Pebblebrook Hotel Trust - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM			10-Q


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 001-34571




PEBBLEBROOK HOTEL TRUST
			(Exact Name of Registrant as Specified in Its Charter)


Maryland						27-1055421
(State of Incorporation or Organization)						(I.R.S. Employer Identification No.)

4747 Bethesda Avenue, Suite 1100, Bethesda, Maryland						20814
(Address of Principal Executive Offices)						(Zip Code)


(240)			507-1300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, $0.01 par value per share

PEB

New York Stock Exchange

Series C Cumulative Redeemable Preferred Shares, $0.01 par value

PEB-PC

New York Stock Exchange

Series D Cumulative Redeemable Preferred Shares, $0.01 par value

PEB-PD

New York Stock Exchange

Series E Cumulative Redeemable Preferred Shares, $0.01 par value

PEB-PE

New York Stock Exchange

Series F Cumulative Redeemable Preferred Shares, $0.01 par value

PEB-PF

New York Stock Exchange

Series G Cumulative Redeemable Preferred Shares, $0.01 par value

PEB-PG

New York Stock Exchange

Series H Cumulative Redeemable Preferred Shares, $0.01 par value

PEB-PH

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

(do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						Outstanding at July 26, 2021
Common shares of beneficial interest ($0.01 par value per share)						131,382,515


Pebblebrook Hotel Trust TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements.	3
	Consolidated Balance Sheets - June 3 0 , 2021 (unaudited) and December 31, 2020	3
	Consolidated Statements of Operations and Comprehensive Income (unaudited) - Three and six months ended June 3 0 , 2021 and 2020	4
	Consolidated Statements of Equity (unaudited) - Three and six months ended June 3 0 , 2021 and 2020	6
	Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30 , 2021 and 2020	10
	Notes to Consolidated Financial Statements (unaudited)	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	40
Item 4.	Controls and Procedures.	40
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings.	40
Item 1A.	Risk Factors.	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	40
Item 3.	Defaults Upon Senior Securities.	41
Item 4.	Mine Safety Disclosures.	41
Item 5.	Other Information.	41
Item 6.	Exhibits.	41

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.


Pebblebrook Hotel Trust Consolidated Balance Sheets (In thousands, except share and per-share data)

	June 30, 2021		December 31, 2020
	(Unaudited)
ASSETS
Investment in hotel properties, net	$	5,667,707	$	5,882,022

Cash and cash equivalents	312,064		124,274
Restricted cash	10,946		12,026
Hotel receivables (net of allowance for doubtful accounts of $542 and $183, respectively)	27,476		10,225
Prepaid expenses and other assets	56,156		47,819
Total assets	$	6,074,349	$	6,076,366
LIABILITIES AND EQUITY
Debt	$	2,274,916	$	2,280,471
Accounts payable, accrued expenses and other liabilities	243,812		226,446
Lease liabilities - operating leases	254,569		255,106
Deferred revenues	47,120		36,057
Accrued interest	4,246		4,653

Distribution payable	11,040		9,307
Total liabilities	2,835,703		2,812,040
Commitments and contingencies (Note 11)
Shareholders’ equity:
Preferred shares of beneficial interest, $.01 par value (liquidation preference $740,000 and $510,000 at June 30, 2021 and December 31, 2020, respectively), 100,000,000 shares authorized; 29,600,000 shares issued and outstanding at June 30, 2021 and 20,400,000 shares issued and outstanding at December 31, 2020	296		204
Common shares of beneficial interest, $.01 par value, 500,000,000 shares authorized; 130,813,750 shares issued and outstanding at June 30, 2021 and 130,673,300 shares issued and outstanding at December 31, 2020	1,308		1,307
Additional paid-in capital	4,263,473		4,169,870
Accumulated other comprehensive income (loss)	(39,820)		(60,071)
Distributions in excess of retained earnings	(993,654)		(853,973)
Total shareholders’ equity	3,231,603		3,257,337
Non-controlling interests	7,043		6,989
Total equity	3,238,646		3,264,326
Total liabilities and equity	$	6,074,349	$	6,076,366

The accompanying notes are an integral part of these financial statements.

Table of Contents


Pebblebrook Hotel Trust Consolidated Statements of Operations and Comprehensive Income (In thousands, except share and per-share data) (Unaudited)

	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
Revenues:
Room	$	108,603	$	10,801	$	162,066	$	187,942
Food and beverage	31,514		3,089		46,323		70,181
Other operating	23,197		8,702		38,568		33,576
Total revenues	163,314		22,592		246,957		291,699
Expenses:
Hotel operating expenses:
Room	28,563		5,430		45,273		59,555
Food and beverage	22,453		3,707		33,196		55,566
Other direct and indirect	56,219		31,448		101,447		126,918
Total hotel operating expenses	107,235		40,585		179,916		242,039
Depreciation and amortization	54,701		55,520		110,144		111,348
Real estate taxes, personal property taxes, property insurance, and ground rent	29,436		27,460		58,026		57,226
General and administrative	9,724		8,216		17,370		30,793
Transaction costs	1		99		112		135
Impairment loss	—		—		14,856		20,570
(Gain) loss on sale of hotel properties	(64,558)		—		(64,558)		(117,448)
(Gain) loss and other operating expenses	520		1,403		971		2,836
Total operating expenses	137,059		133,283		316,837		347,499
Operating income (loss)	26,255		(110,691)		(69,880)		(55,800)
Interest expense	(24,804)		(24,091)		(50,135)		(47,682)
Other	29		303		58		327
Income (loss) before income taxes	1,480		(134,479)		(119,957)		(103,155)
Income tax (expense) benefit	(52)		3,565		(55)		14,309
Net income (loss)	1,428		(130,914)		(120,012)		(88,846)
Net income (loss) attributable to non-controlling interests	(102)		(401)		(960)		(282)
Net income (loss) attributable to the Company	1,530		(130,513)		(119,052)		(88,564)
Distributions to preferred shareholders	(10,094)		(8,139)		(18,233)		(16,278)

Net income (loss) attributable to common shareholders	$	(8,564)	$	(138,652)	$	(137,285)	$	(104,842)
Net income (loss) per share available to common shareholders, basic	$	(0.07)	$	(1.06)	$	(1.05)	$	(0.80)
Net income (loss) per share available to common shareholders, diluted	$	(0.07)	$	(1.06)	$	(1.05)	$	(0.80)
Weighted-average number of common shares, basic	130,813,521		130,563,831		130,794,801		130,559,838
Weighted-average number of common shares, diluted	130,813,521		130,563,831		130,794,801		130,559,838

Table of Contents


Pebblebrook Hotel Trust Consolidated Statements of Operations and Comprehensive Income - Continued (In thousands, except share and per-share data) (Unaudited)

	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020

Comprehensive Income:
Net income (loss)	$	1,428	$	(130,914)	$	(120,012)	$	(88,846)
Other comprehensive income (loss):
Change in fair value of derivative instruments	(2,310)		(7,945)		7,426		(65,419)
Amounts reclassified from other comprehensive income	6,407		7,540		12,825		10,749
Comprehensive income (loss)	5,525		(131,319)		(99,761)		(143,516)
Comprehensive income (loss) attributable to non-controlling interests	(76)		(402)		(828)		(437)
Comprehensive income (loss) attributable to the Company	$	5,601	$	(130,917)	$	(98,933)	$	(143,079)

The accompanying notes are an integral part of these financial statements.

Table of Contents


Pebblebrook Hotel Trust Consolidated Statements of Equity (In thousands, except share data) (Unaudited)





























































	For the three months ended June 30, 2021


















	Preferred Shares			Common Shares			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Distributions in Excess of Retained Earnings		Total Shareholders' Equity		Non-Controlling Interests		Total Equity
	Shares	Amount		Shares	Amount
Balance at March 31, 2021	20,400,000	$	204	130,812,917	$	1,308	$	4,038,860	$	(43,917)	$	(983,771)	$	3,012,684	$	6,472	$	3,019,156
Issuance of shares, net of offering costs	9,200,000	92		—	—		222,248		—		—		222,340		—		222,340



Share-based compensation	—	—		833	—		2,365		—		—		2,365		698		3,063
Distributions on common shares/units	—	—		—	—		—		—		(1,319)		(1,319)		(25)		(1,344)
Distributions on preferred shares	—	—		—	—		—		—		(10,094)		(10,094)		—		(10,094)



Other comprehensive income (loss):
Change in fair value of derivative instruments	—	—		—	—		—		(2,310)		—		(2,310)		—		(2,310)
Amounts reclassified from other comprehensive income	—	—		—	—		—		6,407		—		6,407		—		6,407

Net income (loss)	—	—		—	—		—		—		1,530		1,530		(102)		1,428
Balance at June 30, 2021	29,600,000	$	296	130,813,750	$	1,308	$	4,263,473	$	(39,820)	$	(993,654)	$	3,231,603	$	7,043	$	3,238,646

Table of Contents



	For the three months ended June 30, 2020
	Preferred Shares			Common Shares			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Distributions in Excess of Retained Earnings		Total Shareholders' Equity		Non-Controlling Interests		Total Equity
	Shares	Amount		Shares	Amount
Balance at March 31, 2020	20,400,000	$	204	130,563,226	$	1,306	$	4,075,727	$	(78,980)	$	(391,950)	$	3,606,307	$	21,459	$	3,627,766
Issuance of shares, net of offering costs	—	—		—	—		(9)		—		—		(9)		—		(9)



Share-based compensation	—	—		834	—		1,779		—		—		1,779		—		1,779
Distributions on common shares/units	—	—		—	—		—		—		(1,312)		(1,312)		(20)		(1,332)
Distributions on preferred shares	—	—		—	—		—		—		(8,139)		(8,139)		—		(8,139)



Other comprehensive income (loss):
Change in fair value of derivative instruments	—	—		—	—		—		(7,945)		—		(7,945)		—		(7,945)
Amounts reclassified from other comprehensive income	—	—		—	—		—		7,540		—		7,540		—		7,540

Net income (loss)	—	—		—	—		—		—		(130,513)		(130,513)		(401)		(130,914)
Balance at June 30, 2020	20,400,000	$	204	130,564,060	$	1,306	$	4,077,497	$	(79,385)	$	(531,914)	$	3,467,708	$	21,038	$	3,488,746

Table of Contents



	For the six months ended June 30, 2021
	Preferred Shares			Common Shares			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Distributions in Excess of Retained Earnings		Total Shareholders' Equity		Non-Controlling Interests		Total Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	20,400,000	$	204	130,673,300	$	1,307	$	4,169,870	$	(60,071)	$	(853,973)	$	3,257,337	$	6,989	$	3,264,326
Issuance of shares, net of offering costs	9,200,000	92		—	—		222,238		—		—		222,330		—		222,330

Issuance of common shares for Board of Trustees compensation	—	—		27,711	1		515		—		—		516		—		516
Repurchase of common shares	—	—		(38,310)	(1)		(719)		—		—		(720)		—		(720)
Share-based compensation	—	—		151,049	1		5,643		—		—		5,644		1,047		6,691
Distributions on common shares/units	—	—		—	—		—		—		(2,396)		(2,396)		(33)		(2,429)
Distributions on preferred shares	—	—		—	—		—		—		(18,233)		(18,233)		—		(18,233)

Cumulative effect adjustment from adoption of new accounting standard	—	—		—	—		(113,099)		—		—		(113,099)		—		(113,099)
Purchases of capped calls in connection with convertible senior notes	—	—		—	—		(20,975)		—		—		(20,975)		—		(20,975)
Other comprehensive income (loss):
Change in fair value of derivative instruments	—	—		—	—		—		7,426		—		7,426		—		7,426
Amounts reclassified from other comprehensive income	—	—		—	—		—		12,825		—		12,825		—		12,825

Net income (loss)	—	—		—	—		—		—		(119,052)		(119,052)		(960)		(120,012)
Balance at June 30, 2021	29,600,000	$	296	130,813,750	$	1,308	$	4,263,473	$	(39,820)	$	(993,654)	$	3,231,603	$	7,043	$	3,238,646

Table of Contents



	For the six months ended June 30, 2020
	Preferred Shares			Common Shares			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Distributions in Excess of Retained Earnings		Total Shareholders' Equity		Non-Controlling Interests		Total Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2019	20,400,000	$	204	130,484,956	$	1,305	$	4,069,410	$	(24,715)	$	(424,996)	$	3,621,208	$	10,728	$	3,631,936
Issuance of shares, net of offering costs	—	—		—	—		(94)		—		—		(94)		—		(94)

Issuance of common shares for Board of Trustees compensation	—	—		23,528	1		636		—		—		637		—		637
Repurchase of common shares	—	—		(47,507)	(1)		(1,254)		—		—		(1,255)		—		(1,255)
Share-based compensation	—	—		103,083	1		8,799		—		—		8,800		10,616		19,416
Distributions on common shares/units	—	—		—	—		—		—		(2,076)		(2,076)		(24)		(2,100)
Distributions on preferred shares	—	—		—	—		—		—		(16,278)		(16,278)		—		(16,278)




Change in fair value of derivative instruments	—	—		—	—		—		(65,419)		—		(65,419)		—		(65,419)
Amounts reclassified from other comprehensive income	—	—		—	—		—		10,749		—		10,749		—		10,749

Net income (loss)	—	—		—	—		—		—		(88,564)		(88,564)		(282)		(88,846)
Balance at June 30, 2020	20,400,000	$	204	130,564,060	$	1,306	$	4,077,497	$	(79,385)	$	(531,914)	$	3,467,708	$	21,038	$	3,488,746

The accompanying notes are an integral part of these financial statements.

Table of Contents


Pebblebrook Hotel Trust Consolidated Statements of Cash Flows (In thousands) (Unaudited)
	For the six months ended June 30,
	2021		2020
Operating activities:
Net income (loss)	$	(120,012)	$	(88,846)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	110,144		111,348
Share-based compensation	5,244		19,416

Amortization of deferred financing costs, non-cash interest and mortgage loan premiums	9,068		7,178
(Gain) loss on sale of hotel properties	(64,558)		(117,448)
Impairment loss	14,856		20,570
Non-cash ground rent	3,041		3,129
Other	(52)		92
Changes in assets and liabilities:
Hotel receivables	(17,610)		39,350
Prepaid expenses and other assets	7,315		(1,311)
Accounts payable and accrued expenses	38,765		(60,770)
Deferred revenues	11,516		(19,290)
Net cash provided by (used in) operating activities	(2,283)		(86,582)
Investing activities:


Improvements and additions to hotel properties	(26,984)		(89,636)

Proceeds from sales of hotel properties	171,988		320,036


Deposits on hotel properties	(17,148)		—
Purchase of corporate office equipment, software, and furniture	(64)		—

Net cash provided by (used in) investing activities	127,792		230,400
Financing activities:

Gross proceeds from issuance of preferred shares	230,000		—
Payment of offering costs — common and preferred shares	(7,670)		(94)
Payment of deferred financing costs	(9,611)		(3,618)


Borrowings under revolving credit facilities	—		760,115
Repayments under revolving credit facilities	(40,000)		(535,115)
Proceeds from debt	268,599		12,965
Repayments of debt	(338,000)		(12,965)
Purchases of capped calls for convertible senior notes	(20,975)		—
Repurchases of common shares	(720)		(1,255)


Distributions — common shares/units	(2,634)		(51,338)
Distributions — preferred shares	(16,278)		(16,278)

Repayments of refundable membership deposits	(1,510)		(273)
Net cash provided by (used in) financing activities	61,201		152,144
Net change in cash and cash equivalents and restricted cash	186,710		295,962
Cash and cash equivalents and restricted cash, beginning of year	136,300		56,875
Cash and cash equivalents and restricted cash, end of period	$	323,010	$	352,837

The accompanying notes are an integral part of these financial statements.

PEBBLEBROOK HOTEL TRUST

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Organization

Pebblebrook Hotel Trust (the "Company") was formed as a Maryland real estate investment trust in October 2009 to opportunistically acquire and invest in hotel properties located primarily in major United States cities, with an emphasis on major gateway coastal markets.

As of June 30, 2021, the Company owned 51 hotels with a total of 12,626 guest rooms. The hotels are located in the following markets: Boston, Massachusetts; Chicago, Illinois; Key West, Florida; Miami (Coral Gables), Florida; Los Angeles, California (Beverly Hills, Santa Monica, and West Hollywood); Naples, Florida; Philadelphia, Pennsylvania; Portland, Oregon; San Diego, California; San Francisco, California; Seattle, Washington; Stevenson, Washington; and Washington, D.C.

Substantially all of the Company’s assets are held by, and all of the Company's operations are conducted through, Pebblebrook Hotel, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership. At June 30, 2021, the Company owned 99.3% of the common limited partnership units issued by the Operating Partnership ("common units"). The remaining 0.7% of the common units are owned by the other limited partners of the Operating Partnership. For the Company to maintain its qualification as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), it cannot operate the hotels it owns. Therefore, the Operating Partnership and its subsidiaries lease the hotel properties to subsidiaries of Pebblebrook Hotel Lessee, Inc. (collectively with its subsidiaries, "PHL"), a taxable REIT subsidiary ("TRS"), which in turn engage third-party eligible independent contractors to manage the hotels. PHL is consolidated into the Company’s financial statements.

COVID-19 Operations and Liquidity Update

In March 2020, the World Health Organization declared the novel coronavirus ("COVID-19") to be a global pandemic and the virus spread throughout the 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, the Company implemented significant cost controls, salary reductions and temporarily suspended operations at 47 of its hotels and resorts. In addition, to improve liquidity, the Company 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, the Company reopened its hotels and resorts. As of June 30, 2021, 49 of the Company's hotels and resorts were open, with operations remaining suspended at Villa Florence San Francisco on Union Square and Hotel Vitale. Subsequent to June 30, 2021, the Company reopened Villa Florence San Francisco on Union Square and commenced a renovation of Hotel 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 the Company's operations and financial results to date and the Company expects that it will continue to have a significant negative impact on the Company's results of operations, financial position and cash flow in 2021. The Company cannot estimate when travel demand will fully recover. However, leisure travel as a result of pent-up leisure demand has exceeded expectations, particularly at the Company's warmer weather and resort properties.

In February 2021, the Company issued, at a 5.5% premium to par, an additional $250.0 million aggregate principal amount of the convertible notes originally issued in December 2020. In connection with the pricing of the convertible notes, the Company 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 the Company's senior unsecured revolving credit facility, unsecured term loans and for general corporate purposes.

In February 2021, the Company amended the agreements governing its 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 through December 31, 2021, and to increase the interest rate spread. For additional information regarding these amendments and the convertible notes, see Note 5, Debt.

In May 2021, the Company 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 Company used the net proceeds to reduce amounts outstanding under the Company’s unsecured term loans and for general corporate purposes.

Based on the amendments described above, expense and cash burn rate reductions, and the ability to raise additional liquidity through equity issuances, the Company believes it has sufficient liquidity to meet its obligations for the next twelve months.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP and in conformity with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) applicable to interim financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of equity and consolidated statements of cash flows for the periods presented. Interim results are not necessarily indicative of full-year performance, as a result of the impact of seasonal and other short-term variations and the acquisitions and or dispositions of hotel properties. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

The Company and its subsidiaries are separate legal entities and maintain records and books of account separate and apart from each other. The consolidated financial statements include all of the accounts of the Company and its subsidiaries and are presented in accordance with U.S. GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.

Certain reclassifications have been made to the prior period's financial statements to conform to the current year presentation.

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management’s best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.

Fair Value Measurements

A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value are as follows:

1.Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

2.Level 2 – Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable.

3.Level 3 – Model-derived valuations with unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

The Company's financial instruments include cash and cash equivalents, restricted cash, accounts payable and accrued expenses. Due to their short maturities, the carrying amounts of these assets and liabilities approximate fair value. See Note 5, Debt, to the accompanying consolidated financial statements for disclosures on the fair value of debt and derivative instruments.

Investment in Hotel Properties

Upon acquiring a business or hotel property, the Company measures and recognizes 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 in connection with the transaction, including terms that are above or below market compared to an estimated market agreement at the acquisition date. Acquisition-date fair values of assets and assumed liabilities are determined 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.

Transaction costs are expensed for acquisitions that are considered business combinations and capitalized for asset acquisitions.

Hotel renovations and replacements of assets that improve or extend the life of the asset are recorded at cost and depreciated over their estimated useful lives. Furniture, fixtures and equipment under finance leases are recorded at the present value of the minimum lease payments. Repair and maintenance costs are expensed as incurred.

Hotel properties are recorded at cost and depreciated using the straight-line method over an estimated useful life of 10 to 40 years for buildings, land improvements, and building improvements and 1 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. Intangible assets arising from contractual arrangements are typically amortized over the life of the contract. The Company is required to make subjective assessments as to the useful lives and classification of properties for purposes of determining the amount of depreciation expense to reflect each year with respect to the assets. These assessments may impact the Company’s results of operations.

The Company reviews its 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, the Company performs 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 value of the asset, an adjustment to reduce the carrying value to the related hotel’s estimated fair market value is recorded and an impairment loss is recognized. In the evaluation of impairment of its hotel properties, the Company makes many assumptions and estimates including projected cash flows both from operations and eventual disposition, expected useful life and estimated holding period, future required capital expenditures, and fair values, including consideration of expected terminal capitalization rates, discount rates, and comparable selling prices. The Company will adjust its assumptions with respect to the remaining useful life of the hotel property when circumstances change or it is more likely than not that the hotel property will be sold prior to its previously expected useful life.

The Company will classify a hotel as held for sale and will cease recording depreciation expense when a binding agreement to sell the property has been signed under which the buyer has committed a significant amount of nonrefundable cash, approval of the Company's board of trustees (the "Board of Trustees") has been obtained, no significant financing contingencies exist, and the sale is expected to close within one year. If the fair value less costs to sell is lower than the carrying value of the hotel, the Company will record an impairment loss. The Company will classify the loss as continuing or discontinuing operations on the consolidated statements of operations and comprehensive income and classify the assets and related liabilities as held for sale on the consolidated balance sheets.

The Company will report a disposed or held for sale hotel property or group of hotel properties in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on its operations and financial results. All other disposed hotel properties will have their operating results reflected within continuing operations on the Company's consolidated statements of operations and comprehensive income for all periods presented.

Revenue Recognition

Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over the length of a customer's hotel stay. Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the point in time or over the time period that goods or services are provided to the customer. Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or agent in these arrangements. If the Company is the agent, revenue is recognized based upon the commission earned from the third party. If the Company is the principal, the Company recognizes revenue based upon the gross sales price. Some contracts for rooms or food and beverage services require an upfront deposit which is recorded as deferred revenues (or contract liabilities) and recognized once the performance obligations are satisfied.

The Company recognizes revenue related to nonrefundable membership initiation fees and refundable membership initiation deposits over the expected life of an active membership. For refundable membership initiation deposits, the difference between the amount paid by the member and the present value of the refund obligation is deferred and recognized as other operating revenues on the consolidated statements of operations and comprehensive income over the expected life of an active membership. The present value of the refund obligation is recorded as a membership initiation deposit liability in the consolidated balance sheets and accretes over the nonrefundable term using the effective interest method using the Company's incremental borrowing rate. The accretion is included in interest expense.

Certain of the Company's hotels have retail spaces, restaurants or other spaces which the Company leases to third parties. When collection of substantially all lease payments during the lease term is considered probable, lease revenue is recognized on a straight-line basis over the life of the lease. When collection of substantially all lease payments during the lease term is not considered probable, revenue is recognized as the lesser of the amount under straight-line basis or cash received. Lease revenue is included in other operating revenues in the Company's consolidated statements of operations and comprehensive income.

The Company collects sales, use, occupancy and similar taxes at its hotels which are presented on a net basis on the consolidated statements of operations and comprehensive income. Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. The Company maintains an allowance for doubtful accounts sufficient to cover estimated potential credit losses.

Income Taxes

To qualify as a REIT for federal income tax purposes, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90 percent of its REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains) to its shareholders. As a REIT, the Company generally is not subject to federal corporate income tax on that portion of its taxable income that is currently distributed to shareholders. The Company is subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, the Company's TRS lessees are subject to federal and state income taxes. The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Share-based Compensation

The Company has adopted an equity incentive plan that provides for the grant of common share options, share awards, share appreciation rights, performance units and other equity-based awards. Equity-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the vesting period. Share-based compensation awards that contain a performance condition are reviewed at least quarterly to assess the achievement of the performance condition. Compensation expense will be adjusted when a change in the assessment of achievement of the specific performance condition level is determined to be probable. The determination of fair value of these awards is subjective and involves estimates and assumptions including expected volatility of the Company's shares, expected dividend yield, expected term and assumptions of whether these awards will achieve parity with other operating partnership units or achieve performance thresholds.

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing the net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income (loss) available to common shareholders, as adjusted for dilutive securities, by the weighted-average number of common shares outstanding plus dilutive securities. Any anti-dilutive securities are excluded from the diluted per-share calculation.

Recent Accounting Standards

During the first quarter of 2020, the Financial Accounting Standards Board (" FASB") issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40), which, among other things, simplifies the accounting for convertible instruments by eliminating the requirement to separate conversion features from the host contract. The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. As a result, in more cases, convertible debt will be accounted for as a single instrument. The guidance also removes certain conditions for equity classification related to contracts in an entity’s own equity and requires the application of the if-converted method for calculating diluted earnings per share. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods. The Company early adopted ASU 2020-06 on January 1, 2021. As such, on January 1, 2021, the Company reclassified its equity component of the convertible debt to the liability. Convertible debt is now recorded entirely as a single liability with no portion of the proceeds from the issuance of the convertible debt instrument recorded as attributable to the conversion feature. In addition, the Company ceased recording non-cash interest expense associated with amortization of the debt discount and calculates earnings per share using the if-converted method to the extent those shares are not anti-dilutive.

Note 3. Acquisition and Disposition of Hotel Properties

There were no acquisitions of hotel properties during the three and six months ended June 30, 2021 and 2020.

The following table sets forth information regarding the Company's disposition transactions during the six months ended June 30, 2021 and 2020 (in thousands):

Hotel Property Name

Location

Sale Date

Sale Price

Sir Francis Drake

San Francisco, CA

April 1, 2021

157,625

The Roger New York

New York, NY

June 10, 2021

19,000

2021 Total

176,625

Sofitel Washington DC Lafayette Square and InterContinental Buckhead Atlanta

Washington, DC / Buckhead, GA

March 6, 2020

331,000

2020 Total

331,000

For the three and six months ended June 30, 2021, the Company recognized a gain on its dispositions of $64.6 million, which is included in (gain) loss on sale of hotel properties in the accompanying consolidated statements of operations and comprehensive income. For the three and six months ended June 30, 2020, the Company recognized a gain on its dispositions of zero and $117.4 million, respectively, which is included in (gain) loss on sale of hotel properties in the accompanying consolidated statements of operations and comprehensive income.

For the three and six months ended June 30, 2021 the accompanying consolidated statements of operations and comprehensive income included operating income (loss) of $0.2 million and $(1.3) million, respectively, related to the hotel properties sold. For the three and six months ended June 30, 2020, the accompanying consolidated statements of operations and comprehensive income included operating income (loss) of $(1.0) million and $5.7 million, respectively, related to the hotel properties sold.

The sales of the hotel properties described above did not represent a strategic shift that had a major effect on the Company’s operations and financial results, and therefore, did not qualify as discontinued operations.

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Note 4. Investment in Hotel Properties

Investment in hotel properties as of June 30, 2021 and December 31, 2020 consisted of the following (in thousands):


	June 30, 2021		December 31, 2020
Land	$	947,275	$	973,848
Buildings and improvements	4,768,376		4,849,644
Furniture, fixtures and equipment	501,386		515,975
Finance lease asset	91,181		114,835
Construction in progress	4,913		5,443
	$	6,313,131	$	6,459,745
Right-of-use asset, operating leases	317,322		320,564
Investment in hotel properties	$	6,630,453	$	6,780,309
Less: Accumulated depreciation	(962,746)		(898,287)
Investment in hotel properties, net	$	5,667,707	$	5,882,022

The Company reviews its investment in hotel properties for impairment whenever events or circumstances indicate potential impairment. As a result of the ongoing effects of the COVID-19 pandemic on its expected future operating cash flows and estimated hold periods for certain properties, the Company determined certain impairment triggers had occurred and therefore, the Company assessed its investment in hotel properties for recoverability. Based on the analyses performed, for the six months ended June 30, 2021, the Company recognized an impairment loss of $14.9 million related to one hotel as a result of the fair value being lower than its carrying value. The impairment loss was determined using Level 2 inputs under authoritative guidance for fair value measurements using information from current marketing efforts for this property. For the six months ended June 30, 2020, the Company recognized an impairment loss of $20.6 million related to a retail component of a hotel as a result of the fair value being lower than its carrying value. The impairment loss was determined using Level 2 inputs under authoritative guidance for fair value measurements.

The Company recognized right-of-use assets and related liabilities related to its ground leases, all of which are operating leases. Since most of the Company's leases do not provide an implicit rate, the Company used incremental borrowing rates, which ranged from 5.5% to 7.6%. All of these ground leases have long terms, ranging from 10 years to 88 years and the Company included the exercise of options to extend when it is reasonably certain the Company will exercise such option. See Note 11, Commitments and Contingencies, for additional information about the ground leases. The right-of-use assets and liabilities are amortized to ground rent expense over the term of the underlying lease agreements. As of June 30, 2021, the Company's lease liabilities consisted of operating lease liabilities of $254.6 million and financing lease liabilities of $41.7 million. As of December 31, 2020, the Company's lease liabilities consisted of operating lease liabilities of $255.1 million and financing lease liabilities of $46.4 million. The financing lease liabilities are included in accounts payable, accrued expenses and other liabilities on the Company's accompanying consolidated balance sheets.

Note 5. Debt

On February 18, 2021, the Company amended its credit agreements and related documents governing its unsecured revolving credit facilities, term loan agreements and senior notes, which:

•extended the waiver period for financial covenants through the end of the first quarter of 2022 except for the minimum fixed charge coverage and the minimum unsecured interest coverage ratio which are extended through December 31, 2021. The covenants are substantially less restrictive through a phase-in period;

•extended the majority of the remaining balance of the Company's Sixth Term Loan 2021 tranche, from November 2021 to November 2022;

•increased the spread on the unsecured revolving credit facility to LIBOR plus 2.4% and unsecured term loans to LIBOR plus 2.35%;

•increased the fixed rate on the Senior Unsecured Notes by 0.45% during the waiver period; and

•extended other terms through the waiver period.

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The Company's debt consisted of the following as of June 30, 2021 and December 31, 2020 (dollars in thousands):


				Balance Outstanding as of
	Interest Rate		Maturity Date	June 30, 2021		December 31, 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 the Company's 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 the Company's option, either (i) LIBOR plus an applicable margin or (ii) an 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 the Company's option, either (i) LIBOR plus an applicable margin or (ii) a Base Rate plus an applicable margin. As of June 30, 2021, $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 $57.0 million bore an effective weighted-average floating interest rate of 2.67%. As of December 31, 2020, $1.4 billion of the borrowings under the term loan facilities bore a weighted-average fixed interest rate of 4.19%, after taking into account interest rate swap agreements, and $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.

(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.

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Unsecured Revolving Credit Facilities

The Company has 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, the Company had no outstanding borrowings, $5.8 million of outstanding letters of credit and borrowing capacity of $644.2 million remaining on its senior unsecured 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 Company has the ability to further increase the aggregate borrowing capacity under the credit agreement up to $1.3 billion, subject to lender approval. Borrowings on the revolving credit facility bear interest at LIBOR plus 1.45% to 2.25%, depending on the Company’s leverage ratio. As a result of the amendments to the credit agreements and related documentation described above, the spread on the borrowings is fixed at 2.40% during the waiver period. Additionally, the Company is required to pay an unused commitment fee at an annual rate of 0.20% or 0.30% of the unused portion of the revolving credit facility, depending on the amount of borrowings outstanding. The credit agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a maximum percentage of secured debt to total asset value.

The Company also has 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 the Company's senior unsecured revolving credit facility and matures in January 2022. Borrowings on the PHL Credit Facility bear interest at LIBOR plus 1.45% to 2.25%, depending on the Company's leverage ratio. As a result of the amendments described above, the spread of the borrowings is fixed at 2.40% during the waiver period. The PHL Credit Facility is subject to debt covenants substantially similar to the covenants under the Company's credit agreement that governs the Company's senior unsecured revolving credit facility. As of June 30, 2021, the Company had no borrowings under the PHL Credit Facility and had $25.0 million borrowing capacity remaining available under the PHL Credit Facility.

Under the terms of the credit agreement for the unsecured revolving credit facility, one or more standby letters of credit, up to a maximum aggregate outstanding balance of $30.0 million, may be issued on behalf of the Company by the lenders under the unsecured revolving credit facility. The Company will incur a fee that shall be agreed upon with the issuing bank. Any outstanding standby letters of credit reduce the available borrowings on the senior unsecured revolving credit facility by a corresponding amount. Standby letters of credit of $5.8 million and $6.8 million were outstanding as of June 30, 2021 and December 31, 2020, respectively.

As of June 30, 2021, the Company was in compliance with all debt covenants of the credit agreements that govern the unsecured revolving credit facilities.

Unsecured Term Loan Facilities

The Company has 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 the Company's leverage ratio. Each of the term loan facilities is subject to debt covenants substantially similar to the covenants under the credit agreement that governs the revolving credit facility. Upon completion of the convertible notes offering in February 2021, the Company repaid $177.0 million of the Company's second and sixth term loans. Upon completion of the preferred equity offering in May 2021, the Company repaid $111.0 million of the Company's second and sixth term loans. As of June 30, 2021, the Company was in compliance with all debt covenants of its term loan facilities. The Company entered into interest rate swap agreements to fix the LIBOR rate on a portion of these unsecured term loan facilities. See Derivative and Hedging Activities below.

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 for the three and six months ended June 30, 2021.

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The Company separated the Convertible Notes issued in December 2020 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. 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 such Convertible Notes, or $113.9 million. The amount recorded in equity was not subject to remeasurement or amortization. The $113.9 million also represented the initial discount recorded on the Convertible Notes. The Company early adopted ASU 2020-06 on January 1, 2021. As a result, the Convertible Notes are now recorded as a single liability with no portion recorded in equity. The Company also ceased recording non-cash interest expense associated with amortization of the debt discount.

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.

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.

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Interest Expense

The components of the Company's interest expense consisted of the following for the three and six months ended June 30, 2021 and 2020 (in thousands):


	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
Unsecured revolving credit facilities	$	507	$	3,364	$	1,068	$	5,669
Unsecured term loan facilities	15,632		16,484		31,541		33,636
Convertible senior notes	3,280		—		6,099		—
Senior unsecured notes	1,020		1,198		2,272		2,396

Amortization of deferred financing fees	2,709		1,190		5,368		2,380
Other	1,656		1,855		3,787		3,601
Total interest expense	$	24,804	$	24,091	$	50,135	$	47,682

The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates, taking into consideration general market conditions and maturity of the debt with similar credit terms and is classified within Level 2 of the fair value hierarchy. The estimated fair value of the Company’s fixed rate debt (unsecured senior notes and convertible senior notes) as of June 30, 2021 and December 31, 2020 was $642.4 million and $491.8 million, respectively.

Derivative and Hedging Activities

The Company enters into interest rate swap agreements to hedge against interest rate fluctuations. All of the Company's interest rate swaps are cash flow hedges. All unrealized gains and losses on these hedging instruments are reported in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

The Company's interest rate swaps at June 30, 2021 and December 31, 2020 consisted of the following, by maturity date (dollars in thousands):


			Aggregate Notional Value as of
Hedge Type	Interest Rate Range	Maturity	June 30, 2021		December 31, 2020
Swap-cash flow	1.46% - 1.75%	January 2021	$	—	$	490,000
Swap-cash flow	2.60%	October 2021	110,000		110,000
Swap-cash flow	1.78% - 1.79%	January 2022	180,000		180,000
Swap-cash flow	1.64% - 1.68%	April 2022	100,000		100,000
Swap-cash flow	0.17%	January 2023	200,000		—
Swap-cash flow	1.99%	November 2023	250,000		250,000
Swap-cash flow	2.60%	January 2024	300,000		300,000
Swap-cash flow	1.43% - 1.44%	February 2026	290,000		—
Total			$	1,430,000	$	1,430,000

During the six months ended June 30, 2021, the Company had interest rate swaps for an aggregate notional amount of $490.0 million that became effective as other interest rate swaps matured. As of June 30, 2021, there are no additional interest rate swaps outstanding that will become effective in the future. The Company records all derivative instruments at fair value in the accompanying consolidated balance sheets. Fair values of interest rate swaps are determined using the standard market methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. Variable interest rates used in the calculation of projected receipts and payments on the swaps are based on an expectation of future interest rates derived from observable market interest rate curves (Overnight Index Swap curves) and volatilities (Level 2 inputs). Derivatives expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. The Company incorporates these counterparty credit risks in its fair value measurements. The Company believes it minimizes the credit risk by transacting with major creditworthy financial institutions.

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As of June 30, 2021, the Company's derivative instruments were in both asset and liability positions, with aggregate asset and liability fair values of $0.1 million and $38.9 million, respectively, which are included in prepaid expenses and other assets and accounts payable, accrued expenses and other liabilities, respectively, in the accompanying consolidated balance sheets. The Company expects approximately $20.6 million will be reclassified from accumulated other comprehensive income (loss) to interest expense within the next 12 months.

Note 6. Revenue

The Company presents revenue on a disaggregated basis in the accompanying consolidated statements of operations and comprehensive income. The following table presents revenues by geographic location for the three and six months ended June 30, 2021 and 2020 (in thousands):


	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
Southern FL	$	38,729	$	6,744	$	73,973	$	41,935
San Diego, CA	41,466		5,815		56,144		47,494
Boston, MA	23,455		1,965		33,212		37,907
Los Angeles, CA	21,741		1,501		29,781		36,289
Portland, OR	12,142		1,086		17,924		16,734
San Francisco, CA	9,176		2,963		12,129		63,003
Other(1)	6,629		389		9,604		20,700
Washington, D.C.	4,264		94		6,166		11,003
Chicago, IL	4,274		2,000		6,098		12,273
Seattle, WA	1,438		35		1,926		4,361
	$	163,314	$	22,592	$	246,957	$	291,699

(1) Other includes: Atlanta (Buckhead), GA, Nashville, TN, New York, NY, Philadelphia, PA and Santa Cruz, CA.

Payments from customers are primarily made when services are provided. Due to the short-term nature of the Company's contracts and the almost simultaneous receipt of payment, almost all of the contract liability balance at the beginning of the period is expected to be recognized as revenue over the following 12 months.

Note 7. Equity

Common Shares

The Company is authorized to issue up to 500,000,000 common shares. Each outstanding common share entitles the holder to one vote on each matter submitted to a vote of shareholders. Holders of common shares are entitled to receive dividends when authorized by the Board of Trustees.

On February 22, 2016, the Company announced that the Board of Trustees authorized a share repurchase program of up to $150.0 million of common shares. Under this program, the Company may repurchase common shares from time to time in transactions on the open market or by private agreement. The Company may suspend or discontinue this program at any time. Upon repurchase by the Company, common shares cease to be outstanding and become authorized but unissued common shares. For the six months ended June 30, 2021, the Company had no repurchases under this program and as of June 30, 2021, $56.6 million of common shares remained available for repurchase under this program.

On July 27, 2017, the Company announced that the Board of Trustees authorized a new share repurchase program of up to $100.0 million of common shares. Under this program, the Company may repurchase common shares from time to time in transactions on the open market or by private agreement. The Company may suspend or discontinue this program at any time. This $100.0 million share repurchase program will commence upon completion of the Company's $150.0 million share repurchase program.

On April 29, 2021, the Company 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.

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Common Dividends

The Company declared the following dividends on common shares/units for the six months ended June 30, 2021:

Dividend per Share/Unit

For the Quarter Ended

Record Date

Payable Date

0.01

March 31, 2021

April 15, 2021

0.01

June 30, 2021

July 15, 2021

Preferred Shares

The Company is authorized to issue up to 100,000,000 preferred shares of beneficial interest, $0.01 par value per share (“preferred shares”). 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.

The following Preferred Shares were outstanding as of June 30, 2021 and December 31, 2020:


Security Type	June 30, 2021	December 31, 2020
6.50% Series C	5,000,000	5,000,000
6.375% Series D	5,000,000	5,000,000
6.375% Series E	4,400,000	4,400,000
6.30% Series F	6,000,000	6,000,000
6.375% Series G	9,200,000	—
	29,600,000	20,400,000

The Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares, Series F Preferred Shares and Series G Preferred Shares (collectively, the “Preferred Shares”) rank senior to the common shares and on parity with each other with respect to payment of distributions. The Preferred Shares are cumulative redeemable preferred shares, do not have any maturity date and are not subject to mandatory redemption. The Company could not redeem the Series C Preferred Shares prior to March 18, 2018, could not redeem the Series D Preferred Shares prior to June 9, 2021, could not redeem the Series E Preferred Shares prior to March 4, 2018, could not redeem the Series F Preferred Shares prior to May 25, 2021, and may not redeem the Series G Preferred Shares prior to May 13, 2026, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. On or after May 13, 2026, the Company may, at its option, redeem the Series G Preferred Shares, and at any time the Company may, at its option, redeem the Series C Preferred Shares, the Series D Preferred Shares, the Series E Preferred Shares and the Series F Preferred Shares, in each case in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions through the date of redemption. Upon the occurrence of a change of control, as defined in the Company's declaration of trust, the result of which the common shares and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE MKT or NASDAQ, or any successor exchanges, the Company may, at its option, redeem the Preferred Shares in whole or in part within 120 days following the change of control by paying $25.00 per share, plus any accrued and unpaid distributions through the date of redemption. If the Company does not exercise its right to redeem the Preferred Shares upon a change of control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of common shares based on defined formulas subject to share caps. The share cap on each Series C Preferred Share is 2.0325 common shares, on each Series D Preferred Share is 1.9794 common shares, on each Series E Preferred Share is 1.9372 common shares, on each Series F Preferred Share is 2.0649 common shares, and on each Series G Preferred Share is 2.1231 common shares.

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Preferred Dividends

The Company declared the following dividends on preferred shares for the six months ended June 30, 2021:

Security Type

Dividend per Share/Unit

For the Quarter Ended

Record Date

Payable Date

6.50% Series C

0.41

March 31, 2021

April 15, 2021

6.50% Series C

0.41

June 30, 2021

July 15, 2021

6.375% Series D

0.40

March 31, 2021

April 15, 2021

6.375% Series D

0.40

June 30, 2021

July 15, 2021

6.375% Series E

0.40

March 31, 2021

April 15, 2021

6.375% Series E

0.40

June 30, 2021

July 15, 2021

6.30% Series F

0.39

March 31, 2021

April 15, 2021

6.30% Series F

0.39

June 30, 2021

July 15, 2021

The initial dividend for the 6.375% Series G Preferred Shares will be paid in October 2021.

Non-controlling Interest of Common Units in Operating Partnership

Holders of Operating Partnership units have certain redemption rights that enable the unit holders to cause the Operating Partnership to redeem their units in exchange for, at the Company’s option, cash per unit equal to the market price of common shares at the time of redemption or common shares on a one-for-one basis. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of share splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the Operating Partnership's limited partners or the Company's shareholders.

As of June 30, 2021, the Operating Partnership had two classes of long-term incentive partnership units ("LTIP") units, LTIP Class A units and LTIP Class B units. All of the outstanding LTIP units are held by officers of the Company.

On February 12, 2020, the Board of Trustees granted 415,818 LTIP Class B units to executive officers of the Company. These LTIP units were to vest ratably on January 1, 2023, 2024, 2025 and 2026. In March 2020, the Company cancelled this grant and as a result accelerated and recognized the full expense of $10.5 million.

On July 24, 2020, 109,240 LTIP Class B units were converted to common shares.

On February 18, 2021, the Board of Trustees granted an aggregate of 600,097 LTIP Class B units to executive officers of the Company. These LTIP units will vest ratably on January 1, 2023, 2024, 2025 and 2026 contingent upon continued employment with the Company.

As of June 30, 2021 and December 31, 2020, the Operating Partnership had 727,208 and 127,111 LTIP units outstanding, respectively. Of the 727,208 LTIP units outstanding at June 30, 2021, 127,111 LTIP units have vested. Only vested LTIP units may be converted to common units of the Operating Partnership, which in turn can be tendered for redemption as described above.

On November 30, 2018, in connection with the merger with LaSalle Hotel Properties ("LaSalle"), the Company issued 133,605 OP units in the Operating Partnership to third-party limited partners of LaSalle's operating partnership. As of June 30, 2021 and December 31, 2020, the Operating Partnership had 133,605 OP units held by third parties, excluding LTIP units.

Note 8. Share-Based Compensation Plan

Available Shares

The Company maintains the 2009 Equity Incentive Plan, as amended and restated (as amended, the "Plan"), to attract and retain independent trustees, executive officers and other key employees and service providers. On May 19, 2021, the Company’s shareholders approved an amendment to the Plan which increased the aggregate number of common shares that may be issued under the Plan as share awards, performance units, options, share appreciation rights and other equity-based awards by 1,675,000. As of June 30, 2021, there were 1,812,875 common shares available for issuance under the Plan.

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Service Condition Share Awards

The following table provides a summary of service condition restricted share activity as of June 30, 2021:


	Shares	Weighted-Average Grant Date Fair Value








Unvested at December 31, 2020	242,727	$	24.94
Granted	410,838	$	22.69
Vested	(81,591)	$	30.41
Forfeited	(7,902)	$	23.33

Unvested at June 30, 2021	564,072	$	22.53

For the three and six months ended June 30, 2021, the Company recognized approximately $1.1 million and $1.9 million, respectively, of share-based compensation expense related to these awards in the accompanying consolidated statements of operations and comprehensive income.

Performance-Based Equity Awards

On February 18, 2021, the Board of Trustees approved a target award of 189,348 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2024. The actual number of common shares that ultimately vest will be from 0% to 200% of the target award and will be determined in 2024 based on the performance criteria defined in the award agreements for the period of performance from January 1, 2021 through December 31, 2023.

For the three and six months ended June 30, 2021, the Company recognized approximately $1.3 million and $2.3 million, respectively, of share-based compensation expense related to performance-based equity awards in the accompanying consolidated statements of operations and comprehensive income.

Long-Term Incentive Partnership (LTIP) Units

As of June 30, 2021, the Operating Partnership had two classes of LTIP units, LTIP Class A units and LTIP Class B units. All of the outstanding LTIP units are held by officers of the Company.

On February 18, 2021, the Board of Trustees granted 600,097 LTIP Class B units to executive officers of the Company. These LTIP units vest ratably on January 1, 2023, 2024, 2025 and 2026. The fair value of each award was determined based on the closing price of the Company’s common shares on the grant date of $22.69 per unit. The aggregate grant date fair value of the LTIP Class B units was $13.6 million.

For the three and six months ended June 30, 2021, the Company recognized approximately $0.7 million and $1.0 million, respectively, in expense related to these LTIP units. The aggregate expense related to the LTIP unit grants is presented as non-controlling interest in the Company’s accompanying consolidated balance sheets.

Note 9. Income Taxes

PHL is subject to federal and state corporate income taxes at statutory tax rates. Given the continued negative impact of the COVID-19 pandemic on the Company's financial results and uncertainties about the Company's ability to utilize its net operating loss in future years, the Company has recorded a valuation allowance on its income tax benefit for the three and six months ended June 30, 2021, and has recorded a valuation allowance on all deferred tax assets.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local jurisdictions, where applicable. As of June 30, 2021 and December 31, 2020, the statute of limitations remains open for all major jurisdictions for tax years dating back to 2016.

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Note 10. Earnings Per Share

The following is a reconciliation of basic and diluted earnings per common share (in thousands, except share and per-share data):


	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
Numerator:
Net income (loss) attributable to common shareholders	$	(8,564)	$	(138,652)	$	(137,285)	$	(104,842)
Less: dividends paid on unvested share-based compensation	(12)		(2)		(23)		(4)

Net income (loss) available to common shareholders	$	(8,576)	$	(138,654)	$	(137,308)	$	(104,846)
Denominator:
Weighted-average number of common shares — basic	130,813,521		130,563,831		130,794,801		130,559,838
Effect of dilutive share-based compensation	—		—		—		—
Weighted-average number of common shares — diluted	130,813,521		130,563,831		130,794,801		130,559,838

Net income (loss) per share available to common shareholders — basic	$	(0.07)	$	(1.06)	$	(1.05)	$	(0.80)
Net income (loss) per share available to common shareholders — diluted	$	(0.07)	$	(1.06)	$	(1.05)	$	(0.80)

For the three and six months ended June 30, 2021, 1,030,676 of unvested service condition restricted shares and performance-based equity awards were excluded from diluted weighted-average common shares, as their effect would have been anti-dilutive. For the three and six months ended June 30, 2020, 558,769 of unvested service condition restricted shares and performance-based equity awards were excluded from diluted weighted-average common shares, as their effect would have been anti-dilutive. For the three and six months ended June 30, 2021, 29,441,175 common shares underlying the Convertible Notes have been excluded from diluted shares as their effect would have been anti-dilutive. The LTIP and OP units held by the non-controlling interest holders have been excluded from the denominator of the diluted earnings per share as there would be no effect on the amounts since the limited partners' share of income (loss) would also be added or subtracted to derive net income (loss) available to common shareholders.

Note 11. Commitments and Contingencies

Management Agreements

The Company’s hotel properties are operated pursuant to management agreements with various management companies. The terms of these management agreements range from 1 year to 22 years, not including renewals, and 1 year to 52 years, including renewals. The majority of the Company’s management agreements are terminable at will by the Company upon paying a termination fee and some are terminable by the Company upon sale of the property, with, in some cases, the payment of termination fees. Most of the agreements also provide the Company the ability to terminate based on failure to achieve defined operating performance thresholds. Termination fees range from zero to up to six times the annual base management and incentive management fees, depending on the agreement and the reason for termination. Certain of the Company’s management agreements are non-terminable except upon the manager’s breach of a material representation or the manager’s failure to meet performance thresholds as defined in the management agreement.

The management agreements require the payment of a base management fee generally between 1% and 4% of hotel revenues. Under certain management agreements, the management companies are also eligible to receive an incentive management fee if hotel operating income, cash flows or other performance measures, as defined in the agreements, exceed certain performance thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on its investment in the hotel. For the three and six months ended June 30, 2021, combined base and incentive management fees were $4.4 million and $6.7 million, respectively. For the three and six months ended June 30, 2020, combined base and incentive management fees were $(0.4) million and $6.5 million, respectively. Base and incentive management fees are included in other direct and indirect expenses in the Company's accompanying consolidated statements of operations and comprehensive income.

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On April 30, 2021, the Company provided a notice of default to sbe concerning the hotel management agreement of the Mondrian Los Angeles. Sbe is refuting the Company’s notice of default and has requested arbitration to cure the alleged default.

Reserve Funds

Certain of the Company’s agreements with its hotel managers, franchisors, ground lessors and lenders have provisions for the Company to provide funds, typically 4.0% of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ furniture, fixtures and equipment.

Restricted Cash

At June 30, 2021 and December 31, 2020, the Company had $10.9 million and $12.0 million, respectively, in restricted cash, which consisted of reserves for replacement of furniture and fixtures or reserves to pay for real estate taxes or property insurance under certain hotel management agreements or loan agreements.

Ground and Hotel Leases

As of June 30, 2021, the following hotels were subject to leases as follows:

Lease Properties

Lease Type

Lease Expiration Date

Hotel Monaco Washington DC

Operating lease

November 2059

Argonaut Hotel

Operating lease

December 2059

Hotel Zelos San Francisco

Operating lease

June 2097

Hotel Zephyr Fisherman's Wharf

Operating lease

February 2062

Hotel Palomar Los Angeles Beverly Hills

Operating lease

January 2107

(1)

Restaurant at Southernmost Beach Resort

Operating lease

April 2029

Hyatt Regency Boston Harbor

Operating lease

April 2077

San Diego Mission Bay Resort

Operating lease

July 2068

Paradise Point Resort & Spa

Operating lease

May 2050

Hotel Vitale

Operating lease

March 2070

(2)

Viceroy Santa Monica Hotel

Operating lease

September 2065

The Westin Copley Place, Boston

Operating lease

December 2077

(3)

The Liberty, A Luxury Collection Hotel, Boston

Operating lease

May 2080

Hotel Zeppelin San Francisco

Operating and finance lease

June 2089

(4)

Harbor Court Hotel San Francisco

Finance lease

August 2052

(1) The expiration date assumes the exercise of all 19 five-year extension options.

(2) The expiration date assumes the exercise of a 14-year extension option.

(3) No payments are required through maturity.

(4) The expiration date assumes the exercise of a 30-year extension option.

The Company's leases may require minimum fixed rent payments, percentage rent payments based on a percentage of revenues in excess of certain thresholds or rent payments equal to the greater of a minimum fixed rent or percentage rent. Minimum fixed rent may be adjusted annually by increases in the consumer price index and may be subject to minimum and maximum increases. Some leases also contain certain restrictions on modifications that can be made to the hotel structures due to their status as national historic landmarks.

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The Company records expense on a straight-line basis for leases that provide for minimum rental payments that increase in pre-established amounts over the remaining terms of the leases. Ground rent expense is included in real estate taxes, personal property taxes, property insurance and ground rent in the Company's accompanying consolidated statements of operations and comprehensive income. The components of ground rent expense for the three and six months ended June 30, 2021 and 2020 are as follows (in thousands):


	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
Fixed ground rent	$	4,290	$	4,304	$	8,603	$	8,593
Variable ground rent	1,862		696		3,358		$	2,744
Total ground lease rent	$	6,152	$	5,000	$	11,961	$	11,337

Future maturities of lease liabilities for the Company's operating leases at June 30, 2021 were as follows (in thousands):


2021	$	9,278
2022	18,849
2023	18,034
2024	18,119
2025	18,203
Thereafter	1,127,864
Total lease payments	$	1,210,347
Less: Imputed interest	(955,778)
Present value of lease liabilities	$	254,569

Litigation

The nature of the operations of hotels exposes the Company's hotels, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. The Company has insurance to cover certain potential material losses. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any material litigation threatened against the Company.

Note 12. Supplemental Information to Statements of Cash Flows


	For the six months ended June 30,
	2021		2020

	(in thousands)
Interest paid, net of capitalized interest	$	43,373	$	44,184
Interest capitalized	$	—	$	1,247
Income taxes paid (refunded)	$	74	$	865
Non-Cash Investing and Financing Activities:
Convertible debt discount adjustment	$	113,099	$	—
Distributions payable on common shares/units	$	1,527	$	1,750
Distributions payable on preferred shares	$	9,513	$	7,558
Issuance of common shares for Board of Trustees compensation	$	516	$	637
Issuance of common shares for executive and employee bonuses	$	1,446	$	—

Accrued additions and improvements to hotel properties	$	292	$	4,405




Write-off of deferred financing costs	$	4,516	$	—

Note 13. Subsequent Events

On July 22, 2021, the Company acquired the 200-room Jekyll Island Club Resort located in Jekyll Island, Georgia for $94.0 million.

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On July 27, 2021, the Company issued 10,000,000 of 5.70% Series H Cumulative Redeemable Preferred Shares at a public offering price of $25.00 per share for net proceeds of approximately $242.0 million after underwriting discounts and other offering-related costs.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Pebblebrook Hotel Trust is a Maryland real estate investment trust that conducts its operations so as to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Substantially all of the operations are conducted through Pebblebrook Hotel, L.P. (our "Operating Partnership"), a Delaware limited partnership of which Pebblebrook Hotel Trust is the sole general partner. In this report, we use the terms "the Company", "we" or "our" to refer to Pebblebrook Hotel Trust and its subsidiaries, 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 the U.S. government making it less convenient, more difficult or less desirable for international travelers to enter the U.S., increases in employment costs, energy costs and other operating costs, or decreases in demand caused by events beyond our control including, without limitation, actual or threatened terrorist attacks, natural disasters, cyber attacks, any type of flu or disease-related pandemic, or downturns in general and local economic conditions;

•the availability and terms of financing and capital and the general volatility of securities markets;

•our dependence on third-party managers of our hotels, including our inability to implement strategic business decisions directly;

•risks associated with the U.S. and global economies, the cyclical nature of hotel properties and the real estate industry, including environmental contamination and costs of complying with new or existing laws, including the Americans with Disabilities Act and similar laws;

•interest rate increases;

•our possible failure to qualify as a REIT under the Code and the risk of changes in laws affecting REITs;

•the timing and availability of potential hotel acquisitions 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 ended December 31, 2020.

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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

In March 2020, the World Health Organization declared the novel coronavirus ("COVID-19") to be a global pandemic and the virus spread throughout the 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 of June 30, 2021, 49 of our hotels and resorts were open, with operations remaining suspended at Villa Florence San Francisco on Union Square and Hotel Vitale. Subsequent to June 30, 2021, we re-opened Villa Florence San Francisco on Union Square and commenced a renovation of Hotel 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.

In February 2021, we issued, at a 5.5% premium to par, an additional $250.0 million aggregate principal amount of the convertible notes originally issued in December 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 through December 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.

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Hotel Operating Statistics

The following table represents the key same-property hotel operating statistics for our hotels for the three and six months ended June 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 in March 2020, the above schedule of hotel results for the three and six months ended June 30, 2021 and 2020 includes information from all hotels owned as of June 30, 2021, except for Hotel Zena Washington DC (formerly Donovan Hotel), which was excluded because it was closed during the first and second quarters of 2020 for renovations. Sir Francis 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 with U.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 the National Association of Real Estate Investment Trusts, which defines FFO as net income (calculated in accordance with U.S. GAAP), excluding real estate related depreciation and amortization, gains (losses) from sales of real estate, impairments of real estate assets (including impairment of real estate related joint ventures), the cumulative effect of changes in accounting principles and adjustments for unconsolidated 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 ended June 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)	$	(120,012)	$	(88,846)
Adjustments:
Depreciation and amortization	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)

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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 with U.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 ended June 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)	$	(120,012)	$	(88,846)
Adjustments:
Interest expense	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.

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

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
	Interest Rate		Maturity Date	June 30, 2021		December 31, 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

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Senior Unsecured Notes

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
	Total		Less than 1 year		1 to 3 years		3 to 5 years		More than 5 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 deposits (5)	27,690		203		—		—		27,487
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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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 of June 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The nature of the operations of our hotels exposes the hotels and us to the risk of claims and litigation in the normal course of business. We are not presently subject to any material litigation nor, to our knowledge, is any litigation threatened against us, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or our financial condition.

Item 1A. Risk Factors.

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1, 2021 - April 30, 2021	—	$	—	—	—
May 1, 2021 - May 31, 2021	—	$	—	—	—
June 1, 2021 - June 30, 2021	—	$	—	—	—
Total	—	$	—	—	$	56,600,000

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(1) On February 22, 2016, the Company announced its Board of Trustees authorized a share repurchase program of up to $150.0 million of the Company's outstanding common shares. Under this program, the Company may repurchase its common shares from time to time in transactions on the open market or by private agreement. The Company may suspend or discontinue this program at any time. The amount in this column does not include the approximate dollar value of shares that may yet be purchased under the $100.0 million share repurchase program that was announced on July 27, 2017, which will commence upon the completion of the Company's $150.0 million share repurchase program. See Note 7, Equity, to our unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information about the $100.0 million share repurchase program.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.


Exhibit Number						Description of Exhibit
3.1†						Declaration of Trust of Pebblebrook Hotel Trust, as amended and supplemented through July 23, 2021.
31.1†						Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2†						Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1††						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2††						Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
104						Cover Page Interactive Date File (embedded within the Inline XBRL document)

________________

† Filed herewith.

†† Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PEBBLEBROOK HOTEL TRUST

Date:	July 29, 2021	/s/ JON E. BORTZ
		Jon E. Bortz
		Chairman, President and Chief Executive Officer