 47 -------------------------------------------------------------------------------- (4) InFebruary 2021 , we repaid$12.8 million of the Sixth Term Loan Tranche 2021 and extended the majority of the remaining balance toNovember 2022 . Unsecured Revolving Credit Facilities We are party to a$650.0 million senior unsecured revolving credit facility maturing inJanuary 2022 , with options to extend the maturity date toJanuary 2023 , pursuant to certain terms and conditions and payment of an extension fee. InMarch 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 ofDecember 31, 2020 , we had$40.0 million of outstanding borrowings and borrowing capacity of$603.2 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," the spread on the borrowings is fixed at 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 inJanuary 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 on the borrowings is fixed at 2.25% during the waiver period. As ofDecember 31, 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. Debt" to the accompanying consolidated financial statements. Convertible Senior Notes InDecember 2020 , the Company issued$500.0 million aggregate principal amount of 1.75% Convertible Senior Notes maturing inDecember 2026 (the "Convertible Notes"). The Convertible Notes are governed by an indenture (the "Base Indenture") between the Company andThe Bank of New York Mellon Trust Company, N.A. , as trustee. The net proceeds from the offering of the Notes were approximately$487.3 million after deducting the underwriting fees and other expenses paid by the Company. Interest is payable semi-annually in arrears onJune 15th andDecember 15th of each year, beginning onJune 15, 2021 . The Company recorded coupon interest expense of$0.4 million for the year endedDecember 31, 2020 . The Company separated the Convertible Notes into liability and equity components. The initial carrying amount of the liability component was$386.1 million and was calculated using a discount rate of 6.25%. The discount rate was based on the terms of debt instruments that were similar to the Convertible Notes without an equity component. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the principal amount of the Convertible Notes, or$113.9 million . The amount recorded in equity is not subject to remeasurement or amortization. The$113.9 million also represents the initial discount recorded on the Convertible Notes. The discount is accreted to interest expense using the effective interest rate method over the contractual term of the Convertible Notes. The Company recorded interest expense related to the accretion of the discount and the amortization of the debt issuance costs of$0.9 million for the year endedDecember 31, 2020 . Prior toJune 15, 2026 , the Convertible Notes will be convertible only upon certain circumstances. On and afterJune 15, 2026 , holders may convert any of their Convertible Notes into the Company's 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. The Company may redeem for cash all or a portion of the Convertible Notes, at its option, on or afterDecember 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. 48 -------------------------------------------------------------------------------- In connection with the Convertible Notes, the Company entered into privately negotiated capped call transactions (the "Capped Call Transactions") with certain of the underwriters of the offering 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 was$38.3 million and was recorded within additional paid-in capital. 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 inDecember 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 inDecember 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 OnFebruary 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 year endedDecember 31, 2020 . As ofDecember 31, 2020 ,$56.6 million of common shares remained available for repurchase under this program. OnJuly 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, 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) and Provided by Operations. Our cash used in operating activities was$201.8 million for the year endedDecember 31, 2020 . Our cash from operations includes the operating activities of the 53 hotels we owned as ofDecember 31, 2020 , offset by corporate expenses. The negative cash flow from operations during the year and decline from the prior year is due to the temporary suspension and reduced operations at our hotels as a result of COVID-19. Our cash provided by operating activities was$395.2 million for the year endedDecember 31, 2019 . Our cash from operations includes the operating activities of the 56 hotels we owned as ofDecember 31, 2019 , offset by corporate expenses. Cash Provided by Investing Activities. Our cash provided by investing activities was$250.1 million for the year endedDecember 31, 2020 . During the year endedDecember 31, 2020 , we invested$125.0 million in improvements to our hotel properties and received$375.1 million from sales of hotel properties. Our cash provided by investing activities was$300.0 million for the year endedDecember 31, 2019 . During the year endedDecember 31, 2019 , we invested$169.6 million in improvements to our hotel properties and received$470.4 million from sales of hotel properties. Cash Provided by and (Used in) Financing Activities. Our cash provided by financing activities was$31.1 million for the year endedDecember 31, 2020 . During the year endedDecember 31, 2020 , we borrowed$760.1 million under the revolving credit facilities, repaid$885.1 million under the revolving credit facilities, borrowed$513.0 million in other debt, repaid$213.0 million in other debt, purchased$38.3 million in Capped Call Transactions, repurchased$1.3 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid$86.5 million in distributions, paid$16.4 million in financing fees and paid$1.4 million in other transactions. For the year endedDecember 31, 2019 , cash used in financing activities was$746.1 million . During the year endedDecember 31, 2019 , we borrowed$414.8 million under the revolving credit facilities, repaid$419.8 million under the revolving credit facilities, repaid$518.2 million of debt, repurchased$4.0 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid$217.4 million in distributions and paid$1.5 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 49 -------------------------------------------------------------------------------- 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 year endedDecember 31, 2020 , we invested$125.0 million in capital investments to reposition and improve our properties. Since the beginning of 2020, we have completed the transformational redevelopments of several hotels and resorts, includingHotel Zena Washington DC (formerlyDonovan Hotel ),Embassy Suites San Diego Bay - Downtown,The Westin San Diego Gaslamp Quarter ,Le Parc Suite Hotel ,San Diego Mission Bay Resort (formerlyHilton San Diego Mission Bay Resort ),Viceroy Santa Monica Hotel ,Chaminade Resort & Spa , ViceroyWashington DC (formerlyMason & Rook Hotel ) andThe Marker Key West Harbor Resort . Depending on market conditions, we expect total capital investments to be approximately$60.0 million to$70.0 million in 2021. However, depending on the pace of the recovery, we may decide to proceed with previously planned but deferred renovations at our properties. Contractual Obligations and Off-Balance Sheet Arrangements The table below summarizes our contractual obligations as ofDecember 31, 2020 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands): Payments due by period Less More than 1 1 to 3 3 to 5 than 5 Total year years years years Term loans (2)$ 1,928,638 $ 106,424 $ 1,308,574 $ 513,640 $ - Convertible senior notes (1) 552,135 8,750 17,500 17,500 508,385 Unsecured notes (1) 117,921 4,792 69,349 43,780 - Borrowings under credit facilities (3) 41,056 1,014 40,042 - - Hotel and ground leases (4) 1,209,864 16,814 33,787 34,113 1,125,150 Finance lease obligation 65,009 1,331 2,720 2,802 58,156 Refundable membership initiation deposits (5) 29,260 203 - - 29,057 Purchase commitments (6) 2,971 2,971 - - - Corporate office leases 15,719 1,828 3,309 2,424 8,158 Total$ 3,962,573 $ 144,127 $ 1,475,281 $ 614,259 $ 1,728,906 ____________________ (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 ofDecember 31, 2020 . 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 atLaPlaya Beach Resort and Club . 50 -------------------------------------------------------------------------------- (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 ofDecember 31, 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. The historical trend has been disrupted as a result of COVID-19. For the year endedDecember 31, 2020 , the first quarter of the year had higher revenue, operating income and cash flow with hotels suspensions and decline in operations beginning inMarch 2020 . 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$1.4 billion to hedge variable interest rates on our unsecured term loans. In addition, as ofDecember 31, 2020 , the Company had interest rates swaps for an aggregate notional amount of$490.0 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. 51
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