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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM10-K
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
     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)
 
Maryland27-1055421
(State of Incorporation
or Organization)
(I.R.S. Employer
Identification No.)
4747 Bethesda Avenue,Suite 1100
Bethesda,Maryland20814
(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 ClassTrading Symbol (s)Name of Each Exchange on Which Registered
Common Shares, $0.01 par value per sharePEBNew York Stock Exchange
6.50% Series C Cumulative Redeemable Preferred SharesPEB-PCNew York Stock Exchange
6.375% Series D Cumulative Redeemable Preferred SharesPEB-PDNew York Stock Exchange
6.375% Series E Cumulative Redeemable Preferred SharesPEB-PENew York Stock Exchange
6.30% Series F Cumulative Redeemable Preferred Shares PEB-PFNew York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☑  Yes    ¨  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    ☑  No
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 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 such files).    ☑  Yes   ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filer
Non-accelerated filer
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 262(b)) by the registered public accounting firm that prepared or issued its audit report.   Yes   ¨  No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
  Yes    ☑  No
The aggregate market value of the 129,172,325 common shares of beneficial interest of the registrant held by non-affiliates of the registrant was $1.8 billion based on the closing sale price on the New York Stock Exchange for such common shares of beneficial interest as of June 30, 2020.
The number of common shares of beneficial interest outstanding as of February 18, 2021 was 131,315,800.
_____________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for its 2021 Annual Meeting of Shareholders (to be filed with the Securities and Exchange Commission on or before April 30, 2021) are incorporated by reference into this Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.




Pebblebrook Hotel Trust
TABLE OF CONTENTS
Item No.Page
PART I
1.
1A.
1B.
2.
3.
4.
PART II
5.
6.
7.
7A.
8.
9.
9A.
9B.
PART III
10.
11.
12.
13.
14.
PART IV
15.
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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. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
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, and if we are unable to recommence operations in the near-term, we may become out of compliance with maintenance covenants in certain of our debt facilities;
world events impacting the ability or desire of people to travel may lead to a decline in demand for hotels;
risks associated with the hotel industry, including competition, changes in visa and other travel policies by 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 real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (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 this Annual Report on Form 10-K.
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.
The "Company", "we" or "us" mean Pebblebrook Hotel Trust, a Maryland real estate investment trust, and one or more of its subsidiaries (including Pebblebrook Hotel, L.P., our operating partnership), or, as the context may require, Pebblebrook Hotel Trust only or Pebblebrook Hotel, L.P. only.
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PART I
Item 1. Business.
General
Pebblebrook Hotel Trust is an internally managed hotel investment company, organized in October 2009 to opportunistically acquire and invest in hotel properties located primarily in major U.S. cities, with an emphasis on the major gateway coastal markets. As of December 31, 2020, the Company owned 53 hotels with a total of 13,236 guest rooms.
Substantially all of the Company’s assets are held by, and all of the operations are conducted through, Pebblebrook Hotel, L.P. (our “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. At December 31, 2020, the Company owned 99.8% of the common limited partnership units issued by the Operating Partnership ("common units"). The remaining 0.2% of the common units are owned by the other limited partners of the Operating Partnership. For the Company to maintain its qualification as a REIT under the Code, it cannot operate the hotels it owns. Therefore, the Operating Partnership and its subsidiaries lease the hotel properties to our taxable REIT subsidiary ("TRS") lessees, including subsidiaries of Pebblebrook Hotel Lessee, Inc. (collectively with its subsidiaries, “PHL”), which in turn engage third-party eligible independent contractors to manage the hotels. PHL is consolidated into the Company’s financial statements.
In March 2020, the World Health Organization declared the novel coronavirus ("COVID-19") to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates and health official recommendations, hotel demand was dramatically reduced. See further discussion in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Business Objectives and Strategies
Acquisitions/Investments
We invest in hotel properties located primarily within major U.S. cities, including Boston, Chicago, Key West, Los Angeles, Miami, Naples, New York, Philadelphia, Portland, Santa Monica, San Diego, San Francisco, Seattle and Washington, D.C., with an emphasis on major gateway urban markets. We believe these markets have barriers-to-entry and provide diverse sources of meeting and room night demand generators. In addition, we also opportunistically target investments in resort properties located near our primary urban target markets, as well as in select destination resort markets such as south Florida and southern California. We focus on both branded and independent full-service hotels in the “upper upscale” segment of the lodging industry. The full-service hotels on which we focus our investment activity generally have one or more restaurants, lounges, meeting facilities and other amenities, as well as high levels of customer service. We believe that our target markets, including the major gateway markets, are characterized by barriers-to-entry and that room-night demand and average daily rate ("ADR") growth of these types of hotels will outperform the national average over the long-term, as they have in past cyclical recoveries and growth periods.
We perform and utilize extensive research to evaluate any target market and property, including a detailed review of the long-term economic outlook, trends in local demand generators, competitive environment, property systems and physical condition and property financial performance. Specific acquisition criteria may include, but are not limited to, the following:
premier locations, facilities and other competitive advantages that are not easily replicated;
barriers-to-entry in the market, such as scarcity of development sites, regulatory hurdles, high per-room development costs and long lead times for new development;
acquisition prices at a discount to replacement cost;
properties not subject to long-term management contracts with hotel management companies;
potential return on investment initiatives, including redevelopment, rebranding, redesign, expansion and change of management;
opportunities to implement value-added operational improvements; and
strong demand growth characteristics supported by favorable demographic indicators.
We believe that upper-upscale, full-service hotels and resorts and upscale, hotels located in major U.S. urban, convention and drive-to and destination resort markets are likely to generate some of the most favorable risk-adjusted returns in the lodging industry over the long-term. As discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, the COVID-19 pandemic has materially disrupted hotel occupancy and daily rates, particularly in urban markets in which we have invested. Despite the dramatic decline in demand, revenue and operating income as a result of COVID-19 as well as uncertainty related to international travel restrictions and political factors, we believe that successful vaccination distribution and effective therapeutics throughout the U.S. and the world should gradually allow for a steady return to normalcy.
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We believe that portfolio diversification will allow us to benefit from growth in various customer segments, including business transient, leisure transient and group and convention room-night demand. We believe that new hotel supply growth, following the delivery of current supply construction, will decline from the expected growth rate prior to the pandemic.
We generally seek to enter into flexible management contracts, when possible, with third-party hotel management companies for the operation of our hotels that provide us with the ability to replace operators and/or reposition properties, to the extent that we determine to do so and align our operators with our objective of maximizing our return on investment. In addition, we believe that flexible management contracts facilitate the sale of hotels, and we may seek to sell hotels opportunistically if we believe sales proceeds may be used to repay debt or invested in other hotel properties that offer more attractive risk-adjusted returns.
We may engage in full or partial redevelopment, renovation and repositioning of certain properties, as we seek to maximize the financial performance of our hotels. In addition, we may acquire properties that require significant capital improvement, renovation or refurbishment. We also may acquire hotel and resort properties that we believe would benefit from significant redevelopment or expansion, including, for example, adding rooms, meeting facilities or other amenities.
We may consider acquiring outstanding debt secured by a hotel or resort property from lenders and investors if we believe the returns will be attractive or if we can foreclose on or acquire ownership of the property in the near-term. In connection with our acquisitions, generally we do not, but we may choose to opportunistically, originate or purchase any debt financing or preferred equity. Additionally, we have co-invested, and may in the future co-invest, in hotels and debt with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for a property, partnership, joint venture or other entity.
Asset Management
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. We believe we can add significant value to our portfolio through our intensive asset management strategies. Our executives and asset management team have significant experience in hotel operations and creating and implementing innovative asset management initiatives.
We have developed strategic short- and long-term capital investment plans to enhance our hotels' profitability through the strategic use of, among others, expansions, additions, renovations, technology upgrades and modifications, and energy efficiency improvements. We are also focused on revenue and expense management at our properties. We work closely with our hotel operators to evaluate optimal market mix and pricing strategies, ensure quality staffing and appropriate management focus, implement best practices to minimize expenses and aggressively monitor and evaluate our hotels' operations and performance.
Curator
In 2020, we and six industry-leading hotel operators jointly announced the launch of Curator Hotel & Resort Collection, a collection of small brands and independent lifestyle hotels and resorts worldwide. Curator's distinct owner-centric platform offers an alternative for independent lifestyle hotels seeking to strengthen their performance, providing its members with best-in-class agreements, services and technology, while allowing members to retain their unique identities. We own a majority of the equity interests in Curator, which is consolidated in our consolidated financial statements.
Financing Strategies
Over time, we intend to finance our long-term growth with issuances of common and preferred equity securities and debt financings having staggered maturities. Our debt includes senior unsecured credit facilities, term loans, convertible debt and unsecured notes, and may in the future include mortgage debt secured by our hotel properties or other unsecured debt.
We anticipate using proceeds from our senior unsecured revolving credit facilities, term loans, convertible debt, senior unsecured notes, common and preferred equity issuances, and any mortgage debt financings to fund future acquisitions as well as for property redevelopments, return on investment initiatives and working capital requirements. Subject to market conditions, we intend to repay amounts outstanding under our senior unsecured revolving credit facilities from time to time with proceeds from periodic common and preferred equity issuances, long-term debt financings, cash flows from operations and opportunistic or strategic dispositions.
When purchasing hotel properties, we may issue limited partnership interests in our Operating Partnership as full or partial consideration to sellers who may desire to take advantage of tax deferral on the sale of a hotel or participate in the potential appreciation in value of our common shares of beneficial interest, or common shares. To date, we have not issued any limited partnership interests in our Operating Partnership to purchase hotel properties.
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Competition
We compete for hotel investment opportunities with institutional investors, private equity investors, other REITs and numerous local, regional, national and international owners, including franchisors, in each of our target markets. Some of these entities have substantially greater financial resources than we do and may be able and willing to accept more risk than we can prudently manage. Competition generally may increase the bargaining power of property owners seeking to sell and reduce the number of suitable investment opportunities offered to us or purchased by us.
The hotel industry is highly competitive. Our hotels compete with other hotels and alternative lodging, for guests in our markets. Competitive factors include, among others, location, convenience, brand affiliation, room rates, range of services, facilities and guest amenities or accommodations offered and quality of guest service. Competition in the markets in which our hotels operate includes competition from existing, newly renovated and newly developed hotels in the relevant segments. Competition can adversely affect the occupancy, ADR and room revenue per available room ("RevPAR") of our hotels, and thus our financial results, and may require us to provide additional amenities, incur additional costs or make capital improvements that we otherwise might not choose to make, which may adversely affect our profitability.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns which are greatly influenced by overall economic cycles, geographic locations, weather and customer mix at the hotels. Generally, our hotels have lower revenue, operating income and cash flow in the first quarter of each year and higher revenue, operating income and cash flow in the third quarter of each year. The historical trend has been disrupted as a result of COVID-19. For the year ended December 31, 2020, the first quarter of the year had higher revenue, operating income and cash flow as hotel demand declined substantially as a result of COVID-19 and the Company began to suspend hotel operations beginning in March 2020.
Regulations
Our hotel properties are subject to various federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require us, as owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated, and therefore it is possible we could incur these costs even after we sell a property. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner's ability to borrow using the property as collateral or to sell the property. Under the environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in a hotel may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities. An example would be laws that require a business using chemicals (such as swimming pool chemicals at a hotel property) to manage them carefully and to notify local officials that the chemicals are being used.
We could be responsible for any of the costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our shareholders. Prior to closing a property acquisition, we obtain Phase I environmental site assessments, or ESAs, in order to attempt to identify potential environmental concerns at the properties. These assessments are carried out in accordance with an appropriate level of due diligence and generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property's chain of title and review of historic aerial photographs and other information on past uses of the property. We may also conduct limited subsurface investigations and test for substances of concern where the results of the Phase I ESAs or other information indicates possible contamination or where our consultants recommend such procedures. However, these Phase I ESAs or other investigations may not reveal all environmental costs that might have a material adverse effect on our business, assets, results of operations or liquidity and may not identify all potential environmental liabilities.
We believe that our hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material adverse effect on us. We have not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our properties.
Our properties must comply with Title III of the Americans with Disabilities Act (the "ADA") to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access
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by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in litigation, retrofit costs and imposition of fines or an award of damages to private litigants. Additionally, properties which we may acquire may not be in compliance with the requirements of the ADA, and we endeavor to identify such noncompliance prior to our acquisition. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
Tax Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a result, we generally are not subject to corporate federal income tax on that portion of our REIT taxable income that we currently distribute to our shareholders. A REIT is subject to numerous organizational and operational requirements, including requirements concerning the nature of our gross income and assets and specifying that we must distribute at least 90 percent of our REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains) each year. We will be subject to U.S. federal income tax on our taxable income at regular corporate rates if we fail to qualify as a REIT for U.S. federal income tax purposes in any taxable year, or to the extent we distribute less than 100 percent of our REIT taxable income. We will also not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost. Even if we continue to qualify as a REIT for U.S. federal income tax purposes, we will be subject to certain state and local income, franchise and property taxes.
For us to maintain our qualification as a REIT under the Code, we cannot operate the hotels we own and acquire. Therefore, our Operating Partnership and its subsidiaries lease our hotel properties to our TRS lessees who in turn engage third-party eligible independent contractors to manage our hotels. The earnings of TRS lessees are subject to taxation like other regular C corporations.
Joint Venture
We hold a 99.99% controlling interest in The Liberty, A Luxury Collection Hotel, Boston. Since we hold a controlling interest, the joint venture has been consolidated in our financial statements. The 0.01% interest of the third-party partner is included in non-controlling interests in the consolidated balance sheets.
Human Capital
Our human capital management objectives are to attract, recruit, hire, develop and promote a highly talented, diverse workforce. We maintain strong corporate governance standards. We offer competitive compensation and benefits programs designed to create and maintain shareholder value and to not encourage excessive risk-taking.
Inclusion, representation and diversity matter to Pebblebrook. Pebblebrook is committed to creating and maintaining a work environment of respect for all human beings regardless of race, gender identity, sexual orientation, accessibility needs, religion, political orientation, veteran status, and culture.
Creating a healthy environment for our employees is a top priority at Pebblebrook. We provide employees with standing desks, ergonomic desk chairs, a desk wellness series, and complimentary fitness center memberships. Pebblebrook is deeply committed to its community, through volunteering, donations, and sourcing locally, when available.
We currently employ 53 full-time employees. None of our employees is a member of a union; however, some employees of the hotel managers at several of our hotels are currently represented by labor unions and are subject to collective bargaining agreements.
Available Information
Our Internet website is located at www.pebblebrookhotels.com. Copies of the charters of the committees of our board of trustees, our code of business conduct and ethics and our corporate governance guidelines are available on our website. All reports that we have filed with the United States Securities and Exchange Commission (the "SEC") including this Annual Report on Form 10-K and our current reports on Form 8-K, can be obtained free of charge from the SEC's website at www.sec.gov or through our website.
Item 1A. Risk Factors.
The following summary and discussion sets forth some of the risks associated with our business and should be considered carefully. These risks are interrelated and you should treat them as a whole. Additional risks and uncertainties not presently known to us may also materially and adversely affect our business operations, the value of our shares and our ability to pay dividends to our shareholders. In connection with the forward-looking statements that appear in this Annual Report on Form 10-K, in these risk factors and elsewhere, you should carefully review the section entitled “Forward-Looking Statements.”
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Summary of Risk Factors
Risks Related to Our Business and Properties
Risks related to the potential loss of our executive officers
Risks related to third-party management companies
Risks related to our TRS lessee structure
Risks related to financial performance
Risks related to highly competitive markets and regional downturns
Risks related to restrictive covenants
Risks related to joint ventures and franchise agreements
Risks related to debt service obligations
Risks related to investment decisions
Risks related to the purchase or sale of hotel properties
Risks related to financing and use of financial institutions
Risks related to conflicts of interest
Risks Related to Debt and Financing
Risks related to our existing indebtedness
Risks related to “cash trap” provisions
Risks related to refinancing or defaulting on debt
Risks related to acquiring outstanding debt
Risks related to LIBOR and potential replacements
Risks Related to the Lodging Industry
Risks related to COVID-19 and other viruses, diseases, or future pandemics
Risks related to hotel profitability
Risks related to operations
Risks related to competition for acquisitions
Risks related to the seasonality and cyclical nature of the lodging industry
Risks related to capital expenditure requirements
Risks related to hotel and resort development
Risks related to changing technology and its effects on the lodging industry and cyber-attacks
Risks related to hotel personnel and unionization
Risks related to terrorist attacks
Risks related to underinsurance or lack of insurance
Risks related to unknown or contingent liabilities
Risks related to environmental factors and regulations
Risks related to compliance with federal law and other legislative changes
Risks related to potential litigation
General Risks Related to the Real Estate Industry
Risks related to illiquidity of real estate investments
Risks related to changing tax regimes in states and localities in which we own property
Risks related to liabilities under environmental laws
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Risks Related to Our Organization and Structure
Risks related to change of control
Risks related to ownership limitations in our declaration of trust
Risks related to actions against our trustees and officers
Risks related to changes of major policies
Risks related to further issuances of securities
Risks related to future offerings of debt securities or preferred shares
Risks related to the rights of holders of common shares or preferred shares
Risks related to employment agreements with our executive officers
Risks related to internal controls
U.S. Federal Income Tax Risk Factors
Risks related to potential failures to qualify as a REIT, whether by us or by LaSalle prior to the merger
Risks related to REIT requirements
Risks related to distributions of REIT taxable income
Risks related to our TRS and TRS lessees
Risks related to our Operating Partnership
Risks related to taxation on dividends
Risks related to subsidiary REITs
Risks related to revocation of our REIT qualification
Risks related to share ownership restrictions
Risks related to prohibited transactions tax
Risks related to legislative or regulatory tax changes
Risks Related to Our Business and Properties
We depend on the efforts and expertise of our executive officers and would be adversely affected by the loss of their services.
We depend on the efforts and expertise of our Chairman, President and Chief Executive Officer, as well as our other executive officers, to execute our business strategy. The loss of their services, and our inability to quickly identify and hire suitable replacements, could have an adverse effect on our business activities, including, without limitation, relationships with shareholders, lenders, management companies, joint venture partners and other industry personnel.
Our returns could be negatively impacted if the third-party management companies that operate our hotels do not manage our hotel properties effectively.
Because U.S. federal income tax laws restrict REITs and their subsidiaries from operating or managing a hotel, we do not operate or manage any of our hotel properties. Instead, we lease all of our hotel properties to subsidiaries that qualify as TRSs, under applicable REIT laws, and our TRS lessees retain third-party managers to operate our hotels pursuant to management contracts. Our cash flow from the hotels may be adversely affected if our managers fail to provide quality services and amenities or if they or their affiliates fail to maintain a quality brand name. In addition, our managers or their affiliates may manage, and in some cases may own, invest in or provide credit support or operating guarantees, to hotels that compete with hotel properties that we own or acquire, which may result in conflicts of interest and decisions regarding the operation of our hotels that are not in our best interests.
We do not have the authority to require any hotel property to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel property (for example, setting room rates). Thus, even if we believe our hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, RevPAR and ADR, we cannot force the management company to change its method of operating our hotels. We generally will attempt to resolve issues with our managers through discussions and negotiations. However, if we are unable to reach satisfactory results through discussions and negotiations, we may choose to litigate the dispute or submit the matter to third-party dispute resolution. We can only seek redress if a management company violates the terms of the applicable management contract with a TRS lessee,
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and then only to the extent of the remedies provided for under the terms of the management contract. Additionally, in the event that we need to replace any management company, we may be required by the terms of the management contract to pay substantial termination fees and may experience significant disruptions at the affected hotels.
Our TRS lessee structure subjects us to the risk of increased hotel operating expenses.
Our leases with our TRS lessees require our TRS lessees to pay rent based in part on revenues from our hotels. Our operating risks include decreases in hotel revenues and increases in hotel operating expenses, which would adversely affect our TRS lessees' ability to pay rent due under the leases, including but not limited to increases in: wage and benefit costs, which may include an increase in minimum wages and health benefit costs; repair and maintenance expenses; property taxes; insurance costs; and other operating expenses. Increases in these operating expenses can have a significant adverse impact on our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
Our ability to make distributions to our shareholders is subject to fluctuations in our financial performance, operating results and capital improvements requirements.
To maintain our qualification as a REIT for U.S. federal income tax purposes, we are required to distribute at least 90 percent of our REIT taxable income (determined without regard to the deduction for dividends paid and excluding any net capital gains) each year to our shareholders and we generally expect to make distributions in excess of such amount. In the event of downturns in our operating results, unanticipated capital improvements to our hotel properties or other factors, we may be unable to declare or pay distributions to our shareholders. The timing and amount of distributions are in the sole discretion of our board of trustees which will consider, among other factors, our financial performance, any debt service obligations, any debt covenants and capital expenditure requirements. We cannot assure you that we will generate sufficient cash in order to fund distributions.
We invest primarily in the upper-upscale segment of the lodging market, which is highly competitive and generally subject to greater volatility than most other market segments and could negatively affect our profitability.
The upper-upscale segment of the hotel business is highly competitive. Our hotel properties compete on the basis of location, room rates, quality, service levels, reputation and reservations systems, among many factors. There are many competitors in the upper-upscale segment, and many of these competitors may have substantially greater marketing and financial resources than we have. This competition could reduce occupancy levels and RevPAR at our hotels. In addition, in periods of weak demand, as may occur during a general economic recession, profitability is adversely affected by the relatively high fixed costs of operating upper-upscale hotels.
Restrictive covenants in our management contracts could preclude us from taking actions with respect to the sale or refinancing of a hotel property that would otherwise be in our best interest.
We may enter into management contracts that contain some restrictive covenants or acquire properties subject to existing management contracts that do not allow the flexibility we seek, including management contracts that restrict our ability to terminate the contract or require us to pay significant termination fees. For example, the terms of some management contracts may restrict our ability to sell a property unless the purchaser is not a competitor of the manager and assumes the related management contract and meets specified other conditions which may preclude us from taking actions that would otherwise be in our best interest or could cause us to incur substantial expense.
Due to our concentration in hotel investments primarily in major gateway urban markets, a downturn in the lodging industry generally or a regional downturn in the markets in which we operate would adversely affect our operations and financial condition.
Our primary business is hotel-related. Therefore, a downturn in the lodging industry, in general, and the segments and markets (especially West Coast major gateway metropolitan markets) in which we operate, in particular, would have a material adverse effect on our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
Any joint venture investments that we may make in the future could be adversely affected by our lack of sole decision-making authority, our reliance on our co-venturers' financial condition and disputes between us and our co-venturers.
We may co-invest in hotels in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for a property, partnership, joint venture or other entity. In this event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments through partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt, fail to fund their share of required capital contributions, make dubious business decisions or block or delay necessary decisions.
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Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or trustees from focusing their time and effort on our business. Consequently, action by, or disputes with, partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers.
Our hotels operated under franchise agreements are subject to risks arising from adverse developments with respect to the franchise brand and to costs associated with maintaining the franchise license.
Certain of our hotel properties operate under franchise agreements and we anticipate that some of the hotels we acquire in the future will operate under franchise agreements. We are therefore subject to the risks associated with concentrating hotel investments in several franchise brands, including reductions in business following negative publicity related to one of the brands or the general decline of a brand.
Maintenance of franchise licenses for branded hotel properties is subject to franchisors' operating standards and other terms and conditions including the requirement to make certain capital improvements. Franchisors periodically inspect hotel properties to ensure that we and our lessees and management companies follow their standards. Failure by us, one of our TRS lessees or one of our third-party management companies to maintain these standards or other terms and conditions could result in a franchise license being canceled. If a franchise license is canceled due to our failure to make required improvements or to otherwise comply with its terms, we also may be liable to the franchisor for a termination payment, which varies by franchisor and by hotel property.
The loss of a franchise license could materially and adversely affect the operations and the underlying value of the hotel property because of the loss of associated name recognition, marketing support and centralized reservation system provided by the franchisor and adversely affect our revenues, financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
Debt service obligations could adversely affect our overall operating results, may require us to sell hotel properties, may jeopardize our qualification as a REIT and could adversely affect our ability to make distributions to our shareholders and the market price of our common shares.
Our business strategy includes the use of both secured and unsecured debt to finance long-term growth. Incurring debt subjects us to many risks, including the risks that our cash flow from operations will be insufficient to make required payments of principal and interest, our debt may increase our vulnerability to adverse economic and industry conditions, we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, and the terms of any refinancing will not be as favorable as the terms of the debt being refinanced.
We have placed and may in the future place mortgages on certain of our hotel properties to secure debt. To the extent we cannot meet any of our debt service obligations, we may be required to sell or we will risk losing to foreclosure some or all of our mortgaged hotel properties. If we are required to sell one or more of our hotel properties to meet debt service obligations, we may have to accept unfavorable terms. Also, covenants applicable to debt could impair our planned investment strategy and, if violated, result in a default. If we violate covenants relating to indebtedness, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. In addition, future indebtedness agreements may require that we meet certain covenant tests in order to make distributions to our shareholders.
Higher interest rates could increase debt service requirements on any of our floating rate debt, including our senior unsecured revolving credit facilities, and could reduce the amounts available for distribution to our shareholders, as well as reduce funds available for our operations, future business opportunities or other purposes. We have obtained, and we may in the future obtain, one or more forms of interest rate protection — in the form of swap agreements, interest rate cap contracts or similar agreements that are consistent with our intention to remain qualified as a REIT — to “hedge” against the possible negative effects of interest rate fluctuations. However, such hedging incurs costs and we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations thereunder. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable.
Our senior executive officers have broad discretion to make investments, and they may make investments where the returns are substantially below expectations or which result in net operating losses.
Our senior executive officers have broad discretion, within the general investment criteria established by our board of trustees, to invest our capital and to determine the timing of such investments. In addition, our investment policies may be
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revised from time to time at the discretion of our board of trustees, without a vote of our shareholders. Such discretion could result in investments that may not yield returns consistent with expectations.
Some of our hotels are subject to rights of first offer which may adversely affect our ability to sell those properties on favorable terms or at all.
We are subject to a franchisor’s or operator’s right of first offer, in some instances. These third-party rights may adversely affect our ability to timely dispose of these properties on favorable terms, or at all.
The purchase or sale of properties we put under contract may not be consummated.
From time to time, we enter into purchase and sale agreements for hotel properties. These transactions, whether or not consummated, require substantial time and attention from management. Furthermore, potential acquisitions and potential dispositions require significant expense, including expenses for due diligence, marketing, legal fees and related overhead. To the extent we do not consummate one or more of the transactions, these expenses will not be offset by revenues or proceeds from these properties or dispositions.
If we cannot obtain financing, our growth will be limited.
To maintain our qualification as a REIT for U.S. federal income tax purposes, we are required to distribute at least 90 percent of our REIT taxable income (determined without regard to the deduction for dividends paid and excluding any net capital gains) each year to our shareholders and we generally expect to make distributions in excess of such amount. As a result, our ability to retain earnings to fund acquisitions, redevelopment and development or other capital expenditures is and will continue to be limited. Although our business strategy contemplates future access to debt financing (in addition to our senior unsecured revolving credit facilities and term loans) to fund acquisitions, redevelopment, development, return on investment initiatives and working capital requirements, there can be no assurance that we will be able to obtain such financing on favorable terms or at all. Events in financial markets have adversely impacted the credit markets, and they may do so in the future, and, as a result, credit can become significantly more expensive and difficult to obtain, if available at all. Tightening credit markets may have an adverse effect on our ability to obtain financing on favorable terms, if at all, thereby increasing financing costs and/or requiring us to accept financing with increased restrictions and/or significantly higher interest rates. If adverse conditions in the credit markets—in particular with respect to real estate or lodging industry finance-materially deteriorate, our business could be materially and adversely affected.
Our cash and cash equivalents are maintained in a limited number of financial institutions and the funds in those institutions may not be fully or federally insured.
We maintain cash balances in a limited number of financial institutions. Our cash balances are generally in excess of federally insured limits. The failure or collapse of one or more of these financial institutions may materially adversely affect our ability to recover our cash balances.
Our conflicts of interest policy may not adequately address all of the conflicts of interest that may arise with respect to our activities.
In order to avoid any actual or perceived conflicts of interest with our trustees, officers or employees, we have adopted a conflicts of interest policy to specifically address some of the potential conflicts relating to our activities. Although under this policy any transaction, agreement or relationship in which any of our trustees, officers or employees has an interest must have the approval of a majority of our disinterested trustees, there is no assurance that this policy will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that is favorable to us.
Risks Related to Debt and Financing
Our existing indebtedness contains financial covenants that could limit our operations and our ability to make distributions to our shareholders.
The credit agreements that govern our existing senior unsecured revolving credit facilities and unsecured term loan facilities contain financial and operating covenants, such as net worth requirements, fixed charge coverage, debt ratios and other limitations that restrict our ability to make distributions or other payments to our stockholders, sell all or substantially all of our assets and engage in mergers, consolidations and certain acquisitions without the consent of the lenders. In addition, property-level debt we enter into in the future may contain restrictions (including cash management provisions) that may under circumstances specified in the loan agreements prohibit our subsidiaries that own our hotels from making distributions or paying dividends, repaying loans to us or other subsidiaries or transferring any of their assets to us or another subsidiary which could adversely affect our ability to make distributions to our shareholders. Failure to meet our financial covenants could result from, among other things, changes in our results of operations, the incurrence of additional debt or changes in general economic conditions. Such failures could cause one or more of our lenders to accelerate the timing of payments and could have a material
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adverse effect on our business, financial condition, results of operations and our ability to make distributions to our shareholders. The terms of our debt may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our shareholders.
Mortgage loan agreements we may enter into in the future may contain “cash trap” provisions that could limit our ability to make distributions to our shareholders.
Mortgage loan agreements that we may enter into in the future may contain cash trap provisions that may be triggered if the performance of the hotels securing the loans declines below a threshold. If these provisions are triggered, substantially all of the profit generated by the hotel will be deposited directly into a lockbox account and then swept into a cash management account for the benefit of the lender. In that event, cash would be distributed to us only after certain items are paid, including deposits into leasing and maintenance reserves and the payment of debt service, insurance, taxes, operating expenses and extraordinary capital expenditures and leasing expenses. This could adversely affect our liquidity and our ability to make distributions to our shareholders.
There is refinancing risk associated with our debt.
Our typical debt contains limited principal amortization; therefore, the vast majority of the principal must be repaid at the maturity of the loan in a so-called “balloon payment.” At the maturity of these loans, assuming we do not have sufficient funds to repay the debt, we will need to refinance the debt. If the credit environment is constrained at the time of our debt maturities, we would have a very difficult time refinancing debt or refinancing terms may be at substantially higher interest rates and/or lower proceeds. If we are unable to refinance our debt on acceptable terms, we may be forced to choose from a number of unfavorable options. These options include agreeing to otherwise unfavorable financing terms on one or more of our unencumbered assets, selling one or more hotels at disadvantageous terms, including unattractive prices, or defaulting on the mortgage and permitting the lender to foreclose. Any one of these options could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our shareholders.
If we default on our secured debt, the lenders may foreclose on our hotels.
All of our indebtedness for borrowed money, except our senior unsecured revolving credit facility, term loans and senior unsecured notes, is secured by either single property first mortgage liens or leasehold interests under the ground leases on the applicable hotel. If we default on any of the secured loans, the applicable lender will be able to foreclose on the property pledged to secure the loan.
In addition to causing us to lose the property, a foreclosure may result in taxable income. Under the Code, a foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure even though we did not receive any cash proceeds. As a result, we may then be required to identify and utilize other sources of cash for distributions to our shareholders. If this occurs, our financial condition, cash flow and ability to satisfy our other debt obligations or ability to pay distributions may be adversely affected.
Acquiring outstanding debt secured by a hotel or resort property may expose us to risks of costs and delays in acquiring the underlying property.
We may acquire outstanding debt secured by a hotel or resort property from lenders and investors if we believe we can ultimately foreclose or otherwise acquire ownership of the underlying property in the near-term through foreclosure, deed-in-lieu of foreclosure or other means. However, if we do acquire such debt, borrowers may seek to assert various defenses to our foreclosure or other actions and we may not be successful in acquiring the underlying property on a timely basis, or at all, in which event we could incur significant costs and experience significant delays in acquiring such properties, all of which could adversely affect our financial performance and reduce our expected returns from such investments. In addition, we may not earn a current return on such investments particularly if the loan that we acquire is in default.
Changes in the method of determining the London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with an alternative reference rate, may adversely affect our financial results.
As of December 31, 2020, all of the debt outstanding under our unsecured term loans and our senior unsecured revolving credit facilities was indexed to LIBOR. In July 2017, the U.K. Financial Conduct Authority announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021. In December 2020, the ICE Benchmark Administration, the administrator of LIBOR ("ICE"), announced a consultation on its plan to cease publishing most settings of USD LIBOR at the end of June 2023. The consultation results have not yet been published, but it is unlikely that any setting of USD LIBOR will continue beyond June 2023 (the "LIBOR Transition Date"). The Alternative Reference Rates Committee, a steering committee composed of large U.S. financial institutions and public officials convened by the U.S. Federal Reserve, has recommended the Secured Overnight Financing Rate (“SOFR”) as an alternative reference rate to U.S. dollar LIBOR. SOFR is
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calculated based on overnight transactions under repurchase agreements, backed by Treasury securities. SOFR is observed and backward-looking, which stands in contrast with LIBOR, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question. The future of LIBOR at this time is uncertain. While we expect LIBOR to be available in substantially its current form until the end of 2021, and likely based on ICE's announced consultation through June 2023, if sufficient banks decline to make submissions to ICE, it is possible that LIBOR will become unavailable prior to that point. Should that occur, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. If any of our debt arrangements will be linked to LIBOR, we may need to amend them before the LIBOR Transition Date or earlier. The transition away from LIBOR may adversely impact our ability to manage and hedge exposures to fluctuations in interest rates using derivative instruments. There is no guarantee that a transition from LIBOR to an alternative rate will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could have an adverse effect on our business, results of operations, or financial condition.
Risks Related to the Lodging Industry
The COVID-19 pandemic has had, and is expected to continue to have, a material adverse impact on our financial condition, results of operations, cash flows, liquidity and prospects. The current, and uncertain future, impact of the COVID-19 pandemic, including its effect on the ability or desire of people to travel for leisure or for business, is expected to continue to adversely impact our financial condition, results of operations, cash flows, liquidity and prospects.
The COVID-19 pandemic and federal, state and local government responses and restrictions thereto have significantly disrupted, and are expected to continue to significantly disrupt, our business. As a result of this pandemic and subsequent government mandates and health official recommendations and restrictions, hotel demand was nearly eliminated during the second quarter of 2020 and occupancy levels reached historic lows. While our operations have improved, they are still well below pre-pandemic levels, and there can be no assurance that our operations will continue to improve or that our operations will not deteriorate again in response to surges in the pandemic. Certain states and cities, including those where our hotels are located, have reacted to the pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on the types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue. In response to the COVID-19 pandemic, we temporarily suspended operations at the vast majority of our hotels, and as of December 31, 2020, 37 of our hotels were open and the operations at the remaining 16 hotels remained temporarily suspended. Our operating hotels are running in a more limited capacity as compared to pre-pandemic levels and on a portfolio wide basis, generally with lower occupancy and lower average daily rates. We may determine in the future that it is in the best interest of our company, guests and employees to temporarily suspend operations at some or all of our open hotels. With hotel operations temporarily suspended or reduced, we have been and for the foreseeable future likely will be required to use a substantial portion of our available cash to pay hotel payroll expenses, maintenance expenses, fixed hotel costs, insurance expenses, property taxes and scheduled debt payments. Use of our cash will reduce the amount of cash available for hotel capital expenditures, future business opportunities and other purposes, including distributions to our shareholders. To preserve liquidity, we have worked with our operators to significantly reduce staffing and expenses at our hotels that remain operational, reduced the quarterly cash dividend on our common shares to $0.01 per share, reduced planned capital expenditures and reduced the compensation of our executive officers, board of trustees and employees. While we have taken steps to increase our cash position and preserve our financial flexibility, given the unprecedented impact of COVID-19 on the global market and our hotel operations, we cannot assure you that these steps will prove to be sufficient or that our forecast or the assumptions we used to estimate our liquidity requirements will be correct.
We are unable to predict when any of our hotels with temporarily suspended operations will resume operations. Moreover, once travel advisories and restrictions (which may be continued or reinstituted, due to the continued outbreak or a resurgent outbreak of COVID-19 (such as is currently occurring in much of the United States)) are lifted, travel demand may remain weak for a significant period of time as individuals or businesses may fear or restrict traveling. We are unable to predict if and when occupancy and the average daily rates at our hotels will return to pre-pandemic levels. Additionally, our hotels may be negatively impacted by adverse changes in the economy, including higher unemployment rates, declines in income levels, loss of personal wealth and possibly a national and/or global recession resulting from the impact of COVID-19. Declines in demand trends, occupancy and the average daily rates at our hotels may indicate that one or more of our hotels is impaired, which would adversely affect our financial condition and results of operations.
We are subject to various financial covenants relating to our credit facilities, term loan facilities and senior notes. In February 2021, we completed amendments to the agreements governing our credit facilities, term loan facilities and senior notes, which, among other things, waived certain existing financial covenants through the end of 2021 and others through the first quarter of 2022. Due to COVID-19’s negative impact on our operations throughout 2020 and continuing in 2021, it is
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possible that we may not meet the terms of the financial covenants once they become effective in 2022. Our future liquidity will depend on the gradual return of leisure, business and group business, to our hotels and the stabilization of demand throughout our portfolio. If we are unable to satisfy the amended financial covenants following the end of the existing waiver period, the lenders of such debt may require us to repay the loans. Failure to meet any financial covenants of our debt would adversely affect our financial conditions and results from operations, and may raise doubt about our ability to continue as a going concern.
The COVID-19 pandemic may exacerbate many of the risks described in this Annual Report on Form 10-K and expose us to the following risks, among others:
a complete or partial closure or re-closure of, or other operational issues at, one or more of our hotels, resulting from government, third-party hotel manager or franchisor action, which could materially adversely affect our operations;
the postponement or cancellation of conferences, conventions, festivals, sporting events, public events and other group business that would have otherwise brought individuals to the areas in which our hotels are located, which has caused, and could continue to cause, a decrease in occupancy rates over a prolonged period of time and exacerbate the seasonal volatility at our hotels;
a general decline of in-person business meetings and an increase in the use of teleconferencing and video-conferencing technology, which could cause a sustained shift away from business-related travel and have a material adverse effect on the overall demand for hotel rooms;
a decrease in individuals’ willingness to travel as a result of actual or perceived health risks or a decrease in consumer spending, which could affect the ability of our hotels to generate sufficient revenues to meet operating and other expenses in the short- and long-term;
reduced economic activity impacting the businesses, financial condition and liquidity of our company or that of our third-party hotel managers or franchisors, which could result in us, the third-party hotel manager or the franchisor being unable to comply with operational and performance conditions under the applicable management and franchise agreements;
reduced economic activity impacting the businesses, financial condition and liquidity of the retail and restaurant tenants located at certain of our hotels, which could cause one or more of such tenants to be unable to meet their obligations to us in full, or at all, to otherwise seek modifications of such obligations or to declare bankruptcy;
severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which could make it difficult for us to access debt and equity capital on attractive terms, or at all, and adversely impact our ability to fund business activities and repay debt, including the notes, on a timely basis;
the potential lack of funding, disruptions in the supply of materials or products or the inability of contractors to perform on a timely basis or at all, could cause delays in completing ongoing or future hotel renovations and capital improvements at our hotels;
difficulties in sourcing and transporting materials or products necessary to operate our hotels, such as linens or cleaning supplies, and a decrease in the availability of adequate staffing at our hotels, which could impact our ability to provide our guests with the customary level of service provided at our hotels;
our potential inability to renew or enter into new management agreements for our hotels on favorable terms, or at all, which could cause interruptions in the operations at certain hotels;
a general decline in business activity and demand for real estate transactions, and more specifically, demand for hotel properties, which could adversely affect our ability or desire to make strategic acquisitions or dispositions;
the potential negative impact on the health of our personnel, particularly if a significant number of our senior executive officers are impacted, which could result in a deterioration in our ability to ensure business continuity during a disruption;
the limited access to our facilities, management, franchisors, support staff and professional advisors, which could decrease the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, increase our susceptibility to security breaches, or hamper our ability to comply with regulatory obligations and lead to reputational harm and regulatory issues or fines;
increased operating costs at our hotels due to enhanced cleaning and hygiene protocols required or recommended by major hotel brands, the Centers for Disease Control and Prevention, unions and state and local governments; and
increased labor costs due to demands for higher wages due to health risks associated with working in hotels and requirements for more staff to implement cleaning protocols.
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The adverse effects of the COVID-19 pandemic on the lodging industry are unprecedented and have materially adversely affected our operations. The full extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence. These developments include, the scope, severity and duration of the pandemic; the development, distribution and administration of a successful vaccine or therapy; the length of time it takes for lodging demand and pricing to return to pre-pandemic levels and for normal economic and operating conditions to resume; the actions taken to contain the pandemic or mitigate its impact, as well as the effect of any relaxation of current restrictions, all of which could vary among the geographic regions in which our hotels are located; and the direct and indirect economic effects of the pandemic and containment measures. The rapid development and fluidity of the COVID-19 pandemic makes it extremely difficult to assess its full adverse economic impact on our business, financial condition, results of operations, liquidity and cash flows.
Economic conditions may reduce demand for hotel properties and adversely affect hotel profitability.
The performance of the lodging industry has historically been closely linked to the performance of the general economy and, specifically, growth in U.S. GDP. It is also sensitive to business and personal discretionary spending levels. Declines in corporate travel budgets and consumer demand due to adverse general economic conditions, such as declines in U.S. GDP, risks affecting or reducing travel patterns (such as governmental restrictions on in-bound international travel), lower consumer confidence or adverse political conditions can lower the revenues and profitability of hotel properties and therefore the net operating profits of our TRS lessees to whom we lease our hotel properties. Another domestic or global economic downturn may lead to a significant decline in demand for products and services provided by the lodging industry, lower occupancy levels and significantly reduced room rates.
We cannot predict the pace or duration of the global economic cycles or the cycles in the lodging industry. A period of economic weakness would likely have an adverse impact on our revenues and negatively affect our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
Our operating results and ability to make distributions to our shareholders may be adversely affected by various operating risks common to the lodging industry.
Our hotel properties have different economic characteristics than many other real estate assets and a hotel REIT is structured differently than many other types of REITs. Our TRS lessees engage hotel managers pursuant to management contracts and pay the managers fees for managing the hotels. The TRS lessees receive all the operating profit or losses of the hotels. Moreover, virtually all hotel guests stay at a hotel for only a few nights at a time, so the rate and occupancy at each of our hotels change daily. As a result, we may have highly volatile earnings.
In addition, our hotel properties are subject to various operating risks common to the lodging industry, many of which are beyond our control, including the following:
competition from other hotel properties and non-hotel properties that provide nightly and short-term rentals in our markets;
over building of new hotels in our markets, which could adversely affect occupancy and revenues at our hotel properties;
dependence on business and commercial travelers, conventions and tourism;
increases in energy costs, airplane fares, government taxes and fees, and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;
increases in operating costs due to inflation and other factors that may not be offset by increased room rates;
changes in interest rates and in the availability, cost and terms of debt financing;
changes in governmental laws and regulations (including minimum wage increases), fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;
adverse effects of international, national, regional and local economic and market conditions;
labor strikes or disruptions;
unforeseen events beyond our control, such as terrorist attacks, cyber-attacks, travel-related health concerns and restrictions as a result of pandemics and epidemics such as H1N1 influenza (swine flu), avian bird flu, Zika virus, SARS, MERS and COVID-19 (coronavirus), political instability, regional hostilities, imposition of taxes or surcharges by regulatory authorities, travel-related accidents and unusual weather patterns, including natural disasters such as hurricanes, tsunamis or earthquakes;
strength of the U.S. dollar which may reduce in-bound international travel and encourage out-bound international travel;
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adverse effects of a downturn in the lodging industry; and
risks generally associated with the ownership of hotel properties and real estate, as we discuss in more detail below.
These factors could reduce the revenues and net operating profits of our TRS lessees, which in turn could adversely affect our financial condition, results of operations, the market price of our common shares, and our ability to make distributions to our shareholders.
Competition for acquisitions may reduce the number of properties we can acquire.
We compete for investment opportunities with entities that may have substantially greater financial and other resources than we have. These entities generally may be able to accept more risk than we can prudently manage. This competition may generally limit the number of suitable investment opportunities offered to us or the number of properties that we are able to acquire. This competition may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms.
The seasonality of the lodging industry may cause fluctuations in our quarterly revenues that cause us to borrow money to fund distributions to our shareholders.
The lodging industry is seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in our revenues. Our quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues and to make distributions to our shareholders.
The cyclical nature of the lodging industry may cause the returns from our investments to be less than we expect.
The lodging industry is highly cyclical in nature. Fluctuations in lodging demand and, therefore, hotel operating performance, are caused largely by general economic and local market conditions, which subsequently affect levels of business and leisure travel. In addition to general economic conditions, new hotel room supply is an important factor that can affect lodging industry fundamentals, and over-building has the potential to exacerbate the negative impact of poor economic conditions. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. A decline in lodging demand, or a continued growth in lodging supply, could result in continued deterioration in lodging industry fundamentals and returns that are substantially below expectations, or result in losses, which could adversely affect our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
Capital expenditure requirements at our properties may be costly and require us to incur debt, postpone improvements, reduce distributions or otherwise adversely affect the results of our operations and the market price of our common shares.
Some of the hotel properties we acquire need renovations and capital improvements at the time of acquisition and all the hotel properties we have acquired and will acquire in the future will have an ongoing need for renovations and other capital improvements, including replacement, from time to time, of furniture, fixtures and equipment. The franchisors, if any, of our hotel properties also require periodic capital improvements as a condition to our maintaining the franchise licenses. In addition, our lenders often require that we set aside annual amounts for capital improvements to our hotel properties. These capital improvements may give rise to the following risks:
possible environmental problems;
construction cost overruns and delays;
the possibility that revenues will be reduced while rooms or restaurants are out of service due to capital improvement projects;
a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on attractive terms; and
uncertainties as to market demand or a loss of market demand after capital improvements have begun.
The costs of renovations and capital improvements could adversely affect our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
Hotel and resort development and redevelopment is subject to timing, budgeting and other risks that may adversely affect our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
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We may engage in hotel development and redevelopment if suitable opportunities arise. Hotel development and redevelopment involves a number of risks, including risks associated with:
construction delays or cost overruns that may increase project costs;
the receipt of zoning, occupancy and other required governmental permits and authorizations;
development costs incurred for projects that are not pursued to completion;
acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;
the negative impact of construction on operating performance during and soon after the construction period;
the ability to raise capital; and
governmental restrictions on the nature or size of a project.
We cannot assure you that any development or redevelopment project will be completed on time or within budget. Our inability to complete a project on time or within budget could adversely affect our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
The increasing use by consumers of Internet travel intermediaries and alternative lodging marketplaces may reduce our revenues.
Some of our hotel rooms are booked through Internet travel intermediaries, such as Travelocity.com, Expedia.com and Priceline.com. As bookings through these intermediaries increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from the management companies that operate the hotels we own and acquire. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”), at the expense of brand identification or quality of product or service. These intermediaries hope that consumers will eventually develop brand loyalties to their reservations system rather than to lodging brands or properties. Additional sources of competition, such as alternative lodging marketplaces like Airbnb, may, as they become more accepted, lead to a reduced demand for conventional hotel guest rooms and to an increased supply of lodging alternatives. If the amount of bookings made through Internet travel intermediaries or the use of alternative lodging marketplaces prove to be more significant than we expect, profitability may be lower than expected, and our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders may be adversely affected.
We may be adversely affected by increased use of business-related technology which may reduce the need for business-related travel.
The increased use of teleconference and video-conference technology by businesses, particularly given its widespread use and increased acceptance during the COVID-19 pandemic, which may lead to continued use after the pandemic, could result in decreased business travel as companies increase the use of technologies that allow multiple parties from different locations to participate at meetings without traveling to a centralized meeting location. To the extent that such technologies play an increased role in day-to-day business and the necessity for business-related travel decreases, hotel room demand may decrease and our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders may be adversely affected.
We and our hotel managers rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.
We and our hotel managers rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as individually identifiable information, including information relating to financial accounts. Recently, a number of hotels and hotel management companies have been subject to successful cyber-attacks, including those seeking guest credit card information. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not be able to prevent the systems' improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, ransomware, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information or theft of corporate funds and expose us to claims by guests whose personal information is accessed. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability
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claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations.
Many of our hotel managers carry cyber insurance policies to protect and offset a portion of potential costs that may be incurred from a security breach. Additionally, we currently have cyber insurance policies to provide supplemental coverage above the coverage carried by our third-party managers. Despite various precautionary steps to protect our hotels from losses resulting from cyber-attacks, however, any occurrence of a cyber-attack could still result in losses at our properties, which could affect our results of operations.  We are not aware of any cyber incidents that we believe to be material or that could have a material adverse effect on our business, financial condition and results of operations.
We are subject to risks associated with the employment of hotel personnel, particularly with hotels that employ unionized labor.
Our third-party hotel managers are responsible for hiring and maintaining the labor force at each of our hotels. Although we do not directly employ or manage employees at our hotels, we are subject to risks associated with the employment of hotel personnel, particularly at those hotels with unionized labor. From time to time, strikes, lockouts, public demonstrations or other negative actions and publicity may disrupt hotel operations. In addition, we may be affected by shortages of qualified labor. If our managers are unable to hire qualified labor, our hotel customers may not receive adequate service. We also may incur increased legal costs and indirect labor costs as a result of contract disputes or other events. The resolution of labor disputes or new or re-negotiated labor contracts could lead to increased labor costs, either by increases in wages or benefits or by changes in work rules that raise hotel operating costs. Furthermore, collective bargaining agreements, negotiated between the hotel managers and labor unions, may limit the ability of the hotel managers to reduce the size of hotel workforces during economic downturns. We do not have the ability to control negotiations between hotel managers and labor unions. In addition, we believe that unions are generally becoming more aggressive about organizing workers at hotels in certain locations. Potential labor activities at these hotels could significantly increase the administrative, labor and legal expenses of the third-party management companies operating these hotels and reduce the profits we receive. If additional employees at our hotels become unionized, this could have a material adverse effect on our business, financial condition and results of operations.
Terrorist attacks or changes in terror alert levels could adversely affect travel and hotel demand.
Previous terrorist attacks and subsequent terrorist alerts have adversely affected the U.S. travel and hospitality industries over the past several years, often disproportionately to the effect on the overall economy. The impact that terrorist attacks in the U.S. or elsewhere could have on domestic and international travel and our business in particular cannot be definitively determined, but any such attacks or the threat of such attacks could have a material adverse effect on our business, our ability to finance our business, our ability to insure our properties and our results of operations and financial condition.
Uninsured and underinsured losses could result in a loss of capital.
We maintain comprehensive property insurance on each of our hotel properties, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. There are no assurances that coverage will remain available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods, and losses from terrorist activities, may not be insurable in whole or in part or may not be available on terms that we consider acceptable.
In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel property, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.
Our hotels may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.
The hotel properties that we own or may acquire are or may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. In general, the representations and warranties provided under the transaction agreements related to the sales of the hotel properties may not survive the closing of the transactions. While we will seek to require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these hotels may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may adversely affect our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
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Noncompliance with environmental laws and regulations could subject us to fines and liabilities which could adversely affect our operating results.
Our hotel properties are subject to various federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require us, as owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated, and therefore it is possible we could incur cleanup costs even after we sell some of the properties we acquire. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner's ability to borrow funds using the property as collateral or to sell the property. Under the environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment. A person that arranges for the disposal or transports for disposal or treatment of a hazardous substance at a property owned by another may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in a hotel may seek to recover damages if he or she suffers injury from the asbestos. Also, some of these environmental laws restrict the use of a property or place conditions on various activities. An example would be laws that require a business using chemicals (such as swimming pool chemicals at a hotel property) to manage them carefully and to notify local officials that the chemicals are being used.
We could be responsible for any of the costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could adversely affect our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
As a result, we may become subject to material environmental liabilities. We can make no assurances that future laws or regulations will not impose material environmental liabilities or that the current environmental condition of our hotel properties will not be affected by the condition of the properties in the vicinity of our hotel properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.
Our hotel properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. Some of our properties may contain microbial matter such as mold and mildew. The presence of significant mold at any of our hotel properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. The presence of significant mold could expose us to liability from hotel guests, hotel employees and others if property damage or health concerns arise.
Compliance with the Americans with Disabilities Act could require us to incur substantial costs.
Under the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. While we believe that our hotels are substantially in compliance with these requirements, a determination to the contrary could require removal of access barriers and non-compliance could result in litigation costs, costs to remediate deficiencies, U.S. government fines or damages to private litigants.
If we are required to make substantial modifications to our hotel properties, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders could be adversely affected.
The nature of the operations of our hotels exposes us to the risk of claims and litigation that may arise in the normal course of business.
 As owners of hotel properties, we face potential claims, litigation and threatened litigation from guests, visitors to our properties, contractors, sub-contractors and others.  These claims and proceedings are inherently uncertain and their costs and outcomes cannot be predicted with certainty. Regardless of their outcomes, such claims and legal proceedings can have an adverse impact on us because of the legal and other costs, diversion of management time and resources and other factors. Although we and our hotel management companies maintain insurance covering some of these matters, it is possible that one or more claims, suits or proceedings may not be covered by insurance and could result in substantial costs, judgments, fines and penalties that could adversely affect our business, consolidated financial position, results of operations or cash flows.
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A delay in approving a budget and/or continuing appropriation legislation to fund the operations of the federal government, failure to raise the borrowing limit for the federal government, and other legislative changes and governmental disruptions could affect travel directly and indirectly and may thereby negatively impact our revenues and cash available for distributions.
The delay in approving a budget and continuing appropriation legislation to fund the operations of the federal government caused many federal agencies to cease or curtail some activities during the fourth quarter of 2013 and for an even longer period of time beginning in the fourth quarter of 2018.  In April 2013, the Federal Aviation Administration announced the implementation of furloughs of air traffic controllers, resulting in flight delays throughout the United States until the U.S. Congress passed a bill suspending such furloughs. There can be no assurance that similar action or inaction by federal or state government agencies, or other efforts to reduce government expenditures or growth, will not occur again in future periods, resulting in difficulties and discouraging travel or meetings and conferences.  The reduction in income from both businesses and federal government employees and the possibility of another federal government impasse may adversely affect consumer confidence or may discourage both business and leisure travel, resulting in the deferral or cancellation of travel and a negative effect on our group and transient revenues in the future.  Such impacts could have a material adverse impact on our consolidated financial statements.
General Risks Related to the Real Estate Industry
Illiquidity of real estate investments could significantly impede our ability to sell hotels or otherwise respond to adverse changes in the performance of our hotel properties.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties for reasonable prices in response to changing economic, financial and investment conditions will be limited. The real estate market is affected by many factors beyond our control, including:
adverse changes in international, national, regional and local economic and market conditions;
changes in interest rates and in the availability, cost and terms of debt financing;
changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;
the ongoing need for capital improvements, particularly in older structures;
changes in operating expenses; and
civil unrest, acts of God, including earthquakes, floods, wildfires and other natural disasters, which may result in uninsured losses, and acts of war or terrorism.
We have acquired hotels, and may acquire additional hotels in the future, subject to ground leases or other leasehold interests. Sales of property subject to such leases may require the consent of the lessors. This consent requirement may make it more difficult or expensive to sell or finance the hotels subject to ground leases or other leasehold interests.
We may decide to sell hotel properties in the future. We cannot predict whether we will be able to sell any hotel property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property.
We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a hotel property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond to adverse changes in the performance of the hotel properties or a need for liquidity could adversely affect our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
If states and localities in which we own material amounts of property or conduct material amounts of business raise their income and property tax rates or amend their tax regimes in a manner that increases our state and local tax liabilities, we would have less cash available for distribution to our shareholders and the market price of our shares could be adversely affected.
We and our subsidiaries are subject to income tax and other taxes by states and localities in which we conduct business. Additionally, we are and will continue to be subject to property taxes in states and localities in which we own property, and our TRS lessees are and will continue to be subject to federal, state and local corporate income tax. States and localities may seek additional sources of revenue to reduce budget deficits and otherwise improve their financial condition or provide more
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services, they may, among other steps, raise income and property tax rates and/or amend their tax regimes to eliminate for state income tax purposes the favorable tax treatment REITs enjoy for U.S. federal income tax purposes. We cannot predict when or if any states or localities would make any such changes, or what form those changes would take. If states and localities in which we own material amounts of property or conduct material amounts of business make changes to their tax rates or tax regimes that increase our state and local tax liabilities, such increases would reduce the amount of cash available for distribution to our shareholders and could adversely affect the market price of our shares.
The costs of compliance with or liabilities under environmental laws could significantly reduce our profitability.
Operating expenses at our hotels could be higher than anticipated due to the cost of complying with existing or future environmental laws and regulations. In addition, an owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:
our lack of knowledge of the contamination;
the timing of the contamination;
the cause of the contamination; or
the party responsible for the contamination of the property.
Environmental laws also impose ongoing compliance requirements on owners and operators of real property. Environmental laws potentially affecting us address a wide variety of matters, including, but not limited to, asbestos-containing building materials, storage tanks, storm water and wastewater discharges, lead-based paint, mold/mildew and hazardous wastes. Failure to comply with these laws could result in fines and penalties and/or expose us to third-party liability. Some of our properties may have conditions that are subject to these requirements, and we could be liable for such fines or penalties and/or liable to third parties.
Certain hotel properties we own or may own in the future may contain, or may have contained, asbestos-containing building materials ("ACBMs"). Environmental laws require that ACBMs be properly managed and maintained and may impose fines and penalties on building owners and operators for failure to comply with these requirements. Also, certain properties may be adjacent or near other properties that have contained or currently contain storage tanks for the storage of petroleum products or other hazardous or toxic substances. These operations create a potential for the release of petroleum products or other hazardous or toxic substances. Third parties may be permitted by law to seek recovery from owners or operators for property damage and/or personal injury associated with exposure to contaminants, including, but not limited to, petroleum products, hazardous or toxic substances and asbestos fibers.
We have obtained Phase I environmental site assessments ("ESAs") on our hotel properties and expect to do so for hotel properties we acquire in the future. ESAs are intended to evaluate information regarding the environmental condition of the surveyed property and surrounding properties based generally on visual observations, interviews and certain publicly available databases. These assessments do not typically take into account all environmental issues including, but not limited to, testing of soil or groundwater or the possible presence of asbestos, lead-based paint, radon, wetlands or mold. As a result, these assessments may fail to reveal all environmental conditions, liabilities or compliance concerns. Material environmental conditions, liabilities or compliance concerns may arise after the ESAs and future laws, ordinances or regulations may impose material additional environmental liability. We cannot assure you that costs of future environmental compliance will not affect our ability to make distributions to our shareholders or that such costs or other remedial measures will not be material to us.
The presence of hazardous substances on a property may limit our ability to sell the property on favorable terms or at all, and we may incur substantial remediation costs. The discovery of material environmental liabilities at our properties could subject us to unanticipated significant costs, which could significantly reduce our profitability and the cash available for distribution to our shareholders.
Risks Related to Our Organization and Structure
Provisions of our declaration of trust may limit the ability of a third party to acquire control of us by authorizing our board of trustees to authorize issuances of additional securities.
Our declaration of trust authorizes our board of trustees to issue up to 500,000,000 common shares and up to 100,000,000 preferred shares. In addition, our board of trustees may, without shareholder approval, amend our declaration of trust to increase the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue and to classify or reclassify any unissued common shares or preferred shares and to set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of trustees may authorize the issuance of additional shares or establish a series of common or preferred shares that may have the effect of delaying or preventing a change in control of our company, including transactions at a premium over the market price of our shares, even if shareholders believe that a change of control is in their interest.
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Provisions of Maryland law may limit the ability of a third party to acquire control of us by requiring our board of trustees or shareholders to approve proposals to acquire our company or effect a change of control.
Certain provisions of the Maryland General Corporation Law (the "MGCL") applicable to Maryland real estate investment trusts may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide our common shareholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10 percent or more of the voting power of our shares) or an affiliate of any interested shareholder for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes special appraisal rights and special shareholder voting requirements on these combinations; and
“control share” provisions that provide that our “control shares” (defined as shares which, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
By resolution of our board of trustees, we have opted out of the business combination provisions of the MGCL and provided that any business combination between us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination is first approved by our board of trustees (including a majority of trustees who are not affiliates or associates of such persons). Pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our board of trustees may by resolution elect to opt in to the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
Additionally, Title 8, Subtitle 3 of the MGCL permits our board of trustees, without shareholder approval and regardless of what is currently provided in our declaration of trust or bylaws, to implement certain takeover defenses, such as a classified board. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide our common shareholders with the opportunity to realize a premium over the then current market price. In October 2015, we opted out of the classified board provision of Title 8, Subtitle 3 of the MGCL and prohibited ourselves from opting back into that provision without prior approval of our shareholders.
The ownership limitations in our declaration of trust may restrict or prevent shareholders from engaging in certain transfers of our common shares.
In order for us to maintain our qualification as a REIT for U.S. federal income tax purposes, no more than 50 percent in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the U.S. federal income tax laws to include various kinds of entities) during the last half of any taxable year. To assist us in maintaining our qualification as a REIT, our declaration of trust contains a share ownership limit. Generally, any of our shares owned by affiliated owners will be added together for purposes of the share ownership limit.
If anyone transfers our shares in a way that would violate the share ownership limit or prevent us from qualifying as a REIT under the U.S. federal income tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the share ownership limit or we will consider the transfer to be null and void from the outset, and the intended transferee of those shares will be deemed never to have owned the shares. Anyone who acquires our shares in violation of the share ownership limit or the other restrictions on transfer in our declaration of trust bears the risk of suffering a financial loss when the shares are redeemed or sold if the market price of our shares falls between the date of purchase and the date of redemption or sale.
In addition, these ownership limitations may prevent an acquisition of control of us by a third party without our board of trustees' approval, even if our shareholders believe the change of control is in their interest.
Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which could limit shareholders' recourse in the event of actions not in their best interests.
Under Maryland law, generally, a trustee's actions will be upheld if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our declaration of trust limits the liability of our trustees and officers to us and our shareholders for money damages, except for liability resulting from:
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actual receipt of an improper benefit or profit in money, property or services; or
active and deliberate dishonesty by the trustee or officer that was established by a final judgment as being material to the cause of action adjudicated.
Our declaration of trust authorizes us to indemnify our trustees and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each trustee or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we have entered into indemnification agreements with our officers and trustees and we may be obligated to fund the defense costs incurred by our trustees and officers. As a result, we and our shareholders may have more limited rights against our trustees and officers than might otherwise exist absent the current provisions in our declaration of trust and bylaws or that might exist with other companies.
Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management.
Our declaration of trust provides that a trustee may be removed only for cause (as defined in our declaration of trust) and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of trustees. Our declaration of trust also provides that vacancies on our board of trustees may be filled only by a majority of the remaining trustees in office, even if less than a quorum. These requirements prevent shareholders from removing trustees except for cause and with a substantial affirmative vote and from replacing trustees with their own nominees and may prevent a change in control of our company that is in the best interests of our shareholders.
The ability of our board of trustees to change our major policies without the consent of shareholders may not be in shareholders' interest.
Our board of trustees determines our major policies, including policies and guidelines relating to our acquisitions, leverage, financing, growth, operations and distributions to shareholders. Our board of trustees may amend or revise these and other policies and guidelines from time to time without the vote or consent of our shareholders. Accordingly, our shareholders will have limited control over changes in our policies and those changes could adversely affect our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our shareholders.
Further issuances of equity securities may be dilutive to current shareholders.
We expect to issue additional common shares or preferred shares to raise the capital necessary to finance hotel acquisitions or improvements, refinance debt or pay portions of future dividends. In addition, we may issue units in our Operating Partnership, which are redeemable on a one-for-one basis for our common shares, to acquire hotels. Such issuances could result in dilution of our shareholders' equity interests.
Future offerings of debt securities or preferred shares, which would be senior to our common shares upon liquidation and for the purpose of distributions, may cause the market price of our common shares to decline.
We have issued six series of preferred shares, of which we have repurchased two and four remain outstanding, and three series of senior unsecured notes. In the future, we may increase our capital resources by making additional offerings of debt or equity securities, which may include senior or subordinated notes, series of preferred shares and common shares. We will be able to issue additional common shares or preferred shares without shareholder approval, unless shareholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Upon liquidation, holders of our debt securities and preferred shares and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common shares. Additional equity offerings could significantly dilute the holdings of our existing shareholders or reduce the market price of our common shares, or both. Holders of our common shares are not entitled to preemptive rights or other protections against dilution. Preferred shares and debt, if issued, have a preference on liquidating distributions or a preference on dividend or interest payments that could limit our ability to make a distribution to the holders of our common shares. Because our decision to issue securities will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our shareholders bear the risk of our future securities issuances reducing the market price of our common shares and diluting their interest.
Holders of our outstanding preferred shares have dividend, liquidation and other rights that are senior to the rights of the holders of our common shares.
Our board of trustees has the authority to designate and issue preferred shares with liquidation, dividend and other rights that are senior to those of our common shares. As of December 31, 2020, 5,000,000 shares of our 6.50% Series C Cumulative Redeemable Preferred Shares (the “Series C Preferred Shares”), 5,000,000 shares of our 6.375% Series D Cumulative Redeemable Preferred Shares (the “Series D Preferred Shares”), 4,400,000 shares of our 6.375% Series E Cumulative
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Redeemable Preferred Shares (the “Series E Preferred Shares”) and 6,000,000 shares of our 6.30% Series F Cumulative Redeemable Preferred Shares (the “Series F Preferred Shares”) were issued and outstanding. The aggregate liquidation preference with respect to the outstanding preferred shares is approximately $510.0 million, and aggregate annual dividends on our outstanding preferred shares are approximately $32.6 million. Holders of any of these preferred shares are entitled to cumulative dividends before any dividends may be declared or set aside on our common shares. Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common shares, holders of these preferred shares are entitled to receive a liquidation preference of $25.00 per share plus any accrued and unpaid distributions. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common shares. In addition, holders of these preferred shares have the right to elect two additional trustees to our board of trustees whenever dividends on the preferred shares are in arrears for six or more quarterly dividends, whether or not consecutive.
The change of control conversion and redemption features of the Series C Preferred Shares, the Series D Preferred Shares, the Series E Preferred Shares and the Series F Preferred Shares may make it more difficult for a party to take over our company or discourage a party from taking over our company.
Upon the occurrence of a change of control (as defined in our declaration of trust) as the result of which our common shares and the common securities of the acquiring or surviving entity (or American Depositary Receipts representing such securities) are not listed on the New York Stock Exchange (the “NYSE”), the NYSE American LLC or NASDAQ or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE American LLC or NASDAQ, holders of Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares or Series F Preferred Shares will have the right (unless, as provided in our declaration of trust, we have provided or provide notice of our election to redeem the applicable series) to convert some or all of their preferred shares into our common shares (or equivalent value of alternative consideration), and under these circumstances we will also have a special optional redemption right to redeem such shares. Upon such a conversion, holders of Series C Preferred Shares will be limited to a maximum number of our common shares equal to 2.0325 multiplied by the number of Series C Preferred Shares converted, holders of Series D Preferred Shares will be limited to a maximum number of our common shares equal to 1.9794 multiplied by the number of Series D Preferred Shares converted, holders of Series E Preferred Shares will be limited to a maximum number of our common shares equal to 1.9372 multiplied by the number of Series E Preferred Shares converted and holders of Series F Preferred Shares will be limited to a maximum number of our common shares equal to 2.0649 multiplied by the number of Series F Preferred Shares converted. In addition, those features of the Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change of control of our company under circumstances that otherwise could provide the holders of our common shares, Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares or Series F Preferred Shares with the opportunity to realize a premium over the then-current market price or that shareholders may otherwise believe is in their best interests.
We have entered into an agreement with each of our executive officers that requires us to make payments in the event the officer's employment is terminated by us without cause, by the officer for good reason or under certain circumstances following a change of control of our company.
The agreements that we have entered into with our executive officers provide benefits under certain circumstances that could make it more difficult or expensive for us to terminate these officers and may prevent or deter a change of control of our company that would otherwise be in the interest of our shareholders.
If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our shareholders could lose confidence in our financial results, which could harm our business and the value of our common shares.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting and have our independent auditors annually issue their own opinion on our internal controls over financial reporting. We cannot be certain that we will be successful in maintaining adequate internal controls over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market value of our common shares. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner.
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U.S. Federal Income Tax Risk Factors
Our failure to maintain our qualification as a REIT would result in higher taxes and reduced cash available for distribution to our shareholders.
We have elected to be taxed as a REIT for U.S. federal income tax purposes. However, qualification as a REIT involves the application of highly technical and complex provisions of the Code, for which only a limited number of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our REIT qualification. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis.
Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially applicable with retroactive effect, could make it more difficult or impossible for us to maintain our qualification as a REIT. If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax on our taxable income at regular corporate rates, and distributions to shareholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of our shares. If, for any reason, we ceased to qualify as a REIT and we were not entitled to relief under certain Code provisions, we would be unable to elect REIT status for the four taxable years following the year during which we ceased to so qualify which would negatively impact the value of our shares.
In addition, if we fail to maintain our qualification as a REIT, we will no longer be required to make distributions to shareholders, and all distributions to shareholders will be subject to tax as dividend income to the extent of our current and accumulated earnings and profits. As a result of all these factors, our failure to maintain our qualification as a REIT could impair our ability to execute our business and growth strategies, as well as make it more difficult for us to raise capital and service our indebtedness.
We could face adverse tax consequences if LaSalle failed to qualify as a REIT prior to the merger.
In connection with the closing of the merger, we received an opinion of counsel to the effect that LaSalle qualified as a REIT for U.S. federal income tax purposes through the time of the merger. However, we did not request a ruling from the IRS that LaSalle qualified as a REIT. Notwithstanding the opinion of counsel, if the IRS successfully challenged LaSalle’s REIT status prior to the merger, we could face adverse tax consequences, including:
succeeding to LaSalle’s liability for U.S. federal income taxes at regular corporate rates for the periods in which LaSalle failed to qualify as a REIT (without regard to the deduction for dividends paid for such periods);
succeeding to any built-in gain on LaSalle’s assets, for which we could be liable for U.S. federal income tax at regular corporate rates, if we were to recognize such gain in the five-year period following the merger; and
succeeding to LaSalle’s earnings and profits accumulated during the periods in which LaSalle failed to qualify as a REIT, which we would be required to distribute to our shareholders in order to satisfy the REIT distribution requirements and avoid the imposition of any excise tax.
As a result, we would have less cash available for operations and distributions to our shareholders, which could require us to raise capital on unfavorable terms or pay deficiency dividends.
Complying with REIT requirements may cause us to forego otherwise attractive business opportunities or liquidate otherwise attractive investments.
To maintain our qualification as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders and the ownership of our shares. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
In particular, we must ensure that at the end of each calendar quarter, at least 75 percent of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10 percent of the outstanding voting securities of any one issuer or more than 10 percent of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5 percent of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, no more than 20 percent of the value of our total assets can be represented by the securities of one or more TRSs and no more than 25 percent of our assets can be represented by debt of "publicly offered REITs" (i.e., REITs that are required to file annual and periodic reports with the SEC under the Exchange Act) that is not secured by real property or interests in real property. The Code provides that temporary investments of new capital in stock or debt instruments for the one-year period beginning on the date on which we receive the new capital will be considered qualified real estate assets for purposes of the above requirements. If we fail to comply with these requirements at the end of any calendar
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quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our shareholders.
To maintain our qualification as a REIT and avoid corporate income tax and excise tax, we must distribute annually a certain percentage of our REIT taxable income, which could require us to raise capital on terms or sell properties at prices or at times that are unfavorable.
To maintain our qualification as a REIT, we must distribute to our shareholders each calendar year at least 90 percent of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding any net capital gain. To the extent that we satisfy the 90 percent distribution requirement, but distribute less than 100 percent of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed income. In addition, we will incur a 4 percent nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of:
85 percent of our REIT ordinary income for that year;
95 percent of our REIT capital gain net income for that year; and
any undistributed REIT taxable income from prior years.
We have distributed, and we intend to continue to distribute, our REIT taxable income to our shareholders in a manner intended to satisfy the 90 percent distribution requirement and to avoid both corporate income tax and the 4 percent nondeductible excise tax. However, there is no requirement that TRSs distribute their after tax net income to their parent REIT or their shareholders.
Our REIT taxable income may substantially exceed our net income as determined based on U.S. generally accepted accounting principles, or U.S. GAAP, because, for example, realized capital losses will be deducted in determining our U.S. GAAP net income, but may not be deductible in computing our REIT taxable income. Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require us to borrow or raise capital on terms or sell properties at prices or at times that we regard as unfavorable in order to distribute enough of our REIT taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4 percent nondeductible excise tax in a particular year.
We may pay taxable dividends partly in shares and partly in cash, in which case shareholders may sell our shares to pay tax on such dividends, placing downward pressure on the market price of our shares.
We may pay taxable dividends partly in shares and partly in cash. Under IRS Revenue Procedure 2017-45, as a publicly offered REIT, as long as at least 20% of the total dividend is available in cash and certain other requirements are satisfied, the IRS will treat the share distribution as a dividend (to the extent applicable rules treat such distribution as being made out of our earnings and profits). Although we have no current intention of paying dividends in the form of our own shares, if in the future we choose to pay dividends in our own shares, our shareholders may be required to pay tax in excess of the cash that they receive. If a U.S. shareholder sells the shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our shares at the time of the sale. Furthermore, with respect to certain non-U.S. shareholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in shares. If we pay dividends in our own shares and a significant number of our shareholders sell our shares in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our shares.
Our TRS lessees increase our overall tax liability.
Our TRS lessees are subject to U.S. federal and state income tax on their taxable income, which consists of the revenues from the hotel properties leased by our TRS lessees, net of the operating expenses (including management fees) for such hotel properties and rent payments to us. In certain circumstances, the ability of our TRS lessees to deduct interest expense may be limited. Accordingly, although our ownership of our TRS lessees allows us to participate in the operating income from our hotel properties in addition to receiving rent, that operating income is fully subject to income tax. The after-tax net income of our TRS lessees is available for distribution to us.
Our ownership of our TRSs is limited and our transactions with our TRSs will cause us to be subject to a 100 percent penalty tax on certain income or deductions if those transactions are not conducted on arm's-length terms.
A REIT may own up to 100 percent of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross operating income from hotel operations pursuant to hotel management contracts. Both the subsidiary and the REIT must jointly elect to treat the subsidiary
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as a TRS. A corporation of which a TRS directly or indirectly owns more than 35 percent of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20 percent of the value of a REIT's assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100 percent excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm's-length basis.
Our TRSs are subject to applicable U.S. federal, state and local income tax on their taxable income, and their after-tax net income will be available for distribution to us, but is not required to be distributed to us. We believe that the aggregate value of the stock and securities of our TRSs is and will continue to be less than 20 percent of the value of our total assets (including our TRS stock and securities). Furthermore, we will monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with TRS ownership limitations. In addition, we will scrutinize all of our transactions with our TRSs to ensure that they are entered into on arm's-length terms to avoid incurring the 100 percent excise tax described above. There can be no assurance, however, that we will be able to comply with the TRS ownership limitation discussed above or to avoid application of the 100 percent excise tax discussed above.
If the leases of our hotel properties to our TRS lessees are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to our shareholders.
To maintain our qualification as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” Rents paid to our Operating Partnership by our TRS lessees pursuant to the lease of our hotel properties constitute substantially all of our gross income. In order for such rent to qualify as “rents from real property” for purposes of the gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
If our Operating Partnership failed to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to our shareholders and suffer other adverse consequences.
We believe that our Operating Partnership qualifies to be treated as a partnership for U.S. federal income tax purposes. As a partnership, our Operating Partnership generally is not subject to U.S. federal income tax on its income. Instead, each of its partners, including us, is required to pay tax on its allocable share of our Operating Partnership's income. No assurance can be provided, however, that the IRS will not challenge its status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our Operating Partnership as a corporation for tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. Also, the failure of our Operating Partnership to qualify as a partnership would cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.
If our TRSs fail to qualify as TRSs for U.S. federal income tax purposes or our hotel managers do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT.
Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. We lease all of our hotels to our TRS lessees. So long as any TRS lessee qualifies as a TRS, it will not be treated as a “related party tenant” with respect to our properties that are managed by an independent hotel management company that qualifies as an “eligible independent contractor.” We believe that our TRSs qualify to be treated as TRSs for U.S. federal income tax purposes, but there can be no assurance that the IRS will not challenge the status of a TRS for U.S. federal income tax purposes or that a court would not sustain such a challenge. If the IRS were successful in disqualifying any of our TRS lessee from treatment as a TRS, it is possible that we would fail to meet the asset tests applicable to REITs and substantially all of our income would fail to qualify for the gross income tests. If we failed to meet either the asset or gross income tests, we would likely lose our REIT qualification for U.S. federal income tax purposes.
Additionally, if our hotel managers do not qualify as “eligible independent contractors,” we will fail to qualify as a REIT. Each of the hotel management companies that enter into a management contract with our TRS lessees must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our TRS lessees to be qualifying income for purposes of the REIT gross income tests. Among other requirements, in order to qualify as an eligible independent contractor a manager must not own, directly or through its shareholders, more than 35 percent of our outstanding shares, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35 percent thresholds are complex. Although we intend to monitor ownership of our shares by our hotel managers and their owners, there can be no assurance that these ownership levels will not be exceeded.
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Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum U.S. federal income tax rate applicable to qualified dividend income payable to certain non-corporate U.S. shareholders is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced qualified dividend rates. For taxable years beginning after December 31, 2017 and before January 1, 2026, non-corporate taxpayers may deduct up to 20% of certain pass-through business income, including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are not designated as capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S. federal income tax rate of 29.6% on such income. Although the reduced U.S. federal income tax rate applicable to qualified dividend income does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends and the reduced corporate tax rate could cause certain non-corporate investors to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our shares.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute “gross income” for purposes of the 75 percent or 95 percent gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRSs.
If our subsidiary REITs failed to qualify as REITs, we could be subject to higher taxes and could fail to remain qualified as REITs.
Our Operating Partnership owns 100% of the common shares of our subsidiary REITs that have elected to be taxed as REITs under the U.S. federal income tax laws. Our subsidiary REITs are subject to the various REIT qualification requirements and other limitations described herein that are applicable to us. If either of our subsidiary REITs were to fail to qualify as a REIT, then (i) such subsidiary REIT would become subject to U.S. federal income tax and (ii) our ownership of shares in such subsidiary REIT would cease to be a qualifying asset for purposes of the asset tests applicable to REITs. If our subsidiary REITs were to fail to qualify as a REIT, it is possible that we would fail certain of the asset tests applicable to REITs, in which event we would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions. We have made “protective” TRS elections with respect to each of our subsidiary REITs and may implement other protective arrangements intended to avoid such an outcome if our subsidiary REITs were not to qualify as a REIT, but there can be no assurance that such “protective” elections and other arrangements will be effective to avoid the resulting adverse consequences to us. Moreover, even if the “protective” TRS elections were to be effective in the event of the failure of our subsidiary REITs to maintain their qualifications as REITs, such subsidiary REITs would be subject to U.S. federal income tax and we cannot assure you that we would not fail to satisfy the requirement that not more than 20 percent of the value of our total assets may be represented by the securities of one or more TRSs. In this event, we would fail to qualify as a REIT unless we or such subsidiary REITs could avail ourselves or themselves of certain relief provisions.
The ability of our board of trustees to revoke our REIT qualification without shareholder approval may subject us to U.S. federal and state income tax and reduce distributions to our shareholders.
Our declaration of trust provides that our board of trustees may revoke or otherwise terminate our REIT election, without the approval of our shareholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our shareholders, which may have adverse consequences on our total return to our shareholders and on the market price of our common shares.
The share ownership restrictions of the Code for REITs and the 9.8 percent share ownership limit in our declaration of trust may inhibit market activity in our shares and restrict our business combination opportunities.
In order to qualify as a REIT for each taxable year, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50 percent in value of our issued and outstanding shares at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares under this requirement. Additionally, at least 100 persons must beneficially own our shares during at least 335 days of each
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taxable year. To help insure that we meet these tests, our declaration of trust restricts the acquisition and ownership of our shares.
Our declaration of trust, with certain exceptions, authorizes our board of trustees to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of trustees, our declaration of trust prohibits any person from beneficially or constructively owning more than 9.8 percent (measured by value or number of shares, whichever is more restrictive) of any class or series of our shares. Our board of trustees may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8 percent of the value of our outstanding shares would result in the termination of REIT status. These restrictions on transferability and ownership will not apply, however, if our board of trustees determines that it is no longer in our best interest to continue to qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our shares or otherwise be in the best interest of the shareholders.
The prohibited transactions tax may limit our ability to engage in transactions, including dispositions of assets that would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of real property or may conduct such sales through a TRS.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce the tax benefits of our REIT structure compared to non-REIT corporations, reduce our operating flexibility and reduce the market price of our shares.
At any time, the U.S. federal income tax laws governing REITs or the administrative and judicial interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative and judicial interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative or judicial interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We cannot predict the long-term effect of any recent changes or any future law changes on REITs and their shareholders. We and our shareholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative and judicial interpretation.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We lease our headquarters located at 4747 Bethesda Avenue, Suite 1100, Bethesda, Maryland 20814. We lease office space that was formerly used as our headquarters at 7550 Wisconsin Avenue, 10th Floor, Bethesda, Maryland 20814.
At December 31, 2020, we owned 53 hotels with a total of 13,236 guest rooms.
The following table sets forth certain information about the hotels we owned as of December 31, 2020, all of which are consolidated in our financial statements.
PropertyDate AcquiredLocationNumber of Guest Rooms
1.L'Auberge Del MarNovember 30, 2018Del Mar, CA121 
2.Hotel Palomar Los Angeles Beverly Hills(1)November 20, 2014Los Angeles, CA264 
3.W Los Angeles - West Beverly HillsAugust 23, 2012Los Angeles, CA297 
4.Chamberlain West Hollywood HotelNovember 30, 2018West Hollywood, CA115 
5.Grafton on SunsetNovember 30, 2018West Hollywood, CA108 
6.Le Parc Suite HotelNovember 30, 2018West Hollywood, CA154 
7.Mondrian Los AngelesMay 3, 2011West Hollywood, CA236 
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8.Montrose West HollywoodNovember 30, 2018West Hollywood, CA133 
9.Le Meridien Delfina Santa MonicaNovember 19, 2010Santa Monica, CA310 
10.Viceroy Santa Monica Hotel(1)November 30, 2018Santa Monica, CA169 
11.Embassy Suites San Diego Bay - DowntownJanuary 29, 2013San Diego, CA341 
12.Hilton San Diego Gaslamp QuarterNovember 30, 2018San Diego, CA286 
13.Paradise Point Resort & Spa(1)November 30, 2018San Diego, CA462 
14.San Diego Mission Bay Resort (formerly Hilton San Diego Mission Bay Resort)(1)November 30, 2018San Diego, CA357 
15.Solamar HotelNovember 30, 2018San Diego, CA235 
16.The Westin San Diego Gaslamp QuarterApril 6, 2011San Diego, CA450 
17.Argonaut Hotel(1)February 16, 2011San Francisco, CA252 
18.Harbor Court Hotel San Francisco(1)November 30, 2018San Francisco, CA131 
19.Hotel SperoNovember 30, 2018San Francisco, CA236 
20.Hotel Vitale(1)November 30, 2018San Francisco, CA200 
21.Hotel Zelos San Francisco(1)October 25, 2012San Francisco, CA202 
22.Hotel Zephyr Fisherman's Wharf(1)December 9, 2013San Francisco, CA361 
23.Hotel Zeppelin San Francisco(1)May 22, 2014San Francisco, CA196 
24.Hotel Zetta San FranciscoApril 4, 2012San Francisco, CA116 
25.Hotel Zoe Fisherman's WharfJune 11, 2015San Francisco, CA221 
26.Sir Francis DrakeJune 22, 2010San Francisco, CA416 
27.The Marker San FranciscoNovember 30, 2018San Francisco, CA208 
28.Villa Florence San Francisco on Union SquareNovember 30, 2018San Francisco, CA189 
29.Chaminade Resort & SpaNovember 30, 2018Santa Cruz, CA156 
30.Hotel Zena Washington DC (formerly Donovan Hotel)November 30, 2018Washington, DC191 
31.George HotelNovember 30, 2018Washington, DC139 
32.Hotel Monaco Washington DC(1)September 9, 2010Washington, DC184 
33.Viceroy Washington DC (formerly Mason & Rook Hotel)November 30, 2018Washington, DC178 
34.Southernmost Beach Resort(2)November 30, 2018Key West, FL262 
35.The Marker Key West Harbor ResortNovember 30, 2018Key West, FL96 
36.Hotel Colonnade Coral Gables, Autograph CollectionNovember 12, 2014Miami, FL157 
37.LaPlaya Beach Resort and ClubMay 21, 2015Naples, FL189 
38.Hotel Chicago Downtown, Autograph CollectionNovember 30, 2018Chicago, IL354 
39.The Westin Michigan Avenue ChicagoNovember 30, 2018Chicago, IL752 
40.Hyatt Regency Boston Harbor(1)November 30, 2018Boston, MA270 
41.Revere Hotel Boston CommonDecember 18, 2014Boston, MA356 
42.The Liberty, A Luxury Collection Hotel, Boston
(1) (3)
November 30, 2018Boston, MA298 
43.The Westin Copley Place, Boston(1)November 30, 2018Boston, MA803 
44.W BostonJune 8, 2011Boston, MA238 
45.The Roger New York(1)November 30, 2018New York, NY194 
46.Hotel Vintage PortlandJuly 9, 2012Portland, OR117 
47.The Heathman Hotel November 30, 2018Portland, OR151 
48.The Hotel ZagsAugust 28, 2013Portland, OR174 
49.The Nines, a Luxury Collection Hotel, PortlandJuly 17, 2014Portland, OR331 
50.Sofitel Philadelphia at Rittenhouse SquareDecember 3, 2010Philadelphia, PA306 
51.Hotel Monaco SeattleApril 7, 2011Seattle, WA189 
52.Hotel Vintage SeattleJuly 9, 2012Seattle, WA125 
53.Skamania LodgeNovember 3, 2010Stevenson, WA260 
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Total number of guest rooms13,236 
(1) This property is subject to a long-term ground, air rights or hotel lease.
(2) The restaurant facility at this property is subject to a ground lease.
(3) We own a 99.99% controlling interest in this property.
Hotel Managers and Hotel Management Agreements
We are a party to hotel management agreements with Access Hotels and Resorts, AccorHotels, Benchmark Hotels and Resorts, CoralTree Hospitality Group, Davidson Hotels and Resorts, HEI Hotels and Resorts, Highgate, Hyatt, JRK Property Holdings, Kimpton Hotels and Restaurants, Marriott International, Noble House Hotels & Resorts, Provenance Hotels, Sage Hospitality, sbe Hotel Group, Schulte Hospitality Group, Springboard Hospitality and Viceroy Hotel Group.
Our management agreements generally have the terms described below:
Base Management Fees.  Our management agreements generally provide for the payment of base management fees between 1% and 4% of the applicable hotel's revenues or a fixed amount, as determined in the agreements.
Incentive Management and Other Fees.   Some of our management agreements provide for the payment of incentive management fees.  Generally, incentive management fees are 10% to 20% of net operating income above a specified return on project costs or as a percentage of net operating income above various net operating income thresholds.  Some of our management agreements provide for an incentive fee of the lesser of 1% of revenues or the amount by which net operating income exceeds a threshold.  Some of our management agreements have a maximum incentive fee of 2.5% of revenue.
Terms.  The terms of our management agreements range from 1 year to 22 years not including renewals, and 1 year to 52 years including renewals.
Ability to Terminate.  The majority of our management agreements are terminable at will by us upon payment of a termination fee and some are terminable upon sale of the property. Most of the agreements also provide us the ability to terminate based on failure to achieve defined operating performance thresholds. Termination fees range from zero to up to seven times the annual base management and incentive management fees, depending on the agreement and the reason for termination.
Operational Services.  Each manager has exclusive authority to supervise, direct and control the day-to-day hotel operation and management including establishing all room rates, processing reservations, procuring inventories, supplies and services, hiring and firing employees and independent contractors and preparing public relations, publicity and marketing plans for the hotel.
Executive Supervision and Management Services.  Each manager supervises all managerial and other hotel employees, reviews hotel operation and maintenance, prepares reports, budgets and projections, and provides other administrative and accounting support services for the hotel. Under certain management agreements, we have approval rights over the hiring of certain key management personnel at the hotel.
Chain Services.  Our management agreements with major hotel franchisors require the managers to furnish chain services that are generally made available to other hotels managed by such operators. Such services may, for example, include: the development and operation of computer systems and reservation services; management and administrative services; marketing and sales services; human resources training services; and additional services as may from time to time be more efficiently performed on a national, regional or group level.
Working Capital.  Our management agreements typically require us to maintain working capital for a hotel and to fund the cost of supplies such as linens and other similar items. We are also responsible for providing funds to meet the cash needs for the hotel operations if at any time the funds available from the hotel operations are insufficient to meet the financial requirements of the hotel.
Furniture, Fixtures and Equipment Replacements.  We are required to invest in the hotels and to provide all the necessary furniture, fixtures and equipment for the operation of the hotels (including funding any required furniture, fixture and equipment replacements). Our management agreements generally provide that once a year the managers will prepare a list of furniture, fixtures and equipment to be acquired and certain routine capital repairs to be performed in the following year and an estimate of funds that are necessary for our review and approval. To fund the furniture, fixtures and equipment replacements, a specified percentage of the gross revenues of each hotel (typically 4.0%) is either deposited by the manager with our funds or out of the property's cash flow in an escrow account or held by us, as owner.
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Building Alterations, Improvements and Renewals.  Our management agreements generally require the managers to prepare an annual estimate of the expenditures necessary for major capital repairs, alterations, improvements, renewals and replacements to the structural, mechanical, electrical, heating, ventilating, air conditioning, plumbing and vertical transportation elements of the hotels. In addition to the foregoing, the management agreements generally provide that the managers may propose such changes, alterations and improvements to the hotels as are required by reason of laws or regulations or, in the manager's reasonable judgment, to keep the hotels in a safe, competitive and efficient operating condition.
Sale of a Hotel.  Certain of our management agreements limit our ability to sell, lease or otherwise transfer a hotel, unless the transferee assumes the related management agreement and meets other specified conditions.
Franchise and Sub-License Agreements
We have franchise or sub-license agreements for certain of our hotels. Pursuant to these agreements, we pay franchise or sub-license fees based on a percentage of gross room revenues, as well as certain other fees for marketing and reservations services. Franchise or sub-license fees for room revenues are approximately one to five percent of gross room revenues. Some of these agreements provide us with termination rights. The agreements for the respective hotels expire as follows:
PropertyExpiration Date
Le Meridien Delfina Santa MonicaSeptember 2033
Embassy Suites San Diego Bay - DowntownJanuary 2028
The Nines, a Luxury Collection Hotel, PortlandOctober 2033
Hotel Colonnade Coral Gables, Autograph CollectionApril 2039
The Liberty, A Luxury Collection Hotel, BostonJanuary 2036
Hilton San Diego Gaslamp QuarterApril 2021
Hotel Chicago Downtown, Autograph CollectionFebruary 2034
Paradise Point Resort & Spa15th anniversary after hotel is re-branded as a Margaritaville
Solamar Hotel15th anniversary after hotel is re-branded as a Margaritaville
Item 3. 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 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5.  Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common shares began trading on the NYSE on December 9, 2009 under the symbol “PEB”.
Shareholder Information
On February 18, 2021, there were 67 holders of record of our common shares. However, because the vast majority of our common shares are held by brokers and other institutions on behalf of shareholders, we believe that there are considerably more beneficial holders of our common shares than record holders.
The following graph provides a comparison of the cumulative total return on our common shares from December 31, 2015, to the NYSE closing price per share on December 31, 2020, with the cumulative total return on the Russell 2000 Index (the “Russell 2000 Index”) and the FTSE National Association of Real Estate Investment Trusts Equity REITs Index (the “FTSE NAREIT Equity Index”) for the same period. Total return values were calculated assuming a $100 investment on December 31, 2015 with reinvestment of all dividends in (i) our common shares, (ii) the Russell 2000 Index and (iii) the FTSE NAREIT Equity Index. The total return values do not include any dividends declared, but not paid, during the period.

peb-20201231_g1.jpg

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The actual returns shown on the graph above are as follows:
NameValue of Initial
Investment at
December 31,
2015
Value of
Investment at
December 31,
2016
Value of
Investment at
December 31,
2017
Value of
Investment at
December 31,
2018
Value of
Investment at
December 31,
2019
Value of
Investment at
December 31,
2020
Pebblebrook Hotel Trust$100.00 $112.26 $146.75 $116.67 $116.54 $81.97 
Russell 2000 Index$100.00 $121.28 $139.02 $123.69 $155.21 $186.15 
FTSE NAREIT Equity Index$100.00 $108.87 $118.31 $113.50 $146.01 $138.60 

Distributions
Distributions to the extent of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to a shareholder as ordinary income. Distributions in excess of current and accumulated earnings and profits generally will be treated as a nontaxable reduction of the shareholder's basis in such shareholder's shares, to the extent thereof, and thereafter as taxable capital gain. Distributions that are treated as a reduction of the shareholder's basis in its shares will have the effect of increasing the amount of gain, or reducing the amount of loss, recognized upon the sale of the shareholder's shares.
The declaration of distributions by our company is in the sole discretion of our board of trustees and depends on our actual cash flow, financial condition, capital expenditure requirements for our hotels, the annual distributions requirements under the REIT provisions of the Code and such other factors as our board of trustees deems relevant.
Under the terms of the agreements governing our outstanding debt, as amended as a result of the adverse financial effects of the COVID-19 pandemic on our business, we are currently prohibited from making distributions on our common shares above $0.01 per share unless necessary to maintain our status as a REIT for U.S. federal income tax purposes.
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For income tax purposes, distributions paid per share were characterized as follows:

202020192018
Amount%Amount%Amount%
Common Shares:
Ordinary non-qualified income$— — %$0.5609 30.03 %$1.2040 77.57 %
Qualified dividend— — %0.0069 0.37 %0.3482 22.43 %
Capital gain0.0100 33.33 %1.3000 69.60 %— — %
Return of capital0.0200 66.67 %— — %— — %
Total$0.0300 100.00 %$1.8678 100.00 %$1.5522 100.00 %
Series C Preferred Shares:
Ordinary non-qualified income$— — %$0.6100 30.03 %$1.2605 77.57 %
Qualified dividend— — %0.0075 0.37 %0.3645 22.43 %
Capital gain0.4063 33.34 %1.4138 69.60 %— — %
Return of capital0.8125 66.66 %— — %— — %
Total$1.2188 100.00 %$2.0313 100.00 %$1.6250 100.00 %
Series D Preferred Shares:
Ordinary non-qualified income$— — %$0.5982 30.03 %$1.2363 77.57 %
Qualified dividend— — %0.0074 0.37 %0.3575 22.43 %
Capital gain0.3984 33.33 %1.3866 69.60 %— — %
Return of capital0.7969 66.67 %— — %— — %
Total$1.1953 100.00 %$1.9922 100.00 %$1.5938 100.00 %
Series E Preferred Shares: (1)
Ordinary non-qualified income$— — %$0.5982 30.03 %$— — %
Qualified dividend— — %0.0074 0.37 %— — %
Capital gain0.3984 33.33 %1.3866 69.60 %— — %
Return of capital0.7969 66.67 %— — %— — %
Total$1.1953 100.00 %$1.9922 100.00 %$— — %
Series F Preferred Shares: (1)
Ordinary non-qualified income$— — %$0.5912 30.03 %$— — %
Qualified dividend— — %0.0073 0.37 %— — %
Capital gain0.3938 33.34 %1.3703 69.60 %— — %
Return of capital0.7875 66.66 %— — %— — %
Total$1.1813 100.00 %$1.9688 100.00 %$— — %
(1) Issued upon completion of our merger with LaSalle on November 30, 2018.
Of the common distribution declared on December 15, 2017 and paid on January 12, 2018, $0.3800 was treated as a 2018 distribution for tax purposes. The preferred share distributions declared on December 15, 2017 and paid on January 12, 2018, were treated as 2018 distributions for tax purposes.
Of the common distributions declared on November 19, 2018 and December 14, 2018 and both paid on January 15, 2019, $0.3478 was treated as a 2019 distribution for tax purposes. The preferred share distributions declared on December 14, 2018 and paid on January 15, 2019, $0.4063 of Series C, $0.3984 of Series D, $0.3984 of Series E, and $0.3938 of Series F were treated as 2019 distributions for tax purposes.
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Of the common distribution declared on December 16, 2019 and paid on January 15, 2020, $0.3800 was treated as a 2019 distribution for tax purposes. The preferred share distributions declared on December 16, 2019 and paid on January 15, 2020 were treated as 2019 distributions for tax purposes.
Of the common distribution declared on December 15, 2020 and paid on January 15, 2021, $0.0100 will be treated as a 2021 distribution for tax purposes. The preferred share distributions declared on December 15, 2020 and paid on January 15, 2021 will be treated as 2021 distributions for tax purposes.
Securities Authorized for Issuance Under Equity Compensation Plan
The following table sets forth information regarding securities authorized for issuance under our equity compensation plan, our 2009 Equity Incentive Plan, as amended and restated, as of December 31, 2020. See Note 8 to the accompanying consolidated financial statements for additional information regarding our 2009 Equity Incentive Plan.
Plan CategoryNumber of securities to be issued upon exercise of outstanding options, warrants and rightsWeighted-average exercise price of outstanding options, warrants and rightsNumber of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders
— — 1,199,767 
Equity compensation plans not approved by security holders— — — 
Total— — 1,199,767 

During the year ended December 31, 2020, certain of our employees chose to have us acquire from such employees an aggregate of 47,507 common shares to pay taxes due upon vesting of restricted common shares granted pursuant to share award agreements. The average price paid by the Company for these shares was $26.43 per share.
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased (1)
Average Price Paid Per ShareTotal 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 (2)
October 1, 2020 - October 31, 2020— $— — $— 
November 1, 2020 - November 30, 2020— $— — $— 
December 1, 2020 - December 31, 2020— $— — $— 
Total— $— — $56,600,000 
_____________________________
(1) Amounts in this column represent common shares sold to the Company as payment of tax withholding due upon vesting of equity awards.
(2) On February 22, 2016, we announced that our board of trustees authorized a share repurchase program of up to $150.0 million of our 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. As of December 31, 2020, $56.6 million of common shares remained available for repurchase under this program.
On July 27, 2017, we announced that our board of trustees authorized a new share repurchase program of up to $100.0 million of our 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 the $150.0 million share repurchase program.
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Item 6.  Selected Financial Data.
The following table includes selected historical financial information which has been derived from the audited consolidated financial statements. The following information should be read in conjunction with “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Consolidated Financial Statements and Supplementary Data” and all of the financial statements and notes included elsewhere in this Annual Report on Form 10-K.
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For the year ended December 31,
20202019201820172016
(In thousands, except share and per-share data)
Revenues:
Room$287,439 $1,103,947 $565,107 $532,288 $568,867 
Food and beverage95,892 370,584 199,089 182,737 191,857 
Other operating59,557 137,682 64,482 54,292 55,697 
Total revenues442,888 1,612,213 828,678 769,317 816,421 
Expenses:
Hotel operating expenses:
Room91,771 275,855 143,171 134,068 137,312 
Food and beverage77,698 260,278 136,845 123,213 126,957 
Other direct and indirect209,957 438,035 231,818 210,692 219,655 
Total hotel operating expenses379,426 974,168 511,834 467,973 483,924 
Depreciation and amortization224,560 234,880 108,475 102,290 102,439 
Real estate taxes, personal property taxes, property insurance and ground rent114,333 125,013 54,191 48,500 50,488 
General and administrative45,158 34,047 20,945 20,062 24,712 
Transaction costs10,544 8,679 75,049 71 193 
Impairment loss74,556 — — 1,049 12,148 
(Gain) loss on sale of hotel properties(117,401)(2,819)2,147 (14,877)(40,690)
(Gain) loss and other operating expenses4,421 8,903 (10,935)8,869 3,200 
Total operating expenses735,597 1,382,871 761,706 633,937 636,414 
Operating income (loss)(292,709)229,342 66,972 135,380 180,007 
Interest expense(104,098)(108,474)(53,923)(37,299)(43,615)
Other517 29 2,078 2,362 2,278 
Equity in earnings (loss) of joint venture— — — — (64,842)
Income (loss) before income taxes(396,290)120,897 15,127 100,443 73,828 
Income tax (expense) benefit3,697 (5,172)(1,742)(181)134 
Net income (loss)(392,593)115,725 13,385 100,262 73,962 
Net income (loss) attributable to non-controlling interests(864)283 (8)374 258 
Net income (loss) attributable to the Company(391,729)115,442 13,393 99,888 73,704 
Distributions to preferred shareholders(32,556)(32,556)(17,466)(16,094)(19,662)
Issuance costs of redeemed preferred shares— — — — (7,090)
Net income (loss) attributable to common shareholders$(424,285)$82,886 $(4,073)$83,794 $46,952 
Net income (loss) per share available to common shareholders, basic$(3.25)$0.63 $(0.06)$1.20 $0.65 
Net income (loss) per share available to common shareholders, diluted$(3.25)$0.63 $(0.06)$1.19 $0.64 
Weighted-average number of common shares, basic130,610,015 130,471,670 74,286,307 69,591,973 71,901,499 
Weighted-average number of common shares, diluted130,610,015 130,718,306 74,286,307 69,984,837 72,373,242 
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As of December 31,
20202019201820172016
(In thousands)
Balance Sheet Data:
Investment in hotel properties, net$5,882,022 $6,332,587 $6,534,193 $2,456,450 $2,672,654 
Ground lease asset— — 199,745 29,037 29,627 
Cash and cash equivalents124,274 30,098 83,366 25,410 33,410 
Total assets6,076,366 6,498,555 6,978,348 2,590,868 2,809,259 
Debt2,280,471 2,229,220 2,746,898 885,237 996,251 
Total shareholders' equity3,257,337 3,621,208 3,759,835 1,498,901 1,605,684 
Item 7. 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 REIT under 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.
Overview
In March 2020, the World Health Organization declared the novel coronavirus ("COVID-19") to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates, health official recommendations, corporate travel policy changes and individual responses, hotel demand was dramatically reduced. Following government mandates and health official recommendations, we temporarily suspended operations at 47 of our hotels and resorts and dramatically reduced staffing and expenses at the hotels that remained operational. Throughout the summer months, hotel industry demand improved from its historical lows seen in the second quarter, particularly as leisure customers sought to travel to drive-to hotels and resorts that could offer more space and outdoor experiences. Our monthly revenue increased slowly through October as we reopened several of our hotels and resorts between May and October. November and December had declining revenue at most of our opened hotels, except our South Florida properties, as leisure demand declined and business travel did not return in a meaningful manner. Our South Florida properties experienced slightly increasing revenue late in the year which is consistent with the seasonal pattern for these warm weather resort properties. We anticipate leisure travel will return as vaccine distribution becomes more widely available, followed by business travel. We still anticipate group demand will be the slowest to return until there is more certainty around the health and immunity solution for the country. As of December 31, 2020, 37 of our hotels and resorts were open with operations of the remaining 16 hotels still temporarily suspended. We anticipate reopening additional hotels as demand returns and we determine that we would lose less money with the hotels open versus remaining closed.
The COVID-19 pandemic has had a significant negative impact on our operations and financial results to date and we expect that it will continue to have a significant negative impact on our results of operations, financial position and cash flow in 2021. We cannot estimate when travel demand will recover. As a result of uncertainty at the beginning of the pandemic, in March 2020, we fully drew down on our $650.0 million unsecured revolving credit facility, reduced the quarterly cash dividend on our common shares to one penny per share, reduced planned capital expenditures, reduced the compensation of our executive officers, trustees and employees, and, working closely with our hotel operating partners, significantly reduced our hotels' operating expenses. On June 29, 2020, we amended the agreements governing our existing credit facilities, term loan facilities and senior notes. Among other things, the amendments extended the maturity of a significant portion of our term loan due in November 2021 to November 2022, waived existing financial covenants through the end of the first quarter of 2021 and provided substantially less restrictive financial covenants through the end of the second quarter of 2022. In addition, we repaid approximately $250.0 million on our unsecured revolving credit facility. In December 2020, we issued $500.0 million of convertible notes and used the proceeds to repay an additional $250.0 million of our unsecured revolving credit facility and $200.0 million of our unsecured term loans. As of December 31, 2020, we had $40.0 million of outstanding borrowings $6.8 million of outstanding letters of credit and borrowing capacity of $603.2 million remaining on our senior unsecured credit facility.
During the year ended December 31, 2020, other significant transactions included:
Sold three hotel properties for an aggregate sales price of $387.0 million and recognized a gain of $117.4 million;
Recognized an impairment loss of $74.6 million related to two hotels and the retail component of a hotel; and
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Cancelled LTIP Class B units and time-based service condition awards granted in February 2020 and incurred full compensation expense of $16.0 million.
In February 2021, we issued an additional $250.0 million of convertible notes under the same terms as the December 2020 offering. The notes were sold at a 5.5% premium to par. In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with certain of the underwriters, their respective affiliates and/or other counterparties. We used the net proceeds to reduce amounts outstanding under our senior unsecured revolving credit facility, unsecured term loans, and for general corporate purposes.
In February 2021, we further amended the agreements governing our existing credit facilities, term loan facilities and senior notes to, among other items, increase the interest rate spread and waive financial covenants through the end of the first quarter of 2022 except for the minimum fixed charge coverage and minimum unsecured interest coverage ratio, which were extended through December 31, 2021. Refer to "Note 5. Debt" for additional information regarding these amendments and convertible debt. Based on these amendments and expense and cash burn rate reductions, we believe that we will have sufficient liquidity to meet our obligations for the next twelve months.
While we do not operate our hotel properties, both our asset management team and our executive management team monitor and work cooperatively with our hotel managers by advising and making recommendations in all aspects of our hotels’ operations, including property positioning and repositioning, revenue and expense management, operations analysis, physical design, renovation and capital improvements, guest experience and overall strategic direction. Through these efforts, we seek to improve property efficiencies, lower costs, maximize revenues and enhance property operating margins, which we expect will enhance returns to our shareholders.
Key Indicators of Financial Condition and Operating Performance
We measure hotel results of operations and the operating performance of our business by evaluating financial and non-financial metrics such as room revenue per available room ("RevPAR"); total revenue per available room ("Total RevPAR"); average daily rate ("ADR"); occupancy rate ("Occupancy"); funds from operations ("FFO"); earnings before interest, income taxes, depreciation and amortization ("EBITDA"); and EBITDA for real estate ("EBITDAre"). We evaluate individual hotel and company-wide performance with comparisons to budgets, prior periods and competing properties. ADR, occupancy and RevPAR may be impacted by macroeconomic factors as well as regional and local economies and events. See "Non-GAAP Financial Matters" for further discussion of FFO, EBITDA and EBIDTAre.
Hotel Operating Statistics
The following table represents the key same-property hotel operating statistics for our hotels for the years ended December 31, 2020 and 2019.
For the year ended December 31,
20202019
Same-Property Occupancy25.0 %82.3 %
Same-Property ADR$232.61 $258.10 
Same-Property RevPAR$58.13 $212.51 
Same-Property Total RevPAR$89.14 $310.62 

While the operations of many of our hotels were temporarily suspended beginning in March 2020, the above schedule of hotel results for the years ended December 31 includes information from all hotels owned as of December 31, 2020, except for Hotel Zena Washington DC (formerly Donovan Hotel) for the first, second and fourth quarters in both 2020 and 2019, because it was closed for renovations in the fourth quarter of 2019 and the first and second quarters of 2020.
Results of Operations
This section includes comparisons of certain 2020 financial information to the same information for 2019. Year-to-year comparisons of the 2019 financial information to the same information for 2018 are contained in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 20, 2020.
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At December 31, 2020 and 2019, we had 53 and 56 wholly owned properties and leasehold interests, respectively. All properties owned during these periods have been included in our results of operations during the respective periods since their dates of acquisition or through the dates of disposition. Based on when a property was acquired or disposed, operating results for certain properties are not comparable. The properties listed below are hereinafter referred to as "non-comparable properties" for the years ended December 31, 2020 and 2019. All other properties are considered and referred to as "comparable properties":
PropertyLocationDisposition Date
The Liaison Capitol HillWashington, D.C.February 14, 2019
Hotel Palomar Washington DCWashington, D.C.February 22, 2019
Onyx HotelBoston, MAMay 29, 2019
Hotel Amarano BurbankBurbank, CAJuly 16, 2019
Rouge HotelWashington, D.C.September 12, 2019
Hotel MaderaWashington, D.C.September 26, 2019
Topaz HotelWashington, D.C.November 22, 2019
InterContinental Buckhead AtlantaBuckhead, GAMarch 6, 2020
Sofitel Washington DC Lafayette SquareWashington, D.C.March 6, 2020
Union Station Hotel Nashville, Autograph CollectionNashville, TNJuly 29, 2020
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Comparison of the year ended December 31, 2020 to the year ended December 31, 2019
Revenues — Total revenues decreased by $1,169.3 million, of which $105.3 million was due to the non-comparable properties and the remaining decline was due to the decline in demand and suspension of operations resulting from the COVID-19 pandemic at most of our hotels during the year. As of December 31, 2020, 37 hotels and resorts were open and operations at 16 hotels have been suspended. Both occupancy and average daily rates at the opened hotels continue to be significantly below historical averages.
Hotel operating expenses — Total hotel operating expenses decreased by $594.7 million, of which $63.8 million was due to the non-comparable properties and the remaining decline was due to the significant cost mitigation efforts implemented at the hotels to respond to the significant loss of demand and suspension of operations as a result of the COVID-19 pandemic.
Depreciation and amortization — Depreciation and amortization expense decreased by $10.3 million primarily due to a decrease in assets resulting from the sales of hotels.
Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent decreased by $10.7 million due to a decline in ground rent on ground leases whose rent is based on a percentage of revenues and a decline in real estate taxes of approximately $5.0 million from properties that were sold. These declines were offset by an increase in real estate taxes primarily at properties that have not been reassessed for the current level of activity or are under appeal.
General and administrative — General and administrative expenses consist of employee compensation costs, legal and professional fees, insurance and other expenses. General and administrative expenses increased by $11.1 million primarily due to the non-cash expense of $16.0 million in share-based compensation costs relating to the cancellation of the retention LTIP unit awards and time-based service condition awards and an increase in legal fees, offset by the cost cutting program put in place in response to COVID-19 which reduced primarily employee and trustee compensation and audit fees.
Transaction costs — Transaction costs increased by $1.9 million due to additional transfer taxes paid in connection with the LaSalle merger.
Impairment loss — We recognized an impairment loss of $74.6 million related to two hotels and the retail component of a hotel. There was no comparable transaction in 2019.
(Gain) loss on sale of hotel properties — (Gain) loss on sale of hotel properties increased from a $2.8 million gain to a $117.4 million gain. In 2019, we recognized a gain of $2.8 million from the sale of seven hotel properties. In 2020, we recognized a gain of $117.4 million from the sale of three hotel properties.
(Gain) loss and other operating expenses — (Gain) loss and other operating expenses decreased by $4.5 million due primarily to the $5.9 million in hotel management transition expense incurred in 2019.
Interest expense — Interest expense deceased by $4.4 million primarily as a result of a decrease in interest rates in 2020.
Other — Other increased by $0.5 million due to interest income from higher cash balances from the drawdown on the unsecured revolving credit facility to enhance liquidity.
Income tax (expense) benefit — Income tax (expense) benefit changed from an expense of $5.2 million to a benefit of $3.7 million due primarily to the taxable losses of our TRS as a result of suspended or decreased operations at our hotels compared to the prior year.
Non-controlling interests — Non-controlling interests represent the allocation of income or loss of our Operating Partnership to the common units held by the LTIP and OP unit holders.
Non-GAAP Financial Measures
Non-GAAP financial measures are measures of our historical or future financial performance that are different from measures calculated and presented in accordance 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
44


cost accounting and which may be of lesser significance in evaluating current performance, we believe that FFO provides investors a useful financial measure to evaluate our operating performance.
The following table reconciles net income (loss) to FFO and FFO available to common share and unit holders for the years ended December 31, 2020, 2019 and 2018 (in thousands):
 For the year ended December 31,
 202020192018
Net income (loss)$(392,593)$115,725 $13,385 
Adjustments:
Depreciation and amortization224,124 234,591 108,265 
(Gain) loss on sale of hotel properties(117,401)(2,819)2,147 
Impairment loss74,556 — — 
FFO$(211,314)$347,497 $123,797 
Distribution to preferred shareholders(32,556)(32,556)(17,466)
FFO available to common share and unit holders$(243,870)$314,941 $106,331 
EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. The white paper issued by Nareit entitled “Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate” defines EBITDAre as net income or loss (computed in accordance with U.S. GAAP), excluding interest expense, income tax, depreciation and amortization, gains or losses on the disposition of depreciated property (including gains or losses on change of control), impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate, and after comparable adjustments for our portion of these items related to unconsolidated affiliates. We believe that EBITDA and EBITDAre provide investors useful financial measures to evaluate our operating performance, excluding the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization).
The following table reconciles net income (loss) to EBITDA and EBITDAre for the years ended December 31, 2020, 2019 and 2018 (in thousands):
 For the year ended December 31,
 202020192018
Net income (loss)$(392,593)$115,725 $13,385 
Adjustments:
Interest expense104,098 108,474 53,923 
Income tax expense (benefit)(3,697)5,172 1,742 
Depreciation and amortization224,560 234,880 108,475 
EBITDA$(67,632)$464,251 $177,525 
(Gain) loss on sale of hotel properties(117,401)(2,819)2,147 
Impairment loss74,556 — — 
EBITDAre
$(110,477)$461,432 $179,672 
FFO, EBITDA and EBITDAre do not represent cash generated from operating activities as determined by U.S. GAAP and should not be considered as alternatives to U.S. GAAP net income (loss), as indications of our financial performance, or to U.S. GAAP cash flow from operating activities, as measures of liquidity. In addition, FFO, EBITDA and EBITDAre are not indicative of funds available to fund cash needs, including the ability to make cash distributions.
Critical Accounting Policies
We consider these policies critical because they require estimates about matters that are inherently uncertain, involve various assumptions and require significant management judgment, and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Applying different estimates or assumptions may result in materially different amounts reported in our financial statements.
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Hotel Properties
Investment in Hotel Properties
Estimation and judgment are required to determine the fair values of our acquired hotel properties. Upon acquiring a business or hotel property, we measure and recognize the fair value of the acquired land, land improvements, building, furniture, fixtures and equipment, identifiable intangible assets or liabilities, other assets and assumed liabilities. Identifiable intangible assets or liabilities typically arise from contractual arrangements assumed in connection with the transaction, including terms that are above or below market compared to an estimated market agreement at the acquisition date. We determine the acquisition-date fair values of all assets and assumed liabilities using a combination of the market, cost and income approaches. These valuation methodologies are based on significant Level 2 and Level 3 inputs in the fair value hierarchy, such as estimates of future income growth, capitalization rates, discount rates, capital expenditures and cash flow projections, including hotel revenues and net operating income, at the respective hotel properties. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. Acquisition costs related to business combinations are expensed as incurred.
Hotel renovations and/or replacements of assets that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives. Furniture, fixtures and equipment under finance leases are carried at the present value of the minimum lease payments. Repair and maintenance costs are expensed as incurred.
Impairment
We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, when a hotel property experiences a current or projected loss from operations, when it becomes more likely than not that a hotel property will be sold before the end of its useful life, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, we perform an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel's estimated fair market value is recorded and an impairment loss recognized. In the evaluation of impairment of our hotel properties, we make many assumptions and estimates including projected cash flows both from operations and eventual disposition, expected useful life and holding period, future required capital expenditures, and fair values, including consideration of capitalization rates, discount rates, and comparable selling prices. We will adjust our assumptions with respect to the remaining useful life of the hotel property when circumstances change, such as an expiring ground lease or it is more likely than not that the hotel property will be sold prior to its previously expected useful life.
New Accounting Pronouncements Not Yet Implemented
See Note 2, “Summary of Significant Accounting Policies,” to our consolidated financial statements for additional information relating to recently issued accounting pronouncements.
Liquidity and Capital Resources
In March 2020, the World Health Organization declared COVID-19 to be a global pandemic and the virus has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates, health official recommendations corporate travel policy changes and individual responses, hotel demand was dramatically reduced. As of December 31, 2020, 37 of our hotels and resorts were open with operations of the remaining 16 hotels still temporarily suspended. This has had a material impact on the Company's liquidity. Refer to the Overview in Item 7., "Management’s Discussion and Analysis of Financial Condition and Results of Operations," for additional information.
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Our debt consisted of the following as of December 31, 2020 and 2019 (dollars in thousands):
   Balance Outstanding as of
 Interest RateMaturity DateDecember 31, 2020December 31, 2019
Revolving credit facilities
Senior unsecured credit facility
Floating (1)
January 2022$40,000 $165,000 
PHL unsecured credit facility
Floating (2)
January 2022— — 
Total revolving credit facilities$40,000 $165,000 
Unsecured term loans
First Term Loan
Floating (3)
January 2023300,000 300,000 
Second Term Loan
Floating (3)
April 202265,000 65,000 
Fourth Term Loan
Floating (3)
October 2024110,000 110,000 
Sixth Term Loan:
Tranche 2021
Floating (3)
November 2021
(4)
40,966 300,000 
Tranche 2021 Extended
Floating (3)
November 2022173,034 — 
Tranche 2022
Floating (3)
November 2022286,000 400,000 
Tranche 2023
Floating (3)
November 2023400,000 400,000 
Tranche 2024
Floating (3)
January 2024400,000 400,000 
Total Sixth Term Loan1,300,000 1,500,000 
Total term loans at stated value1,775,000 1,975,000 
Deferred financing costs, net(8,455)(10,343)
Total term loans$1,766,545 $1,964,657 
Convertible senior notes
Convertible senior notes1.75%December 2026500,000 — 
Debt discount, net(113,099)— 
Deferred financing costs, net(12,568)— 
Total convertible senior notes$374,333 $— 
Senior unsecured notes
Series A Notes4.70%December 202360,000 60,000 
Series B Notes4.93%December 202540,000 40,000 
Total senior unsecured notes at stated value100,000 100,000 
Deferred financing costs, net(407)(437)
Total senior unsecured notes$99,593 $99,563 
Total debt$2,280,471 $2,229,220 
__________
(1) Borrowings bear interest at floating rates equal to, at our option, either (i) LIBOR plus an applicable margin or (ii) an Adjusted Base Rate (as defined in the applicable credit agreement) plus an applicable margin.
(2) Borrowings bear interest at floating rates equal to, at our option, either (i) LIBOR plus an applicable margin or (ii) a Eurocurrency Rate (as defined in the applicable credit agreement) plus an applicable margin.
(3) Borrowings under the term loan facilities bear interest at floating rates equal to, at our option, either (i) LIBOR plus an applicable margin or (ii) a Base Rate plus an applicable margin. As 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%. As of December 31, 2019, approximately $1.6 billion of the borrowings under the term loan facilities bore a weighted-average fixed interest rate of 3.43%, after taking into account interest rate swap agreements, and approximately $345.0 million bore a weighted-average floating interest rate of 3.32%.
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(4) In February 2021, we repaid $12.8 million of the Sixth Term Loan Tranche 2021 and extended the majority of the remaining balance to November 2022.
Unsecured Revolving Credit Facilities
We are party to a $650.0 million senior unsecured revolving credit facility maturing in January 2022, with options to extend the maturity date to January 2023, pursuant to certain terms and conditions and payment of an extension fee. In March 2020, as part of our plans to enhance liquidity due to the actual and anticipated impact of the COVID-19 pandemic, we fully drew down on this revolving credit facility. As of December 31, 2020, we had $40.0 million of outstanding borrowings and borrowing capacity of $603.2 million remaining on our senior unsecured revolving credit facility. Interest is paid on the periodic advances under the senior unsecured revolving credit facility at varying rates, based upon either LIBOR or the alternate base rate, plus an additional margin amount, or spread. The interest rate depends upon our leverage ratio pursuant to the provisions of the credit facility agreement. As a result of the amendments described in "Note 5. Debt," the spread on the borrowings is fixed at 2.25% during the waiver period. We have the ability to increase the aggregate borrowing capacity of our senior unsecured revolving credit facility to up to $1.3 billion, subject to lender approval. We intend to repay indebtedness incurred under the senior unsecured revolving credit facility from time to time out of cash flows from operations and, as market conditions permit, from the net proceeds of issuances of additional equity and debt securities and from the net proceeds of dispositions of hotel properties.
We also have a $25.0 million unsecured revolving credit facility (the "PHL Credit Facility") to be used for PHL's working capital and general corporate purposes. This credit facility has substantially similar terms as our senior unsecured revolving credit facility and matures in January 2022. Borrowings under the PHL Credit Facility bear interest at LIBOR plus an applicable margin, depending on our leverage ratio. As a result of the amendments described in "Note 5. Debt," the spread on the borrowings is fixed at 2.25% during the waiver period. As of December 31, 2020, we had no borrowings under the PHL Credit Facility.
Unsecured Term Loan Facilities
We are party to senior unsecured term loans with different maturities. Each unsecured term loan bears interest at a variable rate of a benchmark interest rate plus an applicable margin, depending on our leverage ratio. We entered into interest rate swap agreements to fix the LIBOR rate on a portion of these unsecured term loans. Information about our senior unsecured term loans is found in the table above and "Note 5. Debt" to the accompanying consolidated financial statements.
Convertible Senior Notes
In December 2020, the Company issued $500.0 million aggregate principal amount of 1.75% Convertible Senior Notes maturing in December 2026 (the "Convertible Notes"). 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 net proceeds from the offering of the Notes were approximately $487.3 million after deducting the underwriting fees and other expenses paid by the Company. Interest is payable semi-annually in arrears on June 15th and December 15th of each year, beginning on June 15, 2021. The Company recorded coupon interest expense of $0.4 million for the year ended December 31, 2020.
The Company separated the Convertible Notes into liability and equity components. The initial carrying amount of the liability component was $386.1 million and was calculated using a discount rate of 6.25%. The discount rate was based on the terms of debt instruments that were similar to the Convertible Notes without an equity component. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the principal amount of the Convertible Notes, or $113.9 million. The amount recorded in equity is not subject to remeasurement or amortization. The $113.9 million also represents the initial discount recorded on the Convertible Notes. The discount is accreted to interest expense using the effective interest rate method over the contractual term of the Convertible Notes. The Company recorded interest expense related to the accretion of the discount and the amortization of the debt issuance costs of $0.9 million for the year ended December 31, 2020.
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, at the applicable conversion rate at any time at their election two days prior to the maturity date. The initial conversion rate is 39.2549 common shares per $1,000 principal amount of Convertible Notes, which represents an initial conversion price of approximately $25.47 per share. The conversion rate is subject to adjustment in certain circumstances.
The Company may redeem for cash all or a portion of the Convertible Notes, at its option, on or 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.

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In connection with the Convertible Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the underwriters of the offering of the Convertible Notes or their respective affiliates and other financial institutions (the “Capped Call Counterparties”). The Capped Call Transactions initially cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of common shares underlying the Convertible Notes. The Capped Call Transactions are expected generally to reduce the potential dilution to holders of common shares upon conversion of the Convertible Notes and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction and/or offset subject to a cap. The upper strike price of the Capped Call Transactions is $33.0225 per share. The cost of the Capped Call Transactions was $38.3 million and was recorded within additional paid-in capital.
Senior Unsecured Notes
We have two unsecured notes outstanding, $60.0 million of senior unsecured notes bearing a fixed interest rate of 4.70% per annum and maturing in December 2023 (the "Series A Notes") and $40.0 million of senior unsecured notes bearing a fixed interest rate of 4.93% per annum and maturing in December 2025 (the "Series B Notes"). The terms of the Series A Notes and the Series B Notes are substantially similar to those of our senior unsecured revolving credit facility, as amended and restated. 
Issuance of Shares of Beneficial Interest
On February 22, 2016, we announced that our board of trustees authorized a share repurchase program of up to $150.0 million of the Company's outstanding common shares. Under this program, we may repurchase common shares from time to time in transactions on the open market or by private agreement. We may suspend or discontinue this program at any time. No common shares were repurchased by the Company under the share repurchase program during the year ended December 31, 2020. As of December 31, 2020, $56.6 million of common shares remained available for repurchase under this program.
On July 27, 2017, we announced that our board of trustees authorized a new share repurchase program of up to $100.0 million of the Company's outstanding common shares. Under this program, we may repurchase common shares from time to time in transactions on the open market or by private agreement. We may suspend or discontinue this program at any time. This $100.0 million share repurchase program will commence upon the completion of our $150.0 million share repurchase program.
Sources and Uses of Cash
Our principal sources of cash are cash from operations, borrowings under mortgage financings and other debt, draws on our credit facilities, proceeds from offerings of our equity securities, debt securities and hotel property sales. Our principal uses of cash are asset acquisitions, debt service, capital investments, operating costs, corporate expenses and dividends.
Cash (Used in) and Provided by Operations. Our cash used in operating activities was $201.8 million for the year ended December 31, 2020. Our cash from operations includes the operating activities of the 53 hotels we owned as of December 31, 2020, offset by corporate expenses. The negative cash flow from operations during the year and decline from the prior year is due to the temporary suspension and reduced operations at our hotels as a result of COVID-19. Our cash provided by operating activities was $395.2 million for the year ended December 31, 2019. Our cash from operations includes the operating activities of the 56 hotels we owned as of December 31, 2019, offset by corporate expenses.
Cash Provided by Investing Activities. Our cash provided by investing activities was $250.1 million for the year ended December 31, 2020. During the year ended December 31, 2020, we invested $125.0 million in improvements to our hotel properties and received $375.1 million from sales of hotel properties. Our cash provided by investing activities was $300.0 million for the year ended December 31, 2019. During the year ended December 31, 2019, we invested $169.6 million in improvements to our hotel properties and received $470.4 million from sales of hotel properties.
Cash Provided by and (Used in) Financing Activities. Our cash provided by financing activities was $31.1 million for the year ended December 31, 2020. During the year ended December 31, 2020, we borrowed $760.1 million under the revolving credit facilities, repaid $885.1 million under the revolving credit facilities, borrowed $513.0 million in other debt, repaid $213.0 million in other debt, purchased $38.3 million in Capped Call Transactions, repurchased $1.3 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid $86.5 million in distributions, paid $16.4 million in financing fees and paid $1.4 million in other transactions. For the year ended December 31, 2019, cash used in financing activities was $746.1 million. During the year ended December 31, 2019, we borrowed $414.8 million under the revolving credit facilities, repaid $419.8 million under the revolving credit facilities, repaid $518.2 million of debt, repurchased $4.0 million of common shares for tax withholding purposes in connection with vested share-based equity awards, paid $217.4 million in distributions and paid $1.5 million in other transactions.
Capital Investments
We maintain and intend to continue maintaining all of our hotels, including each hotel that we acquire in the future, in good repair and condition and in conformity with applicable laws and regulations and when applicable, in accordance with the
49


franchisor’s standards and the agreed-upon requirements in our management agreements. Routine capital investments will be administered by the hotel management companies. However, we maintain approval rights over the capital investments as part of the annual budget process and as otherwise required from time to time.
From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, meeting space and restaurants, in order to better compete with other hotels in our markets. In addition, after we acquire a hotel property, we are often required by the franchisor or brand manager, if there is one, to complete a property improvement plan (“PIP”) in order to bring the hotel property up to the franchisor’s or brand’s standards. Generally, we expect to fund renovations and improvements with available cash, restricted cash, borrowings under our credit facility, or proceeds from new debt or equity offerings.
For the year ended December 31, 2020, we invested $125.0 million in capital investments to reposition and improve our properties. Since the beginning of 2020, we have completed the transformational redevelopments of several hotels and resorts, including Hotel Zena Washington DC (formerly Donovan Hotel), Embassy Suites San Diego Bay - Downtown, The Westin San Diego Gaslamp Quarter, Le Parc Suite Hotel, San Diego Mission Bay Resort (formerly Hilton San Diego Mission Bay Resort), Viceroy Santa Monica Hotel, Chaminade Resort & Spa, Viceroy Washington DC (formerly Mason & Rook Hotel) and The Marker Key West Harbor Resort.
Depending on market conditions, we expect total capital investments to be approximately $60.0 million to $70.0 million in 2021. However, depending on the pace of the recovery, we may decide to proceed with previously planned but deferred renovations at our properties.
Contractual Obligations and Off-Balance Sheet Arrangements
The table below summarizes our contractual obligations as of December 31, 2020 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
 Payments due by period
 TotalLess
than 1
year
1 to 3
years
3 to 5
years
More
than 5
years
Term loans (2)
$1,928,638 $106,424 $1,308,574 $513,640 $— 
Convertible senior notes (1)
552,135 8,750 17,500 17,500 508,385 
Unsecured notes (1)
117,921 4,792 69,349 43,780 — 
Borrowings under credit facilities (3)
41,056 1,014 40,042 — — 
Hotel and ground leases (4)
1,209,864 16,814 33,787 34,113 1,125,150 
Finance lease obligation65,009 1,331 2,720 2,802 58,156 
Refundable membership initiation deposits (5)
29,260 203 — — 29,057 
Purchase commitments (6)
2,971 2,971 — — — 
Corporate office leases15,719 1,828 3,309 2,424 8,158 
Total$3,962,573 $144,127 $1,475,281 $614,259 $1,728,906 
 ____________________
(1)Amounts include principal and interest.
(2)Amounts include principal and interest. Borrowings under the term loan facilities bear interest at floating rates equal to, at our option, either (i) LIBOR plus an applicable margin or (ii) a Base Rate plus an applicable margin.
(3)Amounts include principal and interest under the two revolving credit facilities. Interest expense is calculated based on the weighted-average interest rate for all outstanding credit facility borrowings as of December 31, 2020. It is assumed that the outstanding borrowings will be repaid upon maturity with fixed interest-only payments until then.
(4)Our leases may require minimum fixed rent payments, percentage rent payments based on a percentage of revenues in excess of certain thresholds or rent payments equal to the greater of a minimum fixed rent or percentage rent. Minimum fixed rent may be adjusted annually by increases in consumer price index ("CPI") and may be subject to minimum and maximum increases. The table above reflects only minimum fixed rent for all periods presented and does not include assumptions for CPI adjustments.
(5)Represents refundable initiation membership deposits from club members at LaPlaya Beach Resort and Club.
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(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 December 31, 2020, we had no off-balance sheet arrangements.
Inflation
We rely on the performance of the hotels to increase revenues to keep pace with inflation. Generally, our hotel operators possess the ability to adjust room rates daily, except for group or corporate rates contractually committed to in advance, although competitive pressures may limit the ability of our operators to raise rates faster than inflation or even at the same rate.
Seasonality
Demand in the lodging industry is affected by recurring seasonal patterns which are greatly influenced by overall economic cycles, geographic locations, weather and customer mix at the hotels. Generally, our hotels have lower revenue, operating income and cash flow in the first quarter of each year and higher revenue, operating income and cash flow in the third quarter of each year. The historical trend has been disrupted as a result of COVID-19. For the year ended December 31, 2020, the first quarter of the year had higher revenue, operating income and cash flow with hotels suspensions and decline in operations beginning in March 2020.
Derivative Instruments
In the normal course of business, we are exposed to the effects of interest rate changes. We may enter into derivative instruments including interest rate swaps, caps and collars to manage or hedge interest rate risk. Derivative instruments are subject to fair value reporting at each reporting date and the increase or decrease in fair value is recorded in net income (loss) or accumulated other comprehensive income (loss), based on the applicable hedge accounting guidance. Derivatives expose the Company to credit risk in the event of non-performance by the counter parties under the terms of the interest rate hedge agreements. The Company believes it minimizes the credit risk by transacting with major credit-worthy financial institutions.
The Company has interest rate swap agreements with an aggregate notional amount of $1.4 billion to hedge variable interest rates on our unsecured term loans. In addition, as of December 31, 2020, the Company had interest rates swaps for an aggregate notional amount of $490.0 million which will become effective in the future as current swaps mature.
We have designated these pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Sensitivity
We are exposed to market risk from changes in interest rates. We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs by closely monitoring our variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous. From time to time, we may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements are intended to lessen the impact of rising interest rates, they also expose us to the risks that the other parties to the agreements will not perform, we could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly effective cash flow hedges under guidance included in ASC 815 "Derivatives and Hedging."
The table below provides information about financial instruments that are sensitive to changes in interest rates, including notes, term loans, bonds and lines of credit. For debt obligations, the table presents scheduled maturities, including annual amortization of principal, and related weighted-average interest rates for the debt maturing in each specified period (dollars in thousands).
20212022202320242025ThereafterTotal
Liabilities
Fixed rate debt$— $— $60,000 $— $40,000 $500,000 $600,000 
Average interest rate— %— %4.7 %— %4.93 %1.75 %2.26 %
Variable rate debt$40,966 $564,034 $700,000 $510,000 $— $— $1,815,000 
Average interest rate (1)
2.45 %2.52 %4.00 %3.21 %— %— %3.28 %
Total$40,966 $564,034 $760,000 $510,000 $40,000 $500,000 $2,415,000 
____________
(1) See discussion of our debt under Liquidity and Capital Resources and Derivative Instruments.
This table reflects indebtedness outstanding as of December 31, 2020 and does not reflect indebtedness, if any, incurred after that date. Our ultimate exposure to interest rate fluctuations depends on the amount of indebtedness that bears interest at variable rates, the time at which the interest rate is adjusted, the amount of adjustment, the ability to prepay or refinance variable rate indebtedness and hedging strategies used to reduce the impact of any increases in rates. As of December 31, 2020, the estimated fair value of our fixed rate debt was $491.8 million.
As of December 31, 2020, $385.0 million of the Company's aggregate indebtedness (16.9% 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 unhedged variable rate debt increase or decrease by 0.1 percent, our annual interest expense will increase or decrease by approximately $0.4 million, respectively.
Item 8. Consolidated Financial Statements and Supplementary Data.
See Financial Statements and index beginning on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. 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 the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act 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, as of the end of the period covered by this report, these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
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Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the original framework in Internal ControlIntegrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.
KPMG LLP, a registered independent accounting firm, has audited our consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued its report, included herein on page F-4, on the effectiveness of our internal control over financial reporting.
There was no change to our internal control over financial reporting during the fourth quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Trustees, Executive Officers and Corporate Governance.
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2021 Annual Meeting of Shareholders.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2021 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2021 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Trustee Independence.
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2021 Annual Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2021 Annual Meeting of Shareholders.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1. Financial Statements
    Included herein on pages F-1 through F-39.
2. Financial Statement Schedules
The following financial statement schedule is included herein on pages F-40 through F-43.
Schedule III--Real Estate and Accumulated Depreciation
All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial statement and, therefore, have been omitted from this Item 15.
3. Exhibits
The following exhibits are filed or furnished, as the case may be, as part of this Annual Report on Form 10-K:

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Exhibit
Number
Description of Exhibit
Declaration of Trust, as amended and supplemented through November 30, 2018, of Pebblebrook Hotel Trust (incorporated by reference to Exhibit 3.1 to Pebblebrook Hotel Trust’s Annual Report on Form 10-K filed with the SEC on March 1, 2019 (File No. 001-34571)).
Amended and Restated Bylaws of Pebblebrook Hotel Trust (incorporated by reference to Exhibit 3.2 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on November 14, 2016 (File No. 001‑34571)).
First Amendment to Amended and Restated Bylaws of Pebblebrook Hotel Trust (incorporated by reference to Exhibit 3.2 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on July 21, 2017 (File No. 001‑34571)).
Second Amended and Restated Agreement of Limited Partnership of Pebblebrook Hotel, L.P., dated as of December 13, 2013 (incorporated by reference to Exhibit 3.1 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on December 17, 2013 (File No. 001-34571)).
First Amendment to the Second Amended and Restated Agreement of Limited Partnership of Pebblebrook Hotel, L.P., dated as of September 30, 2014 (incorporated by reference to Exhibit 3.4 to Pebblebrook Hotel Trust’s Annual Report on Form 10‑K filed with the SEC on February 17, 2015 (File No. 001‑34571)).
Second Amendment to the Second Amended and Restated Agreement of Limited Partnership of Pebblebrook Hotel, L.P., dated as of June 8, 2016 (incorporated by reference to Exhibit 3.5 to Pebblebrook Hotel Trust’s Current Report on Form 8‑K filed with the SEC on June 8, 2016 (File No. 001‑34571)).
Third Amendment to the Second Amended and Restated Agreement of Limited Partnership of Pebblebrook Hotel, L.P., dated as of November 30, 2018 (incorporated by reference to Exhibit 3.3 to Pebblebrook Hotel Trust’s Current Report on Form 8‑K filed with the SEC on December 3, 2018 (File No. 001‑34571)).
Description of the Registrant's Securities
(incorporated by reference to Exhibit 4.1 to Pebblebrook Hotel Trust's Annual Report on Form 10-K filed with the SEC on February 20, 2020 (File No. 001-34571)).
Indenture, dated December 15, 2020, between the Company and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.1 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on December 16, 2020 (File No. 001 34571)).
First Supplemental Indenture, dated December 15, 2020, between the Company and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.2 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on December 16, 2020 (File No. 001 34571)).
Pebblebrook Hotel Trust 2009 Equity Incentive Plan, as amended and restated effective July 10, 2012 (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust's Quarterly Report on Form 10-Q filed with the SEC on August 2, 2012 (File No. 001-34571)).
Amendment No. 1 to the Pebblebrook Hotel Trust 2009 Equity Incentive Plan, as amended and restated effective July 10, 2012, effective July 7, 2016 (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust’s Quarterly Report on Form 10‑Q filed with the SEC on July 25, 2016 (File No. 001‑34571)).
Amendment No. 2 to the Pebblebrook Hotel Trust 2009 Equity Incentive Plan, as amended and restated effective July 10, 2012, effective February 15, 2017 (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust’s Current Report on Form 8-K filed with the SEC on February 22, 2017 (File No. 001‑34571)).
Change in Control Severance Agreement between Pebblebrook Hotel Trust and Jon E. Bortz (incorporated by reference to Exhibit 10.2 to Pebblebrook Hotel Trust's Annual Report on Form 10-K filed with the SEC on March 24, 2010 (File No. 001-34571)).
Change in Control Severance Agreement between Pebblebrook Hotel Trust and Raymond D. Martz (incorporated by reference to Exhibit 10.3 to Pebblebrook Hotel Trust's Annual Report on Form 10-K filed with the SEC on March 24, 2010 (File No. 001-34571)).
Change in Control Severance Agreement between Pebblebrook Hotel Trust and Thomas C. Fisher (incorporated by reference to Exhibit 10.4 to Pebblebrook Hotel Trust's Annual Report on Form 10-K filed with the SEC on March 24, 2010 (File No. 001-34571)).
Form of Indemnification Agreement between Pebblebrook Hotel Trust and its officers and trustees (incorporated by reference to Exhibit 10.4 of Amendment No. 1 to Pebblebrook Hotel Trust's Registration Statement on Form S-11/A filed with the SEC on November 10, 2009 (File No. 333-162412)).
Form of Share Award Agreement for trustees (incorporated by reference to Exhibit 10.6 of Amendment No. 2 to Pebblebrook Hotel Trust's Registration Statement on Form S-11/A filed with the SEC on November 25, 2009 (File No. 333-162412)).
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Form of Share Award Agreement (Performance Vesting) for executive officers (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust's Quarterly Report on Form 10-Q filed with the SEC on April 26, 2012 (File No. 001-34571)).
Form of LTIP Unit Vesting Agreement (supersedes Exhibits 10.11, 10.12 and 10.13 to Pebblebrook Hotel Trust's Annual Report on Form 10-K filed with the SEC on March 24, 2010 (File No. 001-34571)) (incorporated by reference to Exhibit 10.2 to Pebblebrook Hotel Trust's Quarterly Report on Form 10-Q filed with the SEC on April 26, 2012 (File No. 001-34571)).
Form of Share Award Agreement for executive officers (incorporated by reference to Exhibit 10.3 to Pebblebrook Hotel Trust's Quarterly Report on Form 10-Q filed with the SEC on April 26, 2012 (File No. 001-34571)).
Lease, dated December 1, 1999, by and between the United States of America, acting through the Administrator of General Services, and Tariff Building Associates, L.P. (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on September 13, 2010 (File No. 001-34571)).
Assignment and Assumption of GSA Lease, dated September 9, 2010, by and among the United States of America, acting by and through the Administrator of General Services and Authorized Representatives, Tariff Building Associates, L.P., and Jayhawk Owner LLC (incorporated by reference to Exhibit 10.2 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on September 13, 2010 (File No. 001-34571)).
Historical Lease, dated October 16, 2000, by and between the United States Department of the Interior, National Park Service acting through the Regional Director, Pacific West Region, an agency of the United States of America, and Maritime Hotel Associates, L.P. (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on February 22, 2011 (File No. 001-34571)).
Seventh Amendment to Historic Lease, dated February 6, 2001, by and between the United States Department of the Interior, National Park Service acting through the Regional Director, Pacific West Region, an agency of the United States of America, and Maritime Hotel Associates, L.P. (incorporated by reference to Exhibit 10.2 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on February 22, 2011 (File No. 001-34571)).
Tenth Amendment to Historic Lease, dated December 9, 2008, by and between the United States Department of the Interior, National Park Service acting through the Regional Director, Pacific West Region, an agency of the United States of America, and Maritime Hotel Associates, L.P. (incorporated by reference to Exhibit 10.3 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on February 22, 2011 (File No. 001-34571)).
Eleventh Amendment to Historic Lease, dated February 16, 2011, by and between the United States Department of the Interior, National Park Service acting through the Regional Director, Pacific West Region, an agency of the United States of America, and Wildcats Owner LLC. (incorporated by reference to Exhibit 10.4 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on February 22, 2011 (File No. 001-34571)).
Assignment and Assumption of Historical Lease, dated February 16, 2011, by and among the United States Department of the Interior, National Park Service acting through the Regional Director, Pacific West Region, an Agency of the United States of America, Maritime Hotel Associates, L.P., and Wildcats Owner LLC. (incorporated by reference to Exhibit 10.5 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on February 22, 2011 (File No. 001-34571)).
Form of LTIP Class B Unit Vesting Agreement (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on December 17, 2013 (File No. 001-34571)).
Form of Performance Unit Retention Award Agreement (incorporated by reference to Exhibit 10.2 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on December 17, 2013 (File No. 001-34571)).
Form of Performance Unit Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust's Quarterly Report on Form 10-Q filed with the SEC on April 23, 2015 (File No. 001-34571)).
Fourth Amended and Restated Credit Agreement, dated as of October 13, 2017, among Pebblebrook Hotel, L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, Bank of America, N.A., as administrative agent, swing line lender and L/C issuer, and the other lenders party thereto (incorporated by reference to Exhibit 10.22 to Pebblebrook Hotel Trust's Annual Report on Form 10-K filed with the SEC on February 22, 2018 (File No. 001-34571)).
57


First Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 13, 2017, among Pebblebrook Hotel, L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, Bank of America, N.A., as administrative agent, swing line lender and L/C issuer, and the other lenders party thereto (incorporated by reference to Exhibit 10.6 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on July 2, 2020 (File No. 001 34571)).
Second Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 13, 2017, among Pebblebrook Hotel, L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, Bank of America, N.A., as administrative agent, swing line lender and L/C issuer, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on July 2, 2020 (File No. 001 34571)).
Third Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 13, 2017, among Pebblebrook Hotel, L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, Bank of America, N.A., as administrative agent, swing line lender and L/C issuer, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on December 16, 2020 (File No. 001 34571)).
Amended and Restated Credit Agreement, dated as of October 13, 2017, among Pebblebrook Hotel, L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, PNC Bank, National Association, as administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.25 to Pebblebrook Hotel Trust's Annual Report on Form 10-K filed with the SEC on February 22, 2018 (File No. 001-34571)).
First Amendment to Amended and Restated Credit Agreement, dated as of October 13, 2017, among Pebblebrook Hotel, L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, U.S. Bank National Association, as administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.2 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on July 2, 2020 (File No. 001 34571)).
Second Amendment to Amended and Restated Credit Agreement, dated as of October 13, 2017, among Pebblebrook Hotel, L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, U.S. Bank National Association, as administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.2 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on December 16, 2020 (File No. 001 34571)).
Credit Agreement, dated as of October 13, 2017, among Pebblebrook Hotel, L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, Capital One, National Association, as administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.24 to Pebblebrook Hotel Trust's Annual Report on Form 10-K filed with the SEC on February 22, 2018 (File No. 001-34571)).
First Amendment to Credit Agreement, dated as of November 12, 2015, among Pebblebrook Hotel, L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, Capital One, National Association, as administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.3 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on July 2, 2020 (File No. 001‑34571)).
Second Amendment to Credit Agreement, dated as of November 12, 2015, among Pebblebrook Hotel, L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, Capital One, National Association, as administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.3 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on December 16, 2020 (File No. 001 34571)).
Note Purchase and Guarantee Agreement, dated November 12, 2015, by and among Pebblebrook Hotel Trust, Pebblebrook Hotel, L.P., Massachusetts Mutual Life Insurance Company, MassMutual Asia Limited, Allianz Life Insurance Company of North America and The Guardian Life Insurance Company of America (incorporated by reference to Exhibit 10.33 to Pebblebrook Hotel Trust’s Annual Report on Form 10-K filed with the SEC on February 22, 2016 (File No. 001-34571)).
First Amendment to Note Purchase Agreement, dated as of October 13, 2017, among Pebblebrook Hotel Trust, Pebblebrook Hotel, L.P., Massachusetts Mutual Life Insurance Company, MassMutual Asia Limited, Allianz Life Insurance Company of North America and The Guardian Life Insurance Company of America (incorporated by reference to Exhibit 10.27 to Pebblebrook Hotel Trust's Annual Report on Form 10-K filed with the SEC on February 22, 2018 (File No. 001-34571)).
Second Amendment to Note Purchase Agreement, dated as of October 13, 2017, among Pebblebrook Hotel Trust, Pebblebrook Hotel, L.P., Massachusetts Mutual Life Insurance Company, MassMutual Asia Limited, Allianz Life Insurance Company of North America and The Guardian Life Insurance Company of America (incorporated by reference to Exhibit 10.5 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on July 2, 2020 (File No. 001 34571)).
58


Third Amendment to Note Purchase Agreement, dated as of October 13, 2017, among Pebblebrook Hotel Trust, Pebblebrook Hotel, L.P., Massachusetts Mutual Life Insurance Company, MassMutual Asia Limited, Allianz Life Insurance Company of North America and The Guardian Life Insurance Company of America (incorporated by reference to Exhibit 10.5 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on December 16, 2020 (File No. 001 34571)).
Form of Share Award Agreement (time-based vesting) for Executive Officers (incorporated by reference to Exhibit 10.1 to Pebblebrook Hotel Trust’s Current Report on Form 8-K filed with the SEC on February 16, 2018).
Form of Performance Unit Award Agreement for Executive Officers (incorporated by reference to (incorporated by reference to Exhibit 10.2 to Pebblebrook Hotel Trust’s Current Report on Form 8-K filed with the SEC on February 16, 2018).
Credit Agreement, dated as of October 31, 2018, among Pebblebrook Hotel L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, Bank of America, N.A., as administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.34 to Pebblebrook Hotel Trust’s Annual Report on Form 10-K filed with the SEC on March 1, 2019 (File No. 001-34571)).
First Amendment to Credit Agreement, dated as of October 31, 2018, among Pebblebrook Hotel L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, Bank of America, N.A., as administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.4 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on July 2, 2020 (File No. 001 34571)).
Second Amendment to Credit Agreement, dated as of October 31, 2018, among Pebblebrook Hotel L.P., as the borrower, Pebblebrook Hotel Trust, as the parent REIT and a guarantor, certain subsidiaries of the borrower, as guarantors, Bank of America, N.A., as administrative agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.4 to Pebblebrook Hotel Trust's Current Report on Form 8-K filed with the SEC on December 10, 2020 (File No. 001 34571)).
List of Subsidiaries of Pebblebrook Hotel Trust.
Consent of KPMG LLP.
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.
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.
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.
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.
101.SCH
Inline XBRL Taxonomy Extension Schema Document(1)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document(1)
101.LABInline XBRL Taxonomy Extension Label Linkbase Document(1)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document(1)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document(1)
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)(1)
________________
*    Management agreement or compensatory plan or arrangement.
†    Filed herewith.
††    Furnished herewith.
(1) Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive Income; (iii) Consolidated Statements of Equity; (iv) Consolidated Statements of Cash Flows; (v) Notes to Consolidated Financial Statements; and (vi) Cover Page (in connection with Exhibit 104).



59


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
PEBBLEBROOK HOTEL TRUST
Date:February 23, 2021
/s/ JON E. BORTZ
Jon E. Bortz
Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NameTitleDate
/s/ JON E. BORTZChairman of the Board, President and Chief Executive Officer (principal executive officer)February 23, 2021
Jon E. Bortz
/s/ RAYMOND D. MARTZExecutive Vice President, Chief Financial Officer, Treasurer and Secretary (principal financial officer and principal accounting officer)February 23, 2021
Raymond D. Martz
/s/ CYDNEY C. DONNELLTrusteeFebruary 23, 2021
Cydney C. Donnell
/s/ RON E. JACKSONTrusteeFebruary 23, 2021
Ron E. Jackson
/s/ PHILLIP M. MILLERTrusteeFebruary 23, 2021
Phillip M. Miller
/s/ MICHAEL J. SCHALLTrusteeFebruary 23, 2021
Michael J. Schall
/s/ BONNY W. SIMITrusteeFebruary 23, 2021
Bonny W. Simi
/s/ EARL E. WEBBTrusteeFebruary 23, 2021
Earl E. Webb



PEBBLEBROOK HOTEL TRUST
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
No.
Reports of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets
F-5
Consolidated Statements of Operations and Comprehensive Income
F-6
Consolidated Statements of Equity
F-8
Consolidated Statements of Cash Flows
F-10
Notes to Consolidated Financial Statements
F-12
Schedule III - Real Estate and Accumulated Depreciation
F-40
F-1


Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees
Pebblebrook Hotel Trust:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Pebblebrook Hotel Trust and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
The assessment of hotel properties for impairment
As discussed in Note 2 and 4 to the consolidated financial statements, 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. For hotel properties that have an indication that its carrying value may not be recoverable, an undiscounted cash flow analysis is prepared using various inputs and assumptions, including estimated holding period and expected terminal capitalization rate. To the extent that the carrying value of a hotel property exceeds the estimated undiscounted cash flows, an impairment loss is recognized equal to the excess of carrying value over its fair value. The novel coronavirus (COVID-19) has reduced travel significantly and adversely affected the hospitality industry and resulted in recoverability analyses being performed on all of the Company’s hotel properties. In addition, COVID-19 has increased uncertainty in future cash flow projections and hold periods. The Company determined that the carrying
F-2


value of certain hotel properties exceeded its fair value, and recognized an impairment loss of $74.6 million. Investment in hotel properties was $5.9 billion, or 97% of total assets as of December 31, 2020.
We identified the assessment of hotel properties for impairment as a critical audit matter. Significant auditor judgment was required to evaluate certain key assumptions, specifically, the judgments related to the Company’s estimated holding period, expected terminal capitalization rate, discount rate, and projected cash flows from operations and eventual disposition, including the effects of COVID-19 and the resulting duration of the economic downturn. Changes in the key assumptions could have a significant impact on the determination of recoverability of the carrying value and determination of fair value in hotel properties. Furthermore, in determining the fair value of certain hotel properties, involvement of valuation professionals with specialized skills and knowledge was required to evaluate discount rates and expected terminal capitalization rates used in the determination of the fair value.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to evaluate hotel properties for impairment, including the specific assumptions described above. We inquired of Company officials and inspected documents, such as meeting minutes of the board of trustees, to identify Company strategies that may indicate it was more-likely-than not that a property will be sold significantly before the end of its previously estimated useful life. We read publicly available information in order to identify information regarding potential sales of the Company’s properties. We also performed sensitivity analyses over the estimated holding period of certain of the Company’s hotel properties by changing the Company’s estimates to assess the impact on the analysis. We evaluated the Company’s expected terminal capitalization rates by comparing to published third-party industry reports as well as the Company’s historical hotel property sales. For certain of the hotel properties, we performed sensitivity analyses over the estimated terminal capitalization rate by considering points within the ranges we obtained from published third-party industry reports. We evaluated the Company’s projected cash flows from operations, by comparing to published third-party industry reports evaluating the impact of COVID-19 on the hotel industry. We inquired and obtained representations from the Company regarding the status and evaluation of any potential disposal of properties and read minutes of the board of trustees. We corroborated that information with others in the organization who are responsible for, and have authority over, disposition activities. We also involved valuation professionals with specialized skills and knowledge who assisted in:
assessing the projected future cash flows from operations of each hotel property by comparing the expected duration and financial impact of the economic downturn to publicly available market data, and
evaluating the discount rates and expected terminal capitalization rates used in the determination of the fair value of certain hotel properties, by comparing against ranges that were independently developed using publicly available market data for comparable properties.

/s/ KPMG LLP

We have served as the Company's auditor since 2009.

McLean, Virginia
February 23, 2021
F-3



Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees
Pebblebrook Hotel Trust:
Opinion on Internal Control Over Financial Reporting
We have audited Pebblebrook Hotel Trust and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedule III (collectively, the consolidated financial statements), and our report dated February 23, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

McLean, Virginia
February 23, 2021


F-4




Pebblebrook Hotel Trust
Consolidated Balance Sheets
(In thousands, except share and per-share data)
December 31,
2020
December 31, 2019
  
ASSETS
Investment in hotel properties, net$5,882,022 $6,332,587 
Cash and cash equivalents124,274 30,098 
Restricted cash12,026 26,777 
Hotel receivables (net of allowance for doubtful accounts of $183 and $738, respectively)
10,225 49,619 
Prepaid expenses and other assets47,819 59,474 
Total assets$6,076,366 $6,498,555 
LIABILITIES AND EQUITY
Debt$2,280,471 $2,229,220 
Accounts payable, accrued expenses and other liabilities226,446 260,166 
Lease liabilities - operating leases255,106 256,271 
Deferred revenues36,057 57,704 
Accrued interest4,653 4,694 
Distribution payable9,307 58,564 
      Total liabilities2,812,040 2,866,619 
Commitments and contingencies (Note 11)
Shareholders’ equity:
Preferred shares of beneficial interest, $.01 par value (liquidation preference $510,000 at December 31, 2020 and December 31, 2019), 100,000,000 shares authorized; 20,400,000 shares issued and outstanding at December 31, 2020 and December 31, 2019
204 204 
Common shares of beneficial interest, $.01 par value, 500,000,000 shares authorized; 130,673,300 shares issued and outstanding at December 31, 2020 and 130,484,956 shares issued and outstanding at December 31, 2019
1,307 1,305 
Additional paid-in capital4,169,870 4,069,410 
Accumulated other comprehensive income (loss)(60,071)(24,715)
Distributions in excess of retained earnings(853,973)(424,996)
Total shareholders’ equity3,257,337 3,621,208 
Non-controlling interests6,989 10,728 
      Total equity3,264,326 3,631,936 
      Total liabilities and equity$6,076,366 $6,498,555 
The accompanying notes are an integral part of these financial statements.
F-5

Table of Contents

Pebblebrook Hotel Trust
Consolidated Statements of Operations and Comprehensive Income
(In thousands, except share and per-share data)
 For the year ended December 31,
 202020192018
Revenues:
Room$287,439 $1,103,947 $565,107 
Food and beverage95,892 370,584 199,089 
Other operating59,557 137,682 64,482 
Total revenues442,888 1,612,213 828,678 
Expenses:
Hotel operating expenses:
Room91,771 275,855 143,171 
Food and beverage77,698 260,278 136,845 
Other direct and indirect209,957 438,035 231,818 
Total hotel operating expenses379,426 974,168 511,834 
Depreciation and amortization224,560 234,880 108,475 
Real estate taxes, personal property taxes, property insurance, and ground rent114,333 125,013 54,191 
General and administrative45,158 34,047 20,945 
Transaction costs10,544 8,679 75,049 
Impairment loss74,556   
(Gain) loss on sale of hotel properties(117,401)(2,819)2,147 
(Gain) loss and other operating expenses4,421 8,903 (10,935)
Total operating expenses735,597 1,382,871 761,706 
Operating income (loss)(292,709)229,342 66,972 
Interest expense(104,098)(108,474)(53,923)
Other517 29 2,078 
Income (loss) before income taxes(396,290)120,897 15,127 
Income tax (expense) benefit3,697 (5,172)(1,742)
Net income (loss)(392,593)115,725 13,385 
Net income (loss) attributable to non-controlling interests(864)283 (8)
Net income (loss) attributable to the Company(391,729)115,442 13,393 
Distributions to preferred shareholders(32,556)(32,556)(17,466)
Net income (loss) attributable to common shareholders$(424,285)$82,886 $(4,073)
Net income (loss) per share available to common shareholders, basic$(3.25)$0.63 $(0.06)
Net income (loss) per share available to common shareholders, diluted$(3.25)$0.63 $(0.06)
Weighted-average number of common shares, basic130,610,015 130,471,670 74,286,307 
Weighted-average number of common shares, diluted130,610,015 130,718,306 74,286,307 
F-6

Table of Contents
Pebblebrook Hotel Trust
Consolidated Statements of Operations and Comprehensive Income - Continued
(In thousands, except share and per-share data)
For the year ended December 31,
202020192018
Comprehensive Income:
Net income (loss)$(392,593)$115,725 $13,385 
Other comprehensive income (loss):
Change in fair value of derivative instruments(63,861)(25,785)(1,929)
Amounts reclassified from other comprehensive income28,505 (260)(978)
Comprehensive income (loss)(427,949)89,680 10,478 
Comprehensive income (loss) attributable to non-controlling interests(934)209 (16)
Comprehensive income (loss) attributable to the Company$(427,015)$89,471 $10,494 
The accompanying notes are an integral part of these financial statements.

F-7

Table of Contents

Pebblebrook Hotel Trust
Consolidated Statements of Equity
(In thousands, except share data)
Preferred SharesCommon SharesAdditional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Distributions in Excess of Retained EarningsTotal Shareholders' EquityNon-Controlling InterestsTotal Equity
SharesAmountSharesAmount
Balance at December 31, 201710,000,000 $100 68,812,575 $688 $1,685,437 $3,689 $(191,013)$1,498,901 $4,625 $1,503,526 
Issuance of shares, net of offering costs10,400,000 104 61,399,104 614 2,377,089 — — 2,377,807 — 2,377,807 
Issuance of operating partnership units— — — — — — — — 4,665 4,665 
Issuance of common shares for Board of Trustees compensation— — 17,410 1 661 — — 662 — 662 
Repurchase of common shares— — (69,687)(1)(2,506)— — (2,507)— (2,507)
Share-based compensation— — 151,887 1 5,123 — — 5,124 1,104 6,228 
Distributions on common shares/units— — — — — — (113,172)(113,172)(377)(113,549)
Distributions on preferred shares— — — — — — (17,466)(17,466)(39)(17,505)
Net contribution from non-controlling interests— — — — — — — — 125 125 
Other comprehensive income (loss):
Change in fair value of derivative instruments— — — — — (1,929)— (1,929)— (1,929)
Amounts reclassified from other comprehensive income— — — — — (978)— (978)— (978)
Cumulative effect adjustment
from adoption of new accounting
standard
— — — — — 548 (548)— —  
Net income (loss)— — — — — — 13,393 13,393 (8)13,385 
Balance at December 31, 201820,400,000 $204 130,311,289 $1,303 $4,065,804 $1,330 $(308,806)$3,759,835 $10,095 $3,769,930 
Issuance of shares, net of offering costs— — — — (275)— — (275)— (275)
Issuance of common shares for Board of Trustees compensation— — 25,282 1 739 — — 740 — 740 
Repurchase of common shares— — (126,681)(1)(4,008)— — (4,009)— (4,009)
Share-based compensation— — 275,066 2 7,180 — — 7,182 1,057 8,239 
Distributions on common shares/units— — — — — — (199,076)(199,076)(562)(199,638)
Distributions on preferred shares— — — — — — (32,556)(32,556)(50)(32,606)
Redemption of non-controlling interests— — — — (30)— — (30)(95)(125)
Other comprehensive income (loss):
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Change in fair value of derivative instruments— — — — — (25,785)— (25,785)— (25,785)
Amounts reclassified from other comprehensive income— — — — — (260)— (260)— (260)
Net income (loss)— — — — — — 115,442 115,442 283 115,725 
Balance at December 31, 201920,400,000 $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— — — — (119)— — (119)— (119)
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 12,162 — — 12,163 10,616 22,779 
Distributions on common shares/units— — — — — — (4,692)(4,692)(45)(4,737)
Distributions on preferred shares— — — — — — (32,556)(32,556)— (32,556)
Redemption of non-controlling interest LTIP units— — 109,240 1 13,445 — — 13,446 (13,446) 
Equity component of convertible senior notes— — — — 113,890 — — 113,890 — 113,890 
Purchases of capped calls in connection with convertible senior notes— — — — (38,300)— — (38,300)— (38,300)
Other comprehensive income (loss):
Change in fair value of derivative instruments— — — — — (63,861)— (63,861)— (63,861)
Amounts reclassified from other comprehensive income— — — — — 28,505 — 28,505 — 28,505 
Net income (loss)— — — — — — (391,729)(391,729)(864)(392,593)
Balance at December 31, 202020,400,000 $204 130,673,300 $1,307 $4,169,870 $(60,071)$(853,973)$3,257,337 $6,989 $3,264,326 

The accompanying notes are an integral part of these financial statements.
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Pebblebrook Hotel Trust
Consolidated Statements of Cash Flows
(In thousands)
 For the year ended December 31,
 202020192018
Operating activities:
Net income (loss)$(392,593)$115,725 $13,385 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization224,560 234,880 108,475 
Share-based compensation22,779 8,239 6,228 
(Gain) loss on marketable securities  2,978 
Amortization of deferred financing costs, non-cash interest and mortgage loan premiums17,200 17,349 18,256 
(Gain) loss on sale of hotel properties(117,401)(2,819)2,147 
Impairment loss74,556   
Non-cash ground rent6,198 6,395 3,062 
Other347 2,365 2,939 
Changes in assets and liabilities:
Hotel receivables38,509 8,648 3,684 
Prepaid expenses and other assets3,358 1,061 5,031 
Accounts payable and accrued expenses(60,673)(605)(34,517)
Deferred revenues(18,616)3,964 4,029 
Net cash provided by (used in) operating activities(201,776)395,202 135,697 
Investing activities:
Acquisition of LaSalle, net of cash acquired  (1,372,584)
Improvements and additions to hotel properties(125,014)(169,632)(89,605)
Proceeds from sales of hotel properties375,131 470,352 28,551 
Investment in marketable securities  (356,180)
Sale of marketable securities  6,658 
Purchase of corporate office equipment, software, and furniture (752)(164)
Property insurance proceeds  5,162 
Net cash provided by (used in) investing activities250,117 299,968 (1,778,162)
Financing activities:
Payment of offering costs — common and preferred shares(119)(275)(470)
Payment of deferred financing costs(16,372)(461)(29,366)
(Distributions) contributions from non-controlling interest (125) 
Borrowings under revolving credit facilities760,115 414,771 550,181 
Repayments under revolving credit facilities(885,115)(419,771)(425,181)
Proceeds from debt512,965  1,850,000 
Repayments of debt(212,965)(518,207)(102,366)
Purchases of capped calls for convertible senior notes(38,300)  
Repurchases of common shares(1,255)(4,009)(2,507)
Distributions — common shares/units(53,960)(184,836)(105,729)
Distributions — preferred shares(32,556)(32,556)(16,094)
Proceeds from refundable membership deposits  29 
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Pebblebrook Hotel Trust
Consolidated Statements of Cash Flows
(In thousands)
Repayments of refundable membership deposits(1,354)(637)(754)
Net cash provided by (used in) financing activities31,084 (746,106)1,717,743 
Net change in cash and cash equivalents and restricted cash79,425 (50,936)75,278 
Cash and cash equivalents and restricted cash, beginning of year56,875 107,811 32,533 
Cash and cash equivalents and restricted cash, end of year $136,300 $56,875 $107,811 
The accompanying notes are an integral part of these financial statements.
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PEBBLEBROOK HOTEL TRUST
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2020, the Company owned 53 hotels with a total of 13,236 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; New York, New York; 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 December 31, 2020, the Company owned 99.8% of the common limited partnership units issued by the Operating Partnership ("common units"). The remaining 0.2% 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 has continued to spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates, health official recommendations, corporate policy changes and individual responses, hotel demand was dramatically reduced. Following government mandates and health official recommendations, the Company temporarily suspended operations at 47 of its hotels and resorts and working with its operators, dramatically reduced staffing and expenses at the hotels that remained operational. Throughout the summer months, hotel industry demand improved from its historical lows seen in the second quarter, particularly as leisure customers sought to travel to drive-to hotels and resorts that could offer more space and outdoor experiences. The monthly revenue increased slowly through October as the Company reopened several of its hotels and resorts between May and October. November and December had declining revenue at most of its opened hotels, except its South Florida properties, as leisure demand declined and business travel did not return in a meaningful manner. The South Florida properties experienced slightly increasing revenue late in the year which is consistent with the seasonal pattern for these warm weather resort properties. The Company anticipates leisure travel will return as vaccine distribution becomes more widely available, followed by business travel. The Company still anticipates group demand will be the slowest to return until there is more certainty around health and immunity solution for the country. As of December 31, 2020, 37 of the Company's hotels and resorts listed below were open, with operations at the remaining 16 hotels still temporarily suspended. The Company anticipates reopening additional hotels as demand returns and it determines that the Company would lose less money with the hotels open versus remaining closed.
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PropertyLocation
1.L'Auberge Del MarDel Mar, CA
2.Hotel Palomar Los Angeles Beverly HillsLos Angeles, CA
3.W Los Angeles - West Beverly HillsLos Angeles, CA
4.Mondrian Los AngelesWest Hollywood, CA
5.Le Meridien Delfina Santa MonicaSanta Monica, CA
6.Viceroy Santa Monica HotelSanta Monica, CA
7.Le Parc Suite HotelWest Hollywood, CA
8.Montrose West HollywoodWest Hollywood, CA
9.Chamberlain West Hollywood HotelWest Hollywood, CA
10.Grafton on SunsetWest Hollywood, CA
11.Embassy Suites San Diego Bay - DowntownSan Diego, CA
12.Paradise Point Resort & SpaSan Diego, CA
13.San Diego Mission Bay Resort (formerly Hilton San Diego Mission Bay Resort)San Diego, CA
14.The Westin San Diego Gaslamp QuarterSan Diego, CA
15.Hilton San Diego Gaslamp QuarterSan Diego, CA
16.Solamar HotelSan Diego, CA
17.Hotel SperoSan Francisco, CA
18.Hotel Zetta San FranciscoSan Francisco, CA
19.Chaminade Resort & SpaSanta Cruz, CA
20.Southernmost Beach ResortKey West, FL
21.The Marker Key West Harbor ResortKey West, FL
22.LaPlaya Beach Resort and ClubNaples, FL
23.Hotel Colonnade Coral Gables, Autograph CollectionMiami, FL
24.The Liberty, A Luxury Collection Hotel, BostonBoston, MA
25.Hyatt Regency Boston HarborBoston, MA
26.W BostonBoston, MA
27.The Westin Copley Place, BostonBoston, MA
28.George HotelWashington, DC
29.Hotel Zena Washington DC (formerly Donovan Hotel)Washington, DC
30.Viceroy Washington DC (formerly Mason & Rook Hotel)Washington, DC
31.Skamania LodgeStevenson, WA
32.Hotel Monaco SeattleSeattle, WA
33.Hotel Vintage SeattleSeattle, WA
34.Hotel Vintage PortlandPortland, OR
35.The Heathman Hotel Portland, OR
36.The Nines, a Luxury Collection Hotel, PortlandPortland, OR
37.Sofitel Philadelphia at Rittenhouse SquarePhiladelphia, PA
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 recover. As a result of uncertainty at the beginning of the pandemic, in March 2020, the Company fully drew down on its $650.0 million unsecured revolving credit facility, reduced the quarterly cash dividend on its common shares to one penny per share, reduced planned capital expenditures, reduced the compensation of its executive officers, trustees and employees, and, working closely with its hotel operating partners, significantly reduced its hotels' operating expenses. On June 29, 2020, the Company amended its
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existing credit facilities, term loan facilities and senior notes. Among other things, the amendments extended the maturity of a significant portion of the term loan due in November 2021 to November 2022, waived existing financial covenants through the end of the first quarter of 2021 and provided substantially less restrictive financial covenants through the end of the second quarter of 2022. In addition, the Company repaid approximately $250.0 million on its unsecured revolving credit facility. In December 2020, the Company issued $500.0 million of convertible notes and used the proceeds to repay an additional $250.0 million of its unsecured revolving credit facility and $200.0 million of its unsecured term loans. As of December 31, 2020, the Company had a balance of $40.0 million on its unsecured revolving credit facility.
In February 2021, the Company issued an additional $250.0 million of convertible notes under the same terms as the December 2020 offering, at a 5.5% premium to par. 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 Company used the net proceeds 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 further amended the agreements governing the 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. Refer to "Note 5. Debt" for additional information regarding these amendments and convertible debt. Based on these amendments and expense and cash burn rate reductions, the Company believes that it has sufficient liquidity to meet its obligations for the next twelve months.
The negative impact of the demand loss caused by COVID-19 will result in a significant income tax loss in PHL. 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 had a valuation allowance of $20.9 million as of December 31, 2020. As of December 31, 2020, the Company had an income tax receivable of $6.9 million attributable to the net operating loss carry-back, which is included in prepaid expenses and other assets in the accompanying consolidated balance sheets.
The Company also adopted an optional remote-work policy and other physical distancing policies at its corporate office and the Company does not anticipate these policies to have any adverse impact on its ability to continue to operate its business.  Transitioning to a remote-work environment has not had a material adverse impact on the Company's financial reporting system, internal controls or disclosure controls and procedures.
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Note 2. Summary of Significant Accounting Policies
Basis of Presentation
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 accounting principles generally accepted in the United States of America, ("U.S. GAAP"). All significant intercompany balances and transactions have been eliminated in consolidation. Investments in entities that the Company does not control, but over which the Company has the ability to exercise significant influence regarding operating and financial policies, are accounted for under the equity method.
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.
Risks and Uncertainties
The state of the overall economy can significantly impact hotel operational performance and thus, impact the Company's financial position. As discussed above, the impact of COVID-19 has significantly impacted the hotels' operational performance and therefore the Company has significantly reduced distributions to our shareholders in addition to taking other measures in order to reduce operating expenses. A continued reduction in travel may impact the Company's ability to service debt or meet other financial obligations.
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 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 related to business combinations are expensed as incurred and included on the consolidated statements of operations and comprehensive income.
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.
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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, together with the related operating results, as continuing or discontinuing operations on the statements of operations and classify the assets and related liabilities as held for sale on the balance sheet.
Intangible Assets and Liabilities
Intangible assets or liabilities are recorded on non-market contracts assumed as part of the acquisition of certain hotels. The Company reviews the terms of agreements assumed in conjunction with the purchase of a hotel to determine if the terms are over or under market compared to an estimated market agreement at the acquisition date. Under market lease assets or over market contract liabilities are recorded at the acquisition date and amortized using the straight-line method over the term of the agreement. The Company does not amortize intangible assets with indefinite useful lives, but reviews these assets for impairment annually or at interim periods if events or circumstances indicate that the asset may be impaired.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short-term liquid investments with an original maturity of three months or less. The Company maintains cash and cash equivalents balances in excess of insured limits with various financial institutions. This may subject the Company to significant concentrations of credit risk. The Company performs periodic evaluations of the credit quality of these financial institutions.
Restricted Cash
Restricted cash primarily consists of reserves for replacement of furniture and fixtures and cash held in escrow pursuant to lender requirements to pay for real estate taxes or property insurance.
Prepaid Expenses and Other Assets
The Company's prepaid expenses and other assets consist of prepaid real estate taxes, prepaid insurance, inventories, over or under market leases, and corporate office equipment and furniture.
Derivative Instruments
In the normal course of business, the Company is exposed to the effects of interest rate changes. The Company may enter into derivative instruments including interest rate swaps, caps and collars to manage or hedge interest rate risk. Derivative instruments are recorded at fair value on the balance sheet date. Unrealized gains and losses of hedging instruments are reported in other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
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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. Lease revenue is recognized on a straight-line basis over the life of the lease and 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 significant 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.
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Comprehensive Income
The purpose of reporting comprehensive income is to report a measure of all changes in equity of an entity that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Comprehensive income consists of all components of income, including other comprehensive income, which is excluded from net income.
Segment Information
The Company separately evaluates the performance of each of its hotel properties. However, because each of the hotels has similar economic characteristics, facilities, and services, the hotel properties have been aggregated into a single operating segment.
Recent Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The Company adopted this standard on January 1, 2019. The Company elected the practical expedients allowed under the guidance and retained the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. The Company also elected not to restate prior periods for the impact of the adoption of the new standard. The adoption of this standard has resulted in the recognition of right-of-use assets and related liabilities to account for the Company's future obligations under the ground lease and corporate office arrangements for which the Company is the lessee. See Notes 4 and 11 below for additional disclosures of the adoption of this standard.
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. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. 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, beginning January 1, 2021, the convertible debt will be 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 will cease recording non-cash interest expense associated with amortization of the debt discount and will calculate earnings per share using the if-converted method. 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.
Note 3. Acquisition and Disposition of Hotel Properties
There were no acquisitions of hotel properties during the years ended December 31, 2020 and 2019.
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.
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The following table sets forth information regarding the Company's disposition transactions during the years ended December 31, 2020 and 2019 (in thousands):
Hotel Property NameLocationSale DateSale Price
Sofitel Washington DC Lafayette Square and InterContinental Buckhead AtlantaWashington, DC / Buckhead, GAMarch 6, 2020$331,000 
Union Station Hotel Nashville, Autograph CollectionNashville, TNJuly 29, 202056,000 
2020 Total$387,000 
The Liaison Capitol HillWashington, D.C.February 14, 2019$111,000 
Hotel Palomar Washington DCWashington, D.C.February 22, 2019141,450 
Onyx HotelBoston, MAMay 29, 201958,255 
Hotel Amarano BurbankBurbank, CAJuly 16, 201972,866 
Rouge HotelWashington, DCSeptember 12, 201942,000 
Hotel MaderaWashington, DCSeptember 26, 201923,250 
Topaz HotelWashington, DCNovember 22, 201933,100 
2019 Total$481,921 
For the years ended December 31, 2020, 2019 and 2018, the Company recognized a (gain) loss on its dispositions of $(117.4) million, $(2.8) million and $2.1 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 years ended December 31, 2020, 2019 and 2018, the accompanying consolidated statements of operations and comprehensive income included operating income (loss) of $4.9 million, $46.4 million and $30.1 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.
Note 4. Investment in Hotel Properties
Investment in hotel properties as of December 31, 2020 and 2019 consisted of the following (in thousands):
December 31,
2020
December 31,
2019
Land$973,848 $1,042,198 
Buildings and improvements4,849,644 4,998,108 
Furniture, fixtures and equipment515,975 522,631 
Finance lease asset114,835 134,063 
Construction in progress5,443 35,637 
$6,459,745 $6,732,637 
Right-of-use asset, operating leases320,564 335,272 
Investment in hotel properties$6,780,309 $7,067,909 
Less: Accumulated depreciation(898,287)(735,322)
Investment in hotel properties, net$5,882,022 $6,332,587 
The Company reviews its investment in hotel properties for impairment whenever events or circumstances indicate potential impairment. As a result of the effects of the COVID-19 pandemic on our expected future operating cash flows and estimated hold periods for certain properties, we determined certain impairment triggers had occurred and as a result, the Company assessed its investment in hotel properties for recoverability. Based on the analyses performed, for the year ended December 31, 2020, the Company recognized an impairment loss of $74.6 million related to two hotels and the retail component of a hotel as a result of the fair values being lower than their carrying values. The impairment loss was determined using level 2 inputs under authoritative guidance for fair value measurements.
On January 1, 2019, the Company adopted ASC 842, Leases and applied it prospectively. At adoption, the Company also elected the practical expedients which permitted it to not reassess its prior conclusions about lease identification, classification and initial direct costs. Consequently on January 1, 2019, the Company recognized right-of-use assets and related liabilities
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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 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 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. As of December 31, 2019, the Company's lease liabilities consisted of operating lease liabilities of $256.3 million and financing lease liabilities of $45.6 million. The financing lease liabilities are included in accounts payable, accrued expenses and other liabilities on the Company's accompanying consolidated balance sheets. The adoption of this standard had minimal impact on the Company's consolidated statements of operations and comprehensive income.
Note 5. Debt
On June 29, 2020, the Company amended its credit agreements and related documents governing the unsecured revolving credit facilities, term loan agreements and senior notes which:
waived existing financial covenants through the end of the first quarter of 2021 and provided substantially less restrictive covenants through the end of the second quarter of 2022 ("waiver period");
extended the maturity of $242.6 million of the Company’s Sixth Term Loan 2021 tranche of $300.0 million from November 2021 to November 2022;
fixed the spread at the highest threshold through the end of the waiver period;
increased the LIBOR floor from 0% to 0.25% for any debt not designated by the Company as being covered by an interest rate swap;
requires assets to be pledged as security, in the future, under certain circumstances;
preserved the Company's ability to pay quarterly preferred equity dividend payments and a $0.01 per share quarterly common dividend (or higher if required to maintain REIT status) during the waiver period so long as the Company is in compliance with all loan agreements;
provided the Company flexibility to complete new acquisitions and other investments during the waiver period;
permit the Company to complete up to $90.0 million of capital improvements and redevelopment projects through the end of the waiver period; and
provide limitations during the waiver period on common share repurchases and certain required prepayments following capital issuances or property dispositions.
On February 18, 2021, the Company further amended its credit agreements and related documents governing the 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 extended waiver period; and
extends other terms through the extended waiver period.

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The Company's debt consisted of the following as of December 31, 2020 and 2019 (dollars in thousands):
   Balance Outstanding as of
 Interest RateMaturity DateDecember 31, 2020December 31, 2019
Revolving credit facilities
Senior unsecured credit facility
Floating (1)
January 2022$40,000 $165,000 
PHL unsecured credit facility
Floating (2)
January 2022  
Total revolving credit facilities$40,000 $165,000 
Unsecured term loans
First Term Loan
Floating (3)
January 2023300,000 300,000 
Second Term Loan
Floating (3)
April 202265,000 65,000 
Fourth Term Loan
Floating (3)
October 2024110,000 110,000 
Sixth Term Loan
Tranche 2021
Floating (3)
November 2021
(4)
40,966 300,000 
Tranche 2021 Extended
Floating (3)
November 2022173,034  
Tranche 2022
Floating (3)
November 2022286,000 400,000 
Tranche 2023
Floating (3)
November 2023400,000 400,000 
Tranche 2024
Floating (3)
January 2024400,000 400,000 
Total Sixth Term Loan1,300,000 1,500,000 
Total term loans at stated value1,775,000 1,975,000 
Deferred financing costs, net(8,455)(10,343)
Total term loans$1,766,545 $1,964,657 
Convertible senior notes
   Convertible senior notes1.75%December 2026500,000  
   Debt discount, net(113,099) 
   Deferred financing costs, net(12,568) 
Total convertible senior notes$374,333 $ 
Senior unsecured notes
Series A Notes4.70%December 202360,000 60,000 
Series B Notes4.93%December 202540,000 40,000 
Total senior unsecured notes at stated value100,000 100,000 
Deferred financing costs, net(407)(437)
Total senior unsecured notes$99,593 $99,563 
Total debt$2,280,471 $2,229,220 
________________________
(1) Borrowings bear interest at floating rates equal to, at 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) 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.
(3) 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 December 31, 2020, $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 $345.0 million bore a weighted-average floating interest rate of 2.46%. As of December 31, 2019, $1.6 billion of the borrowings under the term loan facilities bore a weighted-average fixed interest rate of 3.43%, after taking into account interest rate swap agreements, and $345.0 million bore a weighted-average floating interest rate of 3.32%.
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(4) In February 2021, we repaid $12.8 million of the Sixth Term Loan Tranche 2021 and extended the majority of the remaining balance to November 2022.
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 December 31, 2020, the Company had $40.0 million of outstanding borrowings, $6.8 million of outstanding letters of credit and borrowing capacity of $603.2 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 to 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 2.25% 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 2.25% 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 December 31, 2020, 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 $6.8 million and $2.8 million were outstanding as of December 31, 2020 and 2019, respectively.
As of December 31, 2020, 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 December, the Company repaid $200.0 million of the Company's sixth term loans. As of December 31, 2020, 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 maturing in December 2026 (the "Convertible Notes"). 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 net proceeds from the offering of the Convertible Notes were approximately $487.3 million after deducting the underwriting fees and other expenses paid by the Company.
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 $0.4 million for the year ended December 31, 2020.
The Company separated the Convertible Notes into liability and equity components. The initial carrying amount of the liability component was $386.1 million and was calculated using a discount rate of 6.25%. The discount rate was based on the terms of debt instruments that were similar to the Convertible Notes. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the principal amount of the
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Convertible Notes, or $113.9 million. The amount recorded in equity is not subject to remeasurement or amortization. The $113.9 million also represents the initial discount recorded on the Convertible Notes. The discount is accreted to interest expense using the effective interest rate method over the contractual term of the Convertible Notes. The Company recorded interest expense related to the accretion of the discount and the amortization of the debt issuance costs of $0.9 million for the year ended December 31, 2020.
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 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, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the underwriters of the offering of the Convertible Notes or their respective affiliates and other financial institutions (the “Capped Call Counterparties”). The Capped Call Transactions initially cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the number of common shares underlying the Convertible Notes. The Capped Call Transactions are expected generally to reduce the potential dilution to holders of common shares upon conversion of the Convertible Notes and/or offset the potential cash payments that the Company could be required to make in excess of the principal amount of any converted Convertible Notes upon conversion thereof, with such reduction and/or offset subject to a cap. The upper strike price of the Capped Call Transactions is $33.0225 per share. The cost of the Capped Call Transactions was $38.3 million and was recorded within additional paid-in capital.
Senior Unsecured Notes
The Company has $60.0 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 $40.0 million of senior unsecured notes bearing a fixed interest rate of 4.93% per annum and maturing in December 2025 (the "Series B Notes"). The 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 December 31, 2020, the Company was in compliance with all such debt covenants.
Interest Expense
The components of the Company's interest expense consisted of the following (in thousands):
For the year ended December 31,
202020192018
Unsecured revolving credit facilities$10,210 $4,530 $11,274 
Unsecured term loan facilities72,642 79,813 30,479 
Convertible senior notes365   
Senior unsecured notes4,792 4,792 4,686 
Mortgage debt 2,293 2,592 
Amortization of deferred financing fees7,296 7,115 2,565 
Other8,793 9,931 2,327 
Total interest expense$104,098 $108,474 $53,923 
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 December 31, 2020 and 2019 was $491.8 million and $101.2 million, respectively.
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Future Minimum Principal Payments
As of December 31, 2020, the future minimum principal payments for the Company's debt are as follows (in thousands):
2021$40,966 
2022564,034 
2023760,000 
2024510,000 
202540,000 
Thereafter500,000 
Total debt principle payments$2,415,000 
Deferred financing costs(134,529)
Total debt$2,280,471 
Derivative and Hedging Activities
The Company enters into interest rate swap agreements to hedge against interest rate fluctuations. All of the Company's interest rate swaps are cash flow hedges. All unrealized gains and losses on these hedging instruments are reported in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
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The Company's interest rate swaps at December 31, 2020 and 2019 consisted of the following (dollars in thousands):
Notional Value as of
Hedge TypeInterest RateMaturityDecember 31, 2020December 31, 2019
Swap - cash flow1.63%January 2020$ $50,000 
Swap - cash flow1.63%January 2020 50,000 
Swap - cash flow2.46%January 2020 50,000 
Swap - cash flow2.46%January 2020 50,000 
Swap - cash flow1.66%January 2020 50,000 
Swap - cash flow1.66%January 2020 50,000 
Swap - cash flow2.12%December 2020 100,000 
Swap - cash flow2.12%December 2020 100,000 
Swap - cash flow1.74%January 202175,000 75,000 
Swap - cash flow1.75%January 202150,000 50,000 
Swap - cash flow1.53%January 202137,500 37,500 
Swap - cash flow1.53%January 202137,500 37,500 
Swap - cash flow1.46%(1)January 2021100,000 100,000 
Swap - cash flow1.47%(1)January 202147,500 47,500 
Swap - cash flow1.47%(1)January 202147,500 47,500 
Swap - cash flow1.47%(1)January 202147,500 47,500 
Swap - cash flow1.47%(1)January 202147,500 47,500 
Swap - cash flow2.60%October 202155,000 55,000 
Swap - cash flow2.60%October 202155,000 55,000 
Swap - cash flow1.78%(1)January 2022100,000 100,000 
Swap - cash flow1.78%(1)January 202250,000 50,000 
Swap - cash flow1.79%(1)January 202230,000 30,000 
Swap - cash flow1.68%April 202225,000 25,000 
Swap - cash flow1.68%April 202225,000 25,000 
Swap - cash flow1.64%April 202225,000 25,000 
Swap - cash flow1.64%April 202225,000 25,000 
Swap - cash flow1.99%November 202385,000 85,000 
Swap - cash flow1.99%November 202385,000 85,000 
Swap - cash flow1.99%November 202350,000 50,000 
Swap - cash flow1.99%November 202330,000 30,000 
Swap - cash flow2.60%January 202475,000  
Swap - cash flow2.60%January 202450,000  
Swap - cash flow2.60%January 202425,000  
Swap - cash flow2.60%January 202475,000  
Swap - cash flow2.60%January 202475,000  
Total$1,430,000 $1,630,000 
________________________
(1) Swaps assumed in connection with the Company's merger with LaSalle Hotel Properties on November 30, 2018.
In addition, as of December 31, 2020 and 2019, the Company had interest rates swaps for aggregate notional amounts of $490.0 million and $590.0 million, respectively, which will become effective in the future as current swaps mature. 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
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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.
As of December 31, 2020, the Company's derivative instruments were in liability positions, with aggregate liability fair values of $58.0 million which are included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated balance sheets. The Company expects approximately $24.7 million will be reclassified from accumulated other comprehensive income (loss) to interest expense in 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 years ended December 31, 2020, 2019 and 2018 (in thousands):
For the year ended December 31,
202020192018
San Diego, CA$96,071 $243,598 $78,965 
Southern FL76,971 115,600 63,824 
San Francisco, CA66,896 319,195 193,708 
Boston, MA63,356 273,669 85,676 
Los Angeles, CA51,664 200,398 128,016 
Other(1)27,453 128,627 108,583 
Portland, OR27,174 105,571 98,265 
Chicago, IL15,604 82,690 3,885 
Washington, D.C.12,739 111,552 34,731 
Seattle, WA4,960 31,313 33,025 
$442,888 $1,612,213 $828,678 
(1) Other includes: Atlanta (Buckhead), GA, Minneapolis, MN, 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 of beneficial interest, $0.01 par value per share (“common shares”). Each outstanding common share entitles the holder to one vote on each matter submitted to a vote of shareholders. Holders of the Company’s common shares are entitled to receive dividends when authorized by the Company's 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 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. Upon repurchase by the Company, common shares cease to be outstanding and become authorized but unissued common shares. For the year ended December 31, 2020, the Company had no repurchases under this program and as of December 31, 2020, $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 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. This $100.0 million share repurchase program will commence upon completion of the Company's $150.0 million share repurchase program.
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Common Dividends
The Company declared the following dividends on common shares/units for the year ended December 31, 2020:
Dividend per
Share/Unit
For the Quarter
Ended
Record DatePayable Date
$0.01 March 31, 2020March 31, 2020April 15, 2020
$0.01 June 30, 2020June 30, 2020July 15, 2020
$0.01 September 30, 2020September 30, 2020October 15, 2020
$0.01 December 31, 2020December 31, 2020January 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”).
The following Preferred Shares were outstanding as of December 31, 2020 and 2019:
As of December 31,
Security Type20202019
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 
20,400,000 20,400,000 
The Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F 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, may 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 and may not redeem the Series F Preferred Shares prior to May 25, 2021, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. On or after May 25, 2021 and June 9, 2021, the Company may, at its option, redeem the Series F Preferred Shares and Series D Preferred Shares, respectively, and at any time the Company may, at its option, redeem the Series C Preferred Shares or the Series E Preferred Shares, or both, 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 Company’s 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 the Company’s 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 and on each Series F Preferred Share is 2.0649 common shares.
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Preferred Dividends
The Company declared the following dividends on preferred shares for the year ended December 31, 2020:
Security TypeDividend  per
Share/Unit
For the Quarter
Ended
Record DatePayable Date
6.50% Series C
$0.41 March 31, 2020March 31, 2020April 15, 2020
6.50% Series C
$0.41 June 30, 2020June 30, 2020July 15, 2020
6.50% Series C
$0.41 September 30, 2020September 30, 2020October 15, 2020
6.50% Series C
$0.41 December 31, 2020December 31, 2020January 15, 2021
6.375% Series D
$0.40 March 31, 2020March 31, 2020April 15, 2020
6.375% Series D
$0.40 June 30, 2020June 30, 2020July 15, 2020
6.375% Series D
$0.40 September 30, 2020September 30, 2020October 15, 2020
6.375% Series D
$0.40 December 31, 2020December 31, 2020January 15, 2021
6.375% Series E
$0.40 March 31, 2020March 31, 2020April 15, 2020
6.375% Series E
$0.40 June 30, 2020June 30, 2020July 15, 2020
6.375% Series E
$0.40 September 30, 2020September 30, 2020October 15, 2020
6.375% Series E
$0.40 December 31, 2020December 31, 2020January 15, 2021
6.30% Series F
$0.39 March 31, 2020March 31, 2020April 15, 2020
6.30% Series F
$0.39 June 30, 2020June 30, 2020July 15, 2020
6.30% Series F
$0.39 September 30, 2020September 30, 2020October 15, 2020
6.30% Series F
$0.39 December 31, 2020December 31, 2020January 15, 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 the Company’s common shares at the time of redemption or the Company’s 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 December 31, 2020, 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 its executive officers. 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.
As of December 31, 2020 and 2019, the Operating Partnership had 127,111 and 236,351 LTIP units outstanding, respectively. As of December 31, 2020, all of such LTIP units outstanding have vested. Vested LTIP units may be converted to common units of the Operating Partnership, which in turn can be redeemed for common shares or cash 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 December 31, 2020 and 2019, the Operating Partnership had 133,605 OP units held by third parties, excluding LTIP units.
Note 8. Share-Based Compensation Plan
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. The Plan provides for the grant of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards. Share awards under the Plan vest over a period determined by the Board of Trustees, generally over three to five years. The Company pays or accrues for dividends on share-based awards. All share awards are subject to full or partial accelerated vesting upon a change in control and upon death or disability or certain other employment termination events as set forth in the award agreements. As of December 31, 2020, there were 1,199,767 common shares available for issuance under the Plan.
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Service Condition Share Awards
From time to time, the Company awards restricted common shares under the Plan to members of the Board of Trustees, officers and employees. These shares generally vest over three to five years based on continued service or employment.
The following table provides a summary of service condition restricted share activity as of December 31, 2020:
SharesWeighted-Average
Grant Date
Fair Value
Unvested at January 1, 2018137,105 $30.05 
Granted52,609 $36.86 
Vested(61,982)$31.35 
Forfeited $ 
Unvested at December 31, 2018127,732 $32.22 
Granted88,430 $32.64 
Vested(66,276)$30.20 
Forfeited(707)$32.70 
Unvested at December 31, 2019149,179 $33.37 
Granted390,242 $23.62 
Vested(72,824)$33.13 
Forfeited(6,787)$27.68 
Cancelled(217,083)$25.53 
Unvested at December 31, 2020242,727 $24.94 
The fair value of each of these service condition restricted share awards is determined based on the closing price of the Company’s common shares on the grant date and compensation expense is recognized on a straight-line basis over the vesting period. In March 2020, the Company cancelled the February 2020 service condition share award (retention grant) and as a result accelerated and recognized an expense of $5.5 million. For the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $8.1 million, $2.4 million, and $2.0 million respectively, of share-based compensation expense related to these service condition restricted shares in the accompanying consolidated statements of operations and comprehensive income. As of December 31, 2020, there was $3.6 million of total unrecognized share-based compensation expense related to unvested restricted shares. The unrecognized share-based compensation expense is expected to be recognized over the weighted-average remaining vesting period of 2.3 years.
Performance-Based Equity Awards
On December 13, 2013, the Board of Trustees approved a target award of 252,088 performance-based equity awards to officers and employees of the Company. The awards vested based on the extent to which the performance criteria had been met, on January 1, 2016, 2017, 2018, 2019 and 2020. The actual number of common shares that vested was based on the two performance criteria defined in the award agreements for the period of performance beginning on the grant date and ending on the applicable vesting date. In January 2016, the Company issued 25,134 of common shares which represented achieving 49% of the 50,418 target number of shares for that measurement period. In January 2017, the Company issued 12,285 of common shares which represented achieving 25% of the 49,914 target number of shares for that measurement period. In January 2018, the Company issued 72,236 of common shares which represented achieving 145% of the 49,914 target number of shares for that measurement period. In January 2019, the Company issued 35,471 of common shares which represented achieving 71% of the 49,914 target number of shares for that measurement period. In February 2020, the Company issued 27,881 of common shares which represented achieving 56% of the 49,914 target number of shares for that measurement period.
On February 11, 2015, the Board of Trustees approved a target award of 44,962 performance-based equity awards to officers and employees of the Company. In January 2018, these awards vested and the Company issued 14,089 and 2,501 common shares to officers and non-executive management employees, respectively. The actual number of common shares that vested was based on the three performance criteria defined in the award agreements for the period of performance from January 1, 2015 through December 31, 2017.
On July 27, 2015, a target award of 771 performance-based equity awards was granted to an employee of the Company. In January 2018, these awards vested and the Company issued 1,079 common shares to the employee. The actual number of common shares that vested was based on the three performance criteria defined in the award agreement for the period of performance from January 1, 2016 through December 31, 2017.
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On February 10, 2016, the Board of Trustees approved a target award of 100,919 performance-based equity awards to officers and employees of the Company. In January 2019, these awards vested and the Company issued 142,173 and 31,146 common shares to officers and employees, respectively. The actual number of common shares that vested was based on the three performance criteria defined in the award agreements for the period of performance from January 1, 2016 through December 31, 2018.
On February 15, 2017, the Board of Trustees approved a target award of 81,939 performance-based equity awards to officers and employees of the Company. In January 2020, these awards vested and the Company issued 1,972 and 405 common shares to officers and employees, respectively. The actual number of common shares that vested was based on the two performance criteria defined in the award agreements for the period of performance from January 1, 2017 through December 31, 2019.
On February 14, 2018, the Board of Trustees approved a target award of 78,918 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2021. The actual number of common shares that ultimately vest will be from 0% to 200% of the target award and will be determined in 2021 based on the two performance criteria defined in the award agreements for the period of performance from January 1, 2018 through December 31, 2020.
On February 13, 2019, the Board of Trustees approved a target award of 126,891 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2022. The actual number of common shares that ultimately vest will be from 0% to 200% of the target award and will be determined in 2022 based on the two performance criteria defined in the award agreements for the period of performance from January 1, 2019 through December 31, 2021.
On February 12, 2020, the Board of Trustees approved a target award of 161,777 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2023. The actual number of common shares that ultimately vest will be from 0% to 200% of the target award and will be determined in 2023 based on the performance criteria defined in the award agreements for the period of performance from January 1, 2020 through December 31, 2022.
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The grant date fair value of the performance awards, with market conditions, were determined using a Monte Carlo simulation method with the following assumptions (dollars in millions):
Performance Award Grant DatePercentage of Total AwardGrant Date Fair Value by Component ($ in millions)VolatilityInterest RateDividend Yield
December 13, 2013
Relative Total Shareholder Return50.00%$4.729.00%
0.34% - 2.25%
2.40%
Absolute Total Shareholder Return50.00%$2.929.00%
0.34% - 2.25%
2.40%
February 11, 2015
Relative Total Shareholder Return30.00%$0.922.00%1.02%2.50%
Absolute Total Shareholder Return40.00%$0.722.00%1.02%2.50%
EBITDA Comparison30.00%$0.722.00%1.02%2.50%
July 27, 2015
Relative Total Shareholder Return30.00%$(1)22.00%0.68%2.50%
Absolute Total Shareholder Return40.00%$(1)22.00%0.68%2.50%
EBITDA Comparison30.00%$(1)22.00%0.68%2.50%
February 10, 2016
Relative Total Shareholder Return70.00%$1.625.00%0.71%3.00%
Absolute Total Shareholder Return15.00%$0.225.00%0.71%3.00%
EBITDA Comparison15.00%$0.425.00%0.71%3.00%
February 15, 2017
Relative and Absolute Total Shareholder Return
65.00% / 35.00%
$2.728.00%1.27%5.60%
February 14, 2018
Relative and Absolute Total Shareholder Return
65.00% / 35.00%
$3.528.00%2.37%4.70%
February 13, 2019
Relative and Absolute Total Shareholder Return
65.00% / 35.00%
$4.526.00%2.52%4.20%
February 12, 2020
Relative Total Shareholder Return100%$4.923.40%1.41%%
(1)Amounts round to zero.
In the table above, the Relative Total Shareholder Return and Absolute Total Shareholder Return components are market conditions as defined by ASC 718. The EBITDA Comparison component is a performance condition as defined by ASC 718, and, therefore, compensation expense related to this component will be reassessed at each reporting date based on the Company's estimate of the probable level of achievement, and the accrual of compensation expense will be adjusted as appropriate.
Dividends on unvested performance-based equity awards accrue over the vesting period and will be paid on the actual number of shares that vest at the end of the applicable period. The Company recognizes compensation expense on a straight-
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line basis through the vesting date. As of December 31, 2020, there was approximately $4.8 million of unrecognized compensation expense related to these performance-based equity awards which will be recognized over the weighted-average remaining vesting period of 1.7 years. For the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $4.1 million, $4.8 million and $3.2 million, respectively, in expense related to these awards.
Long-Term Incentive Partnership Units
LTIP units, which are also referred to as profits interest units, may be issued to eligible participants for the performance of services to or for the benefit of the Operating Partnership. LTIP units are a class of partnership unit in the Operating Partnership and receive, whether vested or not, the same per-unit profit distributions as the other outstanding units in the Operating Partnership, which equal per-share distributions on common shares. LTIP units are allocated their pro-rata share of the Company's net income (loss). Vested LTIP units may be converted by the holder, at any time, into an equal number of common Operating Partnership units and thereafter will possess all of the rights and interests of a common Operating Partnership unit, including the right to redeem the common Operating Partnership unit for a common share in the Company or cash, at the option of the Operating Partnership.
As of December 31, 2020, 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 December 13, 2013, the Board of Trustees approved a grant of 226,882 LTIP Class B units to executive officers of the Company. These LTIP units were subject to time-based vesting in five equal annual installments beginning January 1, 2016 and ending on January 1, 2020. The fair value of each award was determined based on the closing price of the Company’s common shares on the grant date of $29.19 per unit. The aggregate grant date fair value of the LTIP Class B units was $6.6 million.
On February 12, 2020, the Board of Trustees granted 415,818 LTIP Class B units to executive officers. 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 redeemed for common shares.
As of December 31, 2020, the Company had 127,111 LTIP units outstanding. As of December 31, 2020, all of such LTIP units outstanding have vested.
For the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $10.6 million, $1.1 million, and $1.1 million respectively, in expense related to these LTIP units. As of December 31, 2020, there was no unrecognized share-based compensation expense related to 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
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gains) to its shareholders. It is the Company's current intention to adhere to these requirements and maintain the Company's qualification for taxation as a REIT. 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. However, as a REIT, the Company is still 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, taxable income of TRSs, including our TRS lessees, are subject to federal, state and local income taxes.
For federal income tax purposes, the cash distributions paid to the Company’s common shareholders and preferred shareholders may be characterized as ordinary income, return of capital (generally non-taxable) or capital gains. Tax law permits certain characterization of distributions which could result in differences between cash basis and tax basis distribution amounts.
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The following characterizes distributions paid per common share and preferred share on a tax basis for the years ended December 31, 2020, 2019 and 2018:
202020192018
Amount%Amount%Amount%
Common Shares:
Ordinary non-qualified income$  %$0.5609 30.03 %$1.2040 77.57 %
Qualified dividend  %0.0069 0.37 %0.3482 22.43 %
Capital gain0.0100 33.33 %1.3000 69.60 %  %
Return of capital0.0200 66.67 %  %  %
Total$0.0300 100.00 %$1.8678 100.00 %$1.5522 100.00 %
Series C Preferred Shares:
Ordinary non-qualified income$  %$0.6100 30.03 %$1.2605 77.57 %
Qualified dividend  %0.0075 0.37 %0.3645 22.43 %
Capital gain0.4063 33.34 %1.4138 69.60 %  %
Return of capital0.8125 66.66 %  %  %
Total$1.2188 100.00 %$2.0313 100.00 %$1.6250 100.00 %
Series D Preferred Shares:
Ordinary non-qualified income$  %$0.5982 30.03 %$1.2363 77.57 %
Qualified dividend  %0.0074 0.37 %0.3575 22.43 %
Capital gain0.3984 33.33 %1.3866 69.60 %  %
Return of capital0.7969 66.67 %  %  %
Total$1.1953 100.00 %$1.9922 100.00 %$1.5938 100.00 %
Series E Preferred Shares: (1)
Ordinary non-qualified income$  %$0.5982 30.03 %$  %
Qualified dividend  %0.0074 0.37 %  %
Capital gain0.3984 33.33 %1.3866 69.60 %  %
Return of capital0.7969 66.67 %  %  %
Total$1.1953 100.00 %$1.9922 100.00 %$  %
Series F Preferred Shares: (1)
Ordinary non-qualified income$  %$0.5912 30.03 %$  %
Qualified dividend  %0.0073 0.37 %  %
Capital gain0.3938 33.34 %1.3703 69.60 %  %
Return of capital0.7875 66.66 %  %  %
Total$1.1813 100.00 %$1.9688 100.00 %$  %
(1) Issued upon completion of the Company's merger with LaSalle on November 30, 2018.
Of the common distribution declared on December 15, 2017 and paid on January 12, 2018, $0.3800 was treated as a 2018 distribution for tax purposes. The preferred share distributions declared on December 15, 2017 and paid on January 12, 2018 were treated as 2018 distributions for tax purposes.
Of the common distributions declared on November 19, 2018 and December 14, 2018 and paid on January 15, 2019, $0.3478 was treated as a 2019 distribution for tax purposes. The preferred share distributions declared on December 14, 2018 and paid on January 15, 2019, $0.4063 per Series C Preferred Share, $0.3984 per Series D Preferred Share, $0.3984 per Series E Preferred Share and $0.3938 per Series F Preferred Share, were treated as 2019 distributions for tax purposes.

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Of the common distribution declared on December 16, 2019 and paid on January 15, 2020, $0.3800 was treated as a 2019 distribution for tax purposes. The preferred share distributions declared on December 16, 2019 and paid on January 15, 2020 were treated as 2019 distributions for tax purposes.
Of the common distribution declared on December 15, 2020 and paid on January 15, 2021, $0.0100 will be treated as a 2021 distribution for tax purposes. The preferred share distributions declared on December 15, 2020 and paid on January 15, 2021 were treated as 2021 distributions for tax purposes.
The Company's provision (benefit) for income taxes consists of the following (in thousands):
For the year ended December 31,
202020192018
Federal
Current$(127)$3,061 $1,696 
Deferred(6,266)(106)(248)
State and local
Current668 3,938 360 
Deferred2,028 (1,721)(66)
Income tax expense (benefit)$(3,697)$5,172 $1,742 
A reconciliation of the statutory federal tax expense (benefit) to the Company's income tax expense (benefit) is as follows (in thousands):
For the year ended December 31,
202020192018
Statutory federal tax expense (benefit)$(72,098)$25,388 $3,177 
State income tax expense (benefit), net of federal tax expense (benefit)(5,046)943 300 
REIT income not subject to tax53,311 (21,522)(1,828)
Change in valuation allowance20,056   
Other80 363 93 
Income tax expense (benefit), net$(3,697)$5,172 $1,742 
The Company has provided a valuation allowance against its federal and state deferred tax asset at December 31, 2020 and a valuation allowance against certain state deferred tax assets as of December 31, 2019. The Company has recorded a receivable of $6.9 million representing the portion of the current year loss that will be carried back to prior years in which the Company had taxable income. A valuation allowance has been recognized on the current year loss in excess of the amount that will be carried back and is due to the uncertainty of realizing the loss in future years.
The significant components of the Company's deferred tax assets as of December 31, 2020 and 2019 consisted of the following (in thousands):
December 31, 2020December 31, 2019
Deferred Tax Assets:
Net operating loss carryover$18,309 $723 
State taxes and other1,631 1,158 
Depreciation980 1,668 
Total deferred tax asset before valuation allowance$20,920 $3,549 
Valuation allowance(20,920)(864)
Deferred tax asset net of valuation allowance$ $2,685 
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local jurisdictions, where applicable. As of December 31, 2020 and 2019, the statute of limitations remains open for all major jurisdictions for tax years dating back to 2016 and 2015, respectively.
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Note 10. Earnings Per Share
The following is a reconciliation of basic and diluted earnings per common share (in thousands, except share and per-share data):
 For the year ended December 31,
 202020192018
Numerator:
Net income (loss) attributable to common shareholders$(424,285)$82,886 $(4,073)
Less: dividends paid on unvested share-based compensation(8)(294)(332)
Net income (loss) available to common shareholders$(424,293)$82,592 $(4,405)
Denominator:
Weighted-average number of common shares — basic130,610,015 130,471,670 74,286,307 
Effect of dilutive share-based compensation 246,636  
Weighted-average number of common shares — diluted130,610,015 130,718,306 74,286,307 
Net income (loss) per share available to common shareholders — basic$(3.25)$0.63 $(0.06)
Net income (loss) per share available to common shareholders — diluted$(3.25)$0.63 $(0.06)
For the years ended December 31, 2020, 2019 and 2018, 600,436, zero, 343,941, respectively, 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 year ended December 31, 2020, 19,627,450 shares underlying the convertible debt 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 seven 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 years ended December 31, 2020, 2019, and 2018, combined base and incentive management fees were $9.4 million, $44.8 million and $24.5 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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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 December 31, 2020 and 2019, the Company had $12.0 million and $26.8 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 December 31, 2020, the following hotels were subject to leases as follows:
Lease PropertiesLease TypeLease Expiration Date
Hotel Monaco Washington DCOperating leaseNovember 2059
Argonaut HotelOperating leaseDecember 2059
Hotel Zelos San FranciscoOperating leaseJune 2097
Hotel Zephyr Fisherman's WharfOperating leaseFebruary 2062
Hotel Palomar Los Angeles Beverly HillsOperating leaseJanuary 2107(1)
Restaurant at Southernmost Beach ResortOperating leaseApril 2029
Hyatt Regency Boston HarborOperating leaseApril 2077
San Diego Mission Bay Resort (formerly Hilton San Diego Mission Bay Resort)Operating leaseJuly 2068
Paradise Point Resort & SpaOperating leaseMay 2050
Hotel VitaleOperating leaseMarch 2070(2)
Viceroy Santa Monica HotelOperating leaseSeptember 2065
The Westin Copley Place, BostonOperating leaseDecember 2077(3)
The Liberty, A Luxury Collection Hotel, BostonOperating leaseMay 2080
Hotel Zeppelin San FranciscoOperating and finance leaseJune 2089(4)
Harbor Court Hotel San FranciscoFinance leaseAugust 2052
The Roger New YorkFinance leaseDecember 2044
(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 consumer price index ("CPI") 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 years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):
For the year ended December 31,
202020192018
Fixed ground rent $17,220 $17,042 $8,318 
Variable ground rent4,924 14,689 6,201 
Total ground lease rent$22,144 $31,731 $14,519 
In January 2019, the Company acquired the ground lease underlying the land of the Solamar Hotel for $6.9 million.
Future maturity of lease liabilities for the Company's operating leases at December 31, 2020 were as follows (in thousands):
2021$18,541 
202218,849 
202318,034 
202418,119 
202518,203 
Thereafter1,127,864 
Total lease payments$1,219,610 
Less: Imputed interest(964,504)
Present value of lease liabilities$255,106 
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.
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Note 12. Supplemental Information to Statements of Cash Flows
 For the year ended December 31,
 202020192018
 (in thousands)
Interest paid, net of capitalized interest$90,655 $91,918 $48,658 
Interest capitalized$1,247 $347 $ 
Income taxes paid$3,469 $4,568 $4,047 
Non-Cash Investing and Financing Activities:
Distributions payable on common shares/units$1,749 $51,006 $36,201 
Distributions payable on preferred shares$7,558 $7,558 $7,558 
Issuance of common shares for Board of Trustees compensation$637 $740 $662 
Issuance of common shares for LTIP units redemption$2,831 $ $ 
Accrued additions and improvements to hotel properties$9,164 $3,192 $8,620 
Right of use assets obtained in exchange for lease liabilities$ $257,167 $— 
Purchase of ground lease$ $16,604 $ 
Write-off of fully depreciated building, furniture, fixtures and equipment$ $28,120 $ 
Write-off of deferred financing costs$1,979 $3,013 $ 
The Company also had the following transactions in connection with the LaSalle merger:
Issuance of common shares$ $ $2,144,057 
Issuance of Series E and F preferred shares$ $ $234,222 
Issuance of OP units$ $ $4,665 
Exchange of LaSalle shares as part of purchase price$ $ $346,544 
Note 13. Subsequent Events
In January 2021, the Company entered into an agreement to assign certain rooftop wireless leases and grant long-term easements at 11 of the Company's properties. The Company received proceeds of approximately $12.0 million.
On February 3, 2021, the Company entered into an agreement to sell the Sir Francis Drake in San Francisco, California to an unaffiliated third-party. The Company expects to generate approximately $157.6 million of proceeds after customary closing costs. The Company expects the sale of the hotel to be completed in April 2021, subject to normal closing conditions, although no assurances can be given that the sales will be completed on these terms, or at all.
On February 9, 2021, the Company closed on a public offering of $250.0 million of 1.75% convertible notes. The convertible notes have terms identical to the Convertible Notes issued by the Company on December 15, 2020. The notes were sold at a 5.5% premium to par. In connection with the pricing of the notes, the Company entered into privately negotiated capped call transactions with certain of the underwriters, their respective affiliates and/or other counterparties. The Company used the net proceeds to reduce amounts outstanding under the Company’s senior unsecured revolving credit facility, unsecured term loans, and for general corporate purposes.
On February 18, 2021, the Company further amended its credit agreements and related documents governing the unsecured revolving credit facilities, term loan agreements and senior notes. The amendment is further discussed in "Note 5. Debt."
On February 18, 2021, the Board of Trustees granted awards of an aggregate of 319,947 service condition restricted common shares and target performance-based equity to executive officers and employees of the Company. These awards will vest over 3 years. The actual number of common shares to be issued under the performance-based equity awards will be determined in early 2024 and and will be based on certain performance criteria stipulated in the agreements for the period January 1, 2021 through December 31, 2023.
On February 18, 2021, the Board of Trustees granted awards of 600,097 LTIP Class B units to executive officers and 280,239 service condition restricted common shares to employees of the Company. These awards will vest ratably on January 1, 2023, 2024, 2025, and 2026.
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Note 14. Quarterly Operating Results (Unaudited)
The Company's unaudited consolidated quarterly operating data for the years ended December 31, 2020 and 2019 (in thousands, except per-share data) is below. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of quarterly results have been reflected in the data. It is also management's opinion, however, that quarterly operating data for hotel properties are not indicative of results to be achieved in succeeding quarters or years.
Year Ended December 31, 2020
First QuarterSecond QuarterThird QuarterFourth Quarter
Total revenues$269,107 $22,592 $76,980 $74,209 
Net income (loss)42,068 (130,914)(130,560)(173,187)
Net income (loss) attributable to the Company41,949 (130,513)(130,307)(172,858)
Net income (loss) attributable to common shareholders33,810 (138,652)(138,446)(180,997)
Net income (loss) per share available to common shareholders, basic$0.26 $(1.06)$(1.06)$(1.39)
Net income (loss) per share available to common shareholders, diluted$0.26 $(1.06)$(1.06)$(1.39)
Year Ended December 31, 2019
First QuarterSecond QuarterThird QuarterFourth Quarter
Total revenues$367,169 $442,083 $423,552 $379,409 
Net income (loss)5,655 60,518 29,980 19,572 
Net income (loss) attributable to the Company5,635 60,373 29,891 19,543 
Net income (loss) attributable to common shareholders(2,504)52,234 21,752 11,404 
Net income (loss) per share available to common shareholders, basic$(0.02)$0.40 $0.17 $0.08 
Net income (loss) per share available to common shareholders, diluted$(0.02)$0.40 $0.17 $0.08 
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Pebblebrook Hotel Trust
Schedule III--Real Estate and Accumulated Depreciation
As of December 31, 2020
(In thousands)
Initial CostsGross Amount at End of Year
DescriptionLandBuilding and ImprovementsFurniture, Fixtures and Equipment
Cost Capitalized Subsequent to Acquisition (1)
LandBuilding and ImprovementsFurniture, Fixtures and EquipmentTotalAccumulated DepreciationNet Book ValueYear of Original ConstructionDate of AcquisitionDepreciation Life
Sir Francis Drake$22,500 $60,547 $6,953 $40,035 $22,500 $89,147 $18,388 $130,035 $39,823 $90,212 19286/22/2010
3-40 years
Hotel Monaco Washington DC 60,630 2,441 21,445  77,026 7,490 84,516 26,579 57,937 18399/9/2010
3-40 years
Skamania Lodge7,130 44,987 3,523 25,953 9,881 62,195 9,517 81,593 20,800 60,793 199311/3/2010
3-40 years
Le Meridien Delfina Santa Monica18,784 81,580 2,295 18,654 18,784 92,417 10,112 121,313 34,357 86,956 197211/19/2010
3-40 years
Sofitel Philadelphia at Rittenhouse Square18,000 64,256 4,639 20,331 18,000 75,964 13,262 107,226 29,348 77,878 200012/3/2010
3-40 years
Argonaut Hotel 79,492 4,247 8,826  83,756 8,809 92,565 29,442 63,123 19072/16/2011
3-40 years
The Westin San Diego Gaslamp Quarter25,537 86,089 6,850 38,843 25,537 115,866 15,916 157,319 39,151 118,168 19874/6/2011
1-40 years
Hotel Monaco Seattle10,105 38,888 2,073 12,349 10,105 45,580 7,730 63,415 18,768 44,647 19694/7/2011
3-40 years
Mondrian Los Angeles20,306 110,283 6,091 31,699 20,306 127,584 20,489 168,379 45,311 123,068 19595/3/2011
3-40 years
W Boston19,453 63,893 5,887 16,747 19,453 76,383 10,144 105,980 24,287 81,693 20096/8/2011
2-40 years
Hotel Zetta San Francisco7,294 22,166 290 17,623 7,294 35,337 4,742 47,373 12,945 34,428 19134/4/2012
3-40 years
Hotel Vintage Seattle8,170 23,557 706 8,911 8,170 29,823 3,351 41,344 10,347 30,997 19227/9/2012
3-40 years
Hotel Vintage Portland6,222 23,012 1,093 16,264 6,222 35,024 5,345 46,591 13,311 33,280 18947/9/2012
3-40 years
W Los Angeles - West Beverly Hills24,403 93,203 3,600 31,169 24,403 118,907 9,065 152,375 34,591 117,784 19698/23/2012
3-40 years
Hotel Zelos San Francisco 63,430 3,780 13,166  74,582 5,794 80,376 19,559 60,817 190710/25/2012
3-40 years
Embassy Suites San Diego Bay - Downtown20,103 90,162 6,881 36,081 20,103 117,487 15,637 153,227 34,336 118,891 19881/29/2013
3-40 years
The Hotel Zags8,215 37,874 1,500 7,379 8,215 43,605 3,148 54,968 10,466 44,502 19628/28/2013
3-40 years
Hotel Zephyr Fisherman's Wharf 116,445 3,550 40,919  153,485 7,429 160,914 38,410 122,504 196412/9/2013
3-40 years
Hotel Zeppelin San Francisco12,561 43,665 1,094 36,706 12,561 75,462 6,003 94,026 21,332 72,694 19135/22/2014
1-45 years
The Nines, a Luxury Collection Hotel, Portland18,493 92,339 8,757 12,531 18,493 98,896 14,731 132,120 28,245 103,875 19097/17/2014
3-40 years
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Pebblebrook Hotel Trust
Schedule III--Real Estate and Accumulated Depreciation
As of December 31, 2020
(In thousands)
Hotel Colonnade Coral Gables, Autograph Collection12,108 46,317 1,271 18,388 12,108 59,015 6,961 78,084 15,542 62,542 198911/12/2014
2-40 years
Hotel Palomar Los Angeles Beverly Hills 90,675 1,500 14,494  100,429 6,240 106,669 20,296 86,373 197211/20/2014
3-40 years
Revere Hotel Boston Common41,857 207,817 10,596 (43,700)17,367 180,892 18,311 216,570 44,071 172,499 197212/18/2014
3-40 years
LaPLaya Beach Resort & Club112,575 82,117 6,733 29,717 112,575 108,828 9,739 231,142 23,856 207,286 19685/21/2015
3-40 years
Hotel Zoe Fisherman's Wharf29,125 90,323 2,500 16,626 29,125 105,003 4,446 138,574 18,537 120,037 19906/11/2015
2-40 years
Villa Florence San Francisco on Union Square41,272 94,257 2,994 (29,935)30,496 72,264 5,828 108,588 8,378 100,210 190811/30/2018
3-40 years
Hotel Vitale 105,693 3,896 1,861  106,826 4,624 111,450 9,569 101,881 200511/30/2018
3-40 years
The Marker San Francisco45,243 68,244 5,453 1,803 45,243 69,287 6,213 120,743 7,567 113,176 1910/199511/30/2018
3-40 years
Hotel Spero39,363 64,804 11,235 709 39,363 65,134 11,614 116,111 6,836 109,275 1928/199911/30/2018
3-40 years
Chaminade Resort & Spa22,590 37,114 6,009 13,056 22,590 48,444 7,735 78,769 5,503 73,266 198511/30/2018
3-40 years
Harbor Court Hotel San Francisco 79,009 6,190 1,330  79,760 6,769 86,529 6,074 80,455 1926/199111/30/2018
3-40 years
Viceroy Santa Monica Hotel 91,442 5,257 10,327  99,407 7,619 107,026 8,326 98,700 1967/200211/30/2018
3-40 years
Le Parc Suite Hotel17,876 65,515 2,496 12,361 17,876 74,544 5,828 98,248 6,147 92,101 197011/30/2018
3-40 years
Montrose West Hollywood16,842 58,729 6,499 1,491 16,842 59,045 7,674 83,561 5,137 78,424 197611/30/2018
3-40 years
Chamberlain West Hollywood Hotel14,462 43,157 5,983 1,409 14,462 44,085 6,464 65,011 4,172 60,839 1970/200511/30/2018
3-40 years
Grafton on Sunset12,440 36,932 3,951 588 12,440 37,274 4,197 53,911 4,076 49,835 195411/30/2018
3-40 years
The Westin Copley Place, Boston 291,754 35,780 5,304  295,327 37,511 332,838 26,282 306,556 198311/30/2018
3-40 years
The Liberty, A Luxury Collection Hotel, Boston 195,797 15,126 3,279  197,637 16,565 214,202 15,056 199,146 1851/200711/30/2018
3-40 years
Hyatt Regency Boston Harbor 122,344 6,862 7,533  129,294 7,445 136,739 9,780 126,959 199311/30/2018
3-40 years
George Hotel15,373 65,529 4,489 366 15,373 65,773 4,611 85,757 5,787 79,970 192811/30/2018
3-40 years
Viceroy Washington DC18,686 60,927 2,838 8,579 18,686 66,469 5,875 91,030 5,124 85,906 196211/30/2018
3-40 years
Hotel Zena Washington DC19,035 60,402 2,066 27,810 19,035 84,350 5,928 109,313 3,884 105,429 197211/30/2018
3-40 years
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Pebblebrook Hotel Trust
Schedule III--Real Estate and Accumulated Depreciation
As of December 31, 2020
(In thousands)
Paradise Point Resort & Spa 199,304 22,032 8,556 21 204,573 25,298 229,892 17,977 211,915 196211/30/2018
3-40 years
Hilton San Diego Gaslamp Quarter33,017 131,926 7,741 1,347 33,017 132,937 8,077 174,031 11,049 162,982 200011/30/2018
3-40 years
Solamar Hotel 74,768 8,830 24,507 23,472 75,089 9,544 108,105 7,748 100,357 200511/30/2018
3-40 years
L'Auberge Del Mar33,304 92,297 5,393 5,205 33,304 94,600 8,295 136,199 6,713 129,486 198911/30/2018
3-40 years
San Diego Mission Bay Resort 80,733 9,458 26,388 30 99,545 17,004 116,579 10,465 106,114 196211/30/2018
3-40 years
The Heathman Hotel14,243 38,694 7,062 1,284 14,243 39,636 7,404 61,283 4,298 56,985 192711/30/2018
3-40 years
Southernmost Beach Resort86,131 238,470 8,366 6,744 86,131 243,723 9,857 339,711 17,470 322,241 1958-200811/30/2018
3-40 years
The Marker Resort Key West Harbor Resort25,463 66,903 2,486 3,400 25,463 69,291 3,498 98,252 5,200 93,052 201411/30/2018
3-40 years
The Roger New York 42,882 3,060 (16,946) 25,775 3,221 28,996 3,999 24,997 1930/199811/30/2018
3-40 years
Hotel Chicago Downtown, Autograph Collection39,576 114,014 7,608 (17,618)39,576 95,727 8,277 143,580 8,996 134,584 199811/30/2018
3-40 years
The Westin Michigan Avenue Chicago44,983 103,160 23,744 4,710 44,983 105,970 25,644 176,597 12,964 163,633 1963/197211/30/2018
3-40 years
$982,840 $4,538,547 $331,754 $606,604 $973,848 $4,964,479 $521,418 $6,459,745 $898,287 $5,561,458 

(1) Disposals are reflected as reductions to cost capitalized subsequent to acquisition.
(2) The Company had no encumbrances on any of its hotel properties at December 31, 2020.

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Pebblebrook Hotel Trust
Schedule III--Real Estate and Accumulated Depreciation - Continued
As of December 31, 2020
(In thousands)
Reconciliation of Real Estate and Accumulated Depreciation:
Reconciliation of Real Estate:
Balance at December 31, 2017$2,904,072 
          Acquisitions4,120,641 
          Capital expenditures95,348 
          Disposal of Assets(42,438)
Balance at December 31, 2018$7,077,623 
          Acquisitions23,472 
          Capital expenditures159,574 
          Disposal of Assets(503,383)
          Other(24,649)
Balance at December 31, 2019$6,732,637 
          Capital expenditures115,850 
          Disposal of Assets(314,186)
          Other(74,556)
Balance at December 31, 2020$6,459,745 
Reconciliation of Accumulated Depreciation:
Balance at December 31, 2017$447,622 
          Depreciation107,496 
          Disposal of Assets(11,688)
Balance at December 31, 2018$543,430 
          Depreciation226,953 
          Disposal of Assets(35,061)
Balance at December 31, 2019$735,322 
          Depreciation223,286 
          Disposal of Assets(60,321)
Balance at December 31, 2020$898,287 
The aggregate cost of properties for federal income tax purposes is approximately $6.2 billion as of December 31, 2020.

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