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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM
10-Q
 
 
 


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

For the quarterly period ended March 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)
 
 
 
 
 
Maryland
 
 
27-1055421
(State of Incorporation
or Organization)
 
 
(I.R.S. Employer
Identification No.)
 
 
 
4747 Bethesda Avenue
Suite 1100
 

Bethesda,
Maryland
 
20814
(Address of Principal Executive Offices)
 
(Zip Code)
(240)
507-1300
(Registrant’s telephone number, including area code)
 

Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Shares, $0.01 par value per share
 
PEB
 
New York Stock Exchange
6.50% Series C Cumulative Redeemable Preferred Shares
 
PEB-PC
 
New York Stock Exchange
6.375% Series D Cumulative Redeemable Preferred Shares
 
PEB-PD
 
New York Stock Exchange
6.375% Series E Cumulative Redeemable Preferred Shares
 
PEB-PE
 
New York Stock Exchange
6.30% Series F Cumulative Redeemable Preferred Shares
 
PEB-PF
 
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☑  Yes     No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
 
Non-accelerated filer
(do not check if a smaller reporting company)
 
Smaller reporting company
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at April 30, 2020
Common shares of beneficial interest ($0.01 par value per share)
 
130,756,252



Pebblebrook Hotel Trust
TABLE OF CONTENTS
 
 
 
 
Page
PART I. FINANCIAL INFORMATION
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.


Pebblebrook Hotel Trust
Consolidated Balance Sheets
(In thousands, except share and per-share data)
 
March 31,
2020
 
December 31, 2019
 
(Unaudited)
 
 
ASSETS
 
 
 
Investment in hotel properties, net
$
6,106,943

 
$
6,332,587

Cash and cash equivalents
727,372

 
30,098

Restricted cash
19,396

 
26,777

Hotel receivables (net of allowance for doubtful accounts of $824 and $738, respectively)
24,707

 
49,619

Prepaid expenses and other assets
59,525

 
59,474

Total assets
$
6,937,943

 
$
6,498,555

LIABILITIES AND EQUITY
 
 
 
Debt
$
2,708,258

 
$
2,229,220

Accounts payable and accrued expenses
546,196

 
516,437

Deferred revenues
40,733

 
57,704

Accrued interest
5,686

 
4,694

Distribution payable
9,304

 
58,564

Total liabilities
3,310,177

 
2,866,619

Commitments and contingencies (Note 11)

 

Shareholders’ equity:
 
 
 
Preferred shares of beneficial interest, $.01 par value (liquidation preference $510,000 at March 31, 2020 and at December 31, 2019), 100,000,000 shares authorized; 20,400,000 shares issued and outstanding at March 31, 2020 and December 31, 2019
204

 
204

Common shares of beneficial interest, $.01 par value, 500,000,000 shares authorized; 130,563,226 shares issued and outstanding at March 31, 2020 and 130,484,956 shares issued and outstanding at December 31, 2019
1,306

 
1,305

Additional paid-in capital
4,075,727

 
4,069,410

Accumulated other comprehensive income (loss)
(78,980
)
 
(24,715
)
Distributions in excess of retained earnings
(391,950
)
 
(424,996
)
Total shareholders’ equity
3,606,307

 
3,621,208

Non-controlling interests
21,459

 
10,728

Total equity
3,627,766

 
3,631,936

Total liabilities and equity
$
6,937,943

 
$
6,498,555

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


3

Table of Contents

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

 
 
For the three months ended March 31,
 
 
2020
 
2019
Revenues:
 
 
 
 
Room
 
$
177,141

 
$
248,986

Food and beverage
 
67,092

 
86,750

Other operating
 
24,874

 
31,433

Total revenues
 
269,107

 
367,169

Expenses:
 
 
 
 
Hotel operating expenses:
 
 
 
 
Room
 
54,125

 
67,375

Food and beverage
 
51,859

 
63,357

Other direct and indirect
 
95,470

 
106,075

Total hotel operating expenses
 
201,454

 
236,807

Depreciation and amortization
 
55,828

 
54,302

Real estate taxes, personal property taxes, property insurance, and ground rent
 
29,766

 
31,437

General and administrative
 
22,613

 
11,126

Impairment loss
 
20,570

 

(Gain) loss on sale of hotel properties
 
(117,448
)
 

(Gain) loss and other operating expenses
 
1,433

 
3,560

Total operating expenses
 
214,216

 
337,232

Operating income (loss)
 
54,891

 
29,937

Interest expense
 
(23,591
)
 
(29,328
)
Other
 
24

 
9

Income (loss) before income taxes
 
31,324

 
618

Income tax (expense) benefit
 
10,744

 
5,037

Net income (loss)
 
42,068

 
5,655

Net income (loss) attributable to non-controlling interests
 
119

 
20

Net income (loss) attributable to the Company
 
41,949

 
5,635

Distributions to preferred shareholders
 
(8,139
)
 
(8,139
)
Net income (loss) attributable to common shareholders
 
$
33,810

 
$
(2,504
)
Net income (loss) per share available to common shareholders, basic
 
$
0.26

 
$
(0.02
)
Net income (loss) per share available to common shareholders, diluted
 
$
0.26

 
$
(0.02
)
Weighted-average number of common shares, basic
 
130,555,846

 
130,431,074

Weighted-average number of common shares, diluted
 
130,678,908

 
130,431,074


4

Table of Contents

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

 
 
For the three months ended March 31,
 
 
2020
 
2019
 
 
 
 
 
Comprehensive Income:
 
 
 
 
Net income (loss)
 
$
42,068

 
$
5,655

Other comprehensive income (loss):
 
 
 
 
Unrealized gain (loss) on derivative instruments
 
(54,265
)
 
(9,039
)
Comprehensive income (loss)
 
(12,197
)
 
(3,384
)
Comprehensive income (loss) attributable to non-controlling interests
 
(35
)
 
(6
)
Comprehensive income (loss) attributable to the Company
 
$
(12,162
)
 
$
(3,378
)
The accompanying notes are an integral part of these financial statements.


5

Table of Contents


Pebblebrook Hotel Trust
Consolidated Statements of Equity
(In thousands, except share data)
(Unaudited)
 
 
Preferred Shares
 
Common Shares
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
 Distributions in Excess of Retained Earnings
 
Total Shareholders' Equity
 
Non-Controlling Interests
 
Total Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2018
 
20,400,000

 
$
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

 
1,570

 

 

 
1,572

 
276

 
1,848

Distributions on common shares/units
 

 

 

 

 

 

 
(49,771
)
 
(49,771
)
 
(141
)
 
(49,912
)
Distributions on preferred shares
 

 

 

 

 

 

 
(8,139
)
 
(8,139
)
 

 
(8,139
)
Other comprehensive income (loss):
 

 

 

 

 

 

 

 


 
 
 


Unrealized gain (loss) on derivative instruments
 

 

 

 

 

 
(9,039
)
 

 
(9,039
)
 

 
(9,039
)
Net income (loss)
 

 

 

 

 

 

 
5,635

 
5,635

 
20

 
5,655

Balance at March 31, 2019
 
20,400,000

 
$
204

 
130,484,956

 
$
1,305

 
$
4,063,830

 
$
(7,709
)
 
$
(361,081
)
 
$
3,696,549

 
$
10,250

 
$
3,706,799

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
 
20,400,000

 
$
204

 
130,484,956

 
$
1,305

 
$
4,069,410

 
$
(24,715
)
 
$
(424,996
)
 
$3,621,208
 
$
10,728

 
$3,631,936
Issuance of shares, net of offering costs
 

 

 

 

 
(85
)
 

 

 
(85
)
 

 
(85
)
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
 

 

 
102,249

 
1

 
7,020

 

 

 
7,021

 
10,616

 
17,637

Distribution on common shares/units
 

 

 

 

 

 

 
(764
)
 
(764
)
 
(4
)
 
(768
)
Distribution on preferred shares
 

 

 

 

 

 

 
(8,139
)
 
(8,139
)
 

 
(8,139
)
Other comprehensive income (loss):
 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative instruments
 

 

 

 

 

 
(54,265
)
 

 
(54,265
)
 

 
(54,265
)
Net income (loss)
 

 

 

 

 

 

 
41,949

 
41,949

 
119

 
42,068

Balance at March 31, 2020
 
20,400,000

 
$
204

 
130,563,226

 
$
1,306

 
$
4,075,727

 
$
(78,980
)
 
$
(391,950
)
 
$3,606,307
 
$21,459
 
$3,627,766

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

6

Table of Contents


Pebblebrook Hotel Trust
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
For the three months ended March 31,
 
2020
 
2019
Operating activities:
 
 
 
Net income (loss)
$
42,068

 
$
5,655

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
55,828

 
54,302

Share-based compensation
17,637

 
1,848

Amortization of deferred financing costs, non-cash interest and mortgage loan premiums
3,594

 
1,488

(Gain) loss on sale of hotel properties
(117,448
)
 

Impairment and other losses
20,570

 

Non-cash ground rent
1,574

 
1,520

Other
146

 
2,222

Changes in assets and liabilities:
 
 
 
Hotel receivables
23,386

 
(12,793
)
Prepaid expenses and other assets
(5,200
)
 
54

Accounts payable and accrued expenses
(26,326
)
 
4,784

Deferred revenues
(14,337
)
 
(2,742
)
Net cash provided by (used in) operating activities
1,492

 
56,338

Investing activities:
 
 
 
Improvements and additions to hotel properties
(50,099
)
 
(43,344
)
Proceeds from sales of hotel properties
320,036

 
245,096

Purchase of corporate office equipment, software, and furniture

 
(6
)
Net cash provided by (used in) investing activities
269,937

 
201,746

Financing activities:
 
 
 
Payment of offering costs — common and preferred shares
(85
)
 
(275
)
Payment of deferred financing costs

 
(105
)
Borrowings under revolving credit facilities
760,115

 
1,893

Repayments under revolving credit facilities
(281,947
)
 
(171,893
)
Repayments of debt

 
(70,614
)
Repurchases of common shares
(1,255
)
 
(4,009
)
Distributions — common shares/units
(50,027
)
 
(35,493
)
Distributions — preferred shares
(8,139
)
 
(8,139
)
Repayments of refundable membership deposits
(198
)
 
(189
)
Net cash provided by (used in) financing activities
418,464

 
(288,824
)
Net change in cash and cash equivalents and restricted cash
689,893

 
(30,740
)
Cash and cash equivalents and restricted cash, beginning of year
56,875

 
107,811

Cash and cash equivalents and restricted cash, end of period
$
746,768

 
$
77,071

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

7


PEBBLEBROOK HOTEL TRUST
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization
Pebblebrook Hotel Trust (the "Company") was formed as a Maryland real estate investment trust in October 2009 to opportunistically acquire and invest in hotel properties located primarily in major United States cities, with an emphasis on major gateway coastal markets.
As of March 31, 2020, the Company owned 54 hotels with a total of 13,352 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; Nashville, Tennessee; 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 March 31, 2020, the Company owned 99.7% of the common limited partnership units issued by the Operating Partnership ("common units"). The remaining 0.3% of the common units are owned by the other limited partners of the Operating Partnership. For the Company to qualify 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, Management’s Plans and Liquidity
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 has been nearly eliminated. Following the government mandates and health official recommendations, the Company temporarily suspended operations at 46 of its 54 hotels and resorts and dramatically reduced staffing and expenses at the eight hotels that remain operational. Operations will remain suspended until state and local government restrictions and requirements are lifted and the Company can be confident that reopening the hotels will not jeopardize the health and safety of guests, employees and communities. COVID-19 has had a negative impact on the Company's operations and financial results to date, and yet the full financial impact of the reduction in hotel demand caused by the pandemic and suspension of operations at the Company's hotels cannot be reasonably estimated at this time due to uncertainty as to its severity and duration. The Company expects that the COVID-19 pandemic may ultimately have a significant impact on the Company's results of operations, financial position and cash flow in 2020. As a result, 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 for the first quarter of 2020 and likely the remainder of 2020, reduced planned capital expenditures, reduced the compensation of its executive officers, board of trustees and employees, and, working closely with its hotel operating partners, significantly reduced its hotels' operating expenses. In an effort to protect the health and safety of the Company's employees, the Company adopted an optional remote-work policy and other physical distancing policies at its corporate office and it 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.
As of March 31, 2020, the Company maintained unrestricted cash of $727.4 million. The Company has no scheduled debt maturities until the fourth quarter of 2021 and all of its debt is unsecured. Management has evaluated the current business environment and its effect on the Company's results of operations, the actions the Company has taken and the other options available to the Company and has determined that the Company has sufficient liquidity in the event of a prolonged decline in hotel demand without additional equity or debt financing or property sales.
Although the Company was in compliance with all its debt covenants as of March 31, 2020, management has determined it is probable the Company will violate certain financial covenants under its credit agreements within the next twelve months if covenant waivers are not obtained. If the Company were to violate one or more financial covenants, the lenders could declare the Company in default and could accelerate the amounts due under a portion or all of the Company’s outstanding debt. The Company is actively negotiating the terms for waivers with its lenders and the Company believes it will receive such waivers before any covenants are violated. However, because any waivers would be granted at the sole discretion of the lenders, the Company has determined that there is substantial doubt about the Company’s ability to continue as a going concern for one

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year after the date the financial statements are issued. U.S. generally accepted accounting principles (“U.S. GAAP”) requires that in making this determination, the Company could not consider future fundraising activities, whether through equity or debt offerings or dispositions of hotel properties, or the likelihood of obtaining covenant waivers, all of which are outside of the Company's control. Management believes that obtaining the waivers currently being negotiated will remove the reason for the determination of substantial doubt, however, there can be no assurance that the Company will be able to obtain waivers on acceptable terms or at all. Any covenant waiver may lead to increased costs, increased interest rates, additional restrictive covenants and other possible lender protections. In addition to or in lieu of obtaining waivers as described above, the Company believes it could raise additional funds if needed through a combination of hotel dispositions or debt or equity financings.

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP and in conformity with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) applicable to interim financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of equity and consolidated statements of cash flows for the periods presented. Interim results are not necessarily indicative of full-year performance, as a result of the impact of seasonal and other short-term variations and the acquisitions and or dispositions of hotel properties. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The Company and its subsidiaries are separate legal entities and maintain records and books of account separate and apart from each other. The consolidated financial statements include all of the accounts of the Company and its subsidiaries and are presented in accordance with U.S. GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior period's financial statements to conform to the current year presentation.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management’s best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.
Fair Value Measurements
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value are as follows:

1.
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
2.
Level 2 – Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable.
3.
Level 3 – Model-derived valuations with unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The Company's financial instruments include cash and cash equivalents, restricted cash, accounts payable and accrued expenses. Due to their short maturities, the carrying amounts of these assets and liabilities approximate fair value. See Note 5 to the accompanying consolidated financial statements for disclosures on the fair value of debt and derivative instruments.

9


Investment in Hotel Properties
Upon acquisition of a 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 based on replacement costs, appraised values, and estimated fair values using methods similar to those used by independent appraisers and that use appropriate discount and/or capitalization rates and available market information. Hotel acquisitions are generally considered to be asset acquisitions defined by ASU 2017-01 and transaction costs related to asset acquisitions are capitalized. 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 an asset are recorded at cost and depreciated over their estimated useful lives. Assets under capital leases are recorded at the present value of the minimum lease payments. Repair and maintenance costs are expensed as incurred.
Hotel properties are recorded at cost and depreciated using the straight-line method over an estimated useful life of 10 to 40 years for buildings, land improvements, and building improvements and 1 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. Intangible assets arising from contractual arrangements are typically amortized over the life of the contract. The Company is required to make subjective assessments as to the useful lives and classification of properties for purposes of determining the amount of depreciation expense to reflect each year with respect to the assets. These assessments may impact the Company’s results of operations.
The Company reviews its investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, when a hotel property experiences a current or projected loss from operations, when it becomes more likely than not that a hotel property will be sold before the end of its useful life, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, the Company performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying value of the asset, an adjustment to reduce the carrying value to the related hotel’s estimated fair market value is recorded and an impairment loss is recognized. In the evaluation of impairment of its hotel properties, the Company makes many assumptions and estimates including projected cash flows both from operations and eventual disposition, expected useful life and holding period, future required capital expenditures, and fair values, including consideration of 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 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 consolidated statements of operations and comprehensive income and classify the assets and related liabilities as held for sale on the consolidated balance sheets.
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

10


between the amount paid by the member and the present value of the refund obligation is deferred and recognized as other operating revenues on the consolidated statements of operations and comprehensive income over the expected life of an active membership. The present value of the refund obligation is recorded as a membership initiation deposit liability in the consolidated balance sheets and accretes over the nonrefundable term using the effective interest method using the Company's incremental borrowing rate. The accretion is included in interest expense.
Certain of the Company's hotels have retail spaces, restaurants or other spaces which the Company leases to third parties. When collection of substantially all lease payments during the lease term is considered probable, lease revenue is recognized on a straight-line basis over the life of the lease. When collection of substantially all lease payments during the lease term is not considered probable, revenue is recognized as the lesser of the amount under straight-line basis or cash received. Lease revenue is included in other operating revenues in the Company's consolidated statements of operations and comprehensive income.
The Company collects sales, use, occupancy and similar taxes at its hotels which are presented on a net basis on the consolidated statements of operations and comprehensive income. Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. The Company maintains an allowance for doubtful accounts sufficient to cover estimated potential credit losses.
Income Taxes
To qualify as a REIT for federal income tax purposes, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90 percent of its adjusted taxable income 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, PHL, whose subsidiaries lease the Company’s hotels from the Operating Partnership, is 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.
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

11


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

Note 3. Acquisition and Disposition of Hotel Properties
There were no acquisitions of hotel properties during the three months ended March 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.
During the three months ended March 31, 2020, the Company sold two hotel properties in a single transaction for an aggregate sales price of $331.0 million. In connection with this transaction, the Company recorded an aggregate of $117.4 million net gain on sale, which is included in (gain) loss on sale of hotel properties, in the accompanying consolidated statements of operations and comprehensive income. For the three months ended March 31, 2020 and 2019, the accompanying consolidated statements of operations and comprehensive income included operating income (loss) of $4.3 million and $10.3 million, respectively, related to the hotel properties sold.
The following table sets forth information regarding the disposition transactions during the three months ended March 31, 2019 (in thousands):
Hotel Property Name
 
Location
 
Sale Date
 
Sale Price
The Liaison Capitol Hill
 
Washington, D.C.
 
February 14, 2019
 
$
111,000

Hotel Palomar Washington DC
 
Washington, D.C.
 
February 22, 2019
 
141,450

Total
 
 
 
 
 
$
252,450


The Company recognized no gain or loss on these dispositions. The sales of the hotel properties described above did not represent a strategic shift that had a major effect on the Company’s operations and financial results, and therefore, did not qualify as discontinued operations.

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Note 4. Investment in Hotel Properties
Investment in hotel properties as of March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
 
 
March 31,
2020
 
December 31, 2019
Land
$
982,016

 
$
1,042,198

Buildings and improvements
4,853,709

 
4,998,108

Furniture, fixtures and equipment
506,773

 
522,631

Capital lease asset
134,063

 
134,063

Construction in progress
45,503

 
35,637

 
$
6,522,064

 
$
6,732,637

Right-of-use asset, operating leases
333,611

 
335,272

Investment in hotel properties
$
6,855,675

 
$
7,067,909

Less: Accumulated depreciation
(748,732
)
 
(735,322
)
Investment in hotel properties, net
$
6,106,943

 
$
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, we determined certain impairment triggers had occurred and as a result, the Company assessed its investment in hotel properties for recoverability. Based on the analysis performed, the Company recognized an impairment loss of $20.6 million related to a retail component of a hotel as a result of the fair value being lower than its carrying value. The impairment loss was determined using level 2 inputs under authoritative guidance for fair value measurements.

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 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 March 31, 2020, the Company's right-of-use assets of $333.6 million, which included favorable and unfavorable intangibles, are included in the investment in hotel properties and its related lease liabilities of $256.3 million are presented in accounts payable and accrued expenses in the Company's consolidated balance sheets. The adoption of this standard had minimal impact on the Company's consolidated statements of operations and comprehensive income.

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Note 5. Debt
The Company's debt consisted of the following as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
 

 

Balance Outstanding as of
 
Interest Rate

Maturity Date

March 31, 2020

December 31, 2019
Revolving credit facilities
 
 
 
 
 
 
 
Senior unsecured credit facility
Floating (1)

January 2022

$
643,168


$
165,000

PHL unsecured credit facility
Floating (2)

January 2022




Total revolving credit facilities
 
 
 
 
$
643,168

 
$
165,000

 
 
 
 
 
 
 
 
Unsecured term loans









First Term Loan
Floating (3)

January 2023

300,000


300,000

Second Term Loan
Floating (3)

April 2022

65,000


65,000

Fourth Term Loan
Floating (3)
 
October 2024
 
110,000

 
110,000

Sixth Term Loan
 
 
 
 
 
 
 
Tranche 2021
Floating (3)
 
November 2021
 
300,000

 
300,000

Tranche 2022
Floating (3)
 
November 2022
 
400,000

 
400,000

Tranche 2023
Floating (3)
 
November 2023
 
400,000

 
400,000

Tranche 2024
Floating (3)
 
January 2024
 
400,000

 
400,000

Total Sixth Term Loan
 
 
 
 
1,500,000

 
1,500,000

Total term loans at stated value




1,975,000


1,975,000

Deferred financing costs, net




(9,497
)

(10,343
)
Total term loans




$
1,965,503


$
1,964,657











Senior unsecured notes









Series A Notes
4.70%

December 2023

60,000


60,000

Series B Notes
4.93%

December 2025

40,000


40,000

Total senior unsecured notes at stated value




100,000


100,000

Deferred financing costs, net




(413
)

(437
)
Total senior unsecured notes




$
99,587


$
99,563

Total debt




$
2,708,258


$
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 March 31, 2020, $1.6 billion of the borrowings under the term loan facilities bore an effective weighted-average fixed interest rate of 3.56%, after taking into account interest rate swap agreements, and $345.0 million bore a weighted-average floating interest rate of 2.55%. 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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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. In March 2020, as part of our plans to enhance liquidity due to the impact of COVID-19, we fully drew down the remaining availability on this revolving credit facility. As of March 31, 2020, the Company had $643.2 million of outstanding borrowings, $6.8 million of outstanding letters of credit and no borrowing capacity 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. 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. 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. 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 March 31, 2020, the Company had no borrowings under the PHL Credit Facility and had $25.0 million borrowing capacity remaining 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 March 31, 2020 and December 31, 2019, respectively.

As of March 31, 2020, the Company was in compliance with the debt covenants of the credit agreements that govern the unsecured revolving credit facilities. See additional discussion on the impact of the COVID-19 pandemic on debt covenants in Note 1.
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. As of March 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.
Senior Unsecured Notes
The Company has 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 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 March 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):
 

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For the three months ended March 31,
 
 
2020
 
2019
Unsecured revolving credit facilities
 
$
2,305

 
$
1,400

Unsecured term loan facilities
 
17,152

 
21,865

Senior unsecured notes
 
1,198

 
1,198

Mortgage debt
 

 
626

Amortization of deferred financing fees
 
1,190

 
1,488

Other
 
1,746

 
2,751

Total interest expense
 
$
23,591

 
$
29,328


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 mortgage loans) as of March 31, 2020 and December 31, 2019 was $106.2 million and $101.2 million, respectively.
Derivative and Hedging Activities
The Company enters into interest rate swap agreements to hedge against interest rate fluctuations. All of the Company's interest rate swaps are cash flow hedges. All unrealized gains and losses on these hedging instruments are reported in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

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The Company's interest rate swaps at March 31, 2020 and December 31, 2019 consisted of the following (dollars in thousands):
 
 
 
 
 
 
Notional Value as of
Hedge Type
 
Interest Rate
 
Maturity
 
March 31, 2020
 
December 31, 2019
Swap - cash flow
 
1.63%
 
January 2020
 
$

 
$
50,000

Swap - cash flow
 
1.63%
 
January 2020
 

 
50,000

Swap - cash flow
 
2.46%
 
January 2020
 

 
50,000

Swap - cash flow
 
2.46%
 
January 2020
 

 
50,000

Swap - cash flow
 
1.66%
 
January 2020
 

 
50,000

Swap - cash flow
 
1.66%
 
January 2020
 

 
50,000

Swap - cash flow
 
2.12%
 
December 2020
 
100,000

 
100,000

Swap - cash flow
 
2.12%
 
December 2020
 
100,000

 
100,000

Swap - cash flow
 
1.74%
 
January 2021
 
75,000

 
75,000

Swap - cash flow
 
1.75%
 
January 2021
 
50,000

 
50,000

Swap - cash flow
 
1.53%
 
January 2021
 
37,500

 
37,500

Swap - cash flow
 
1.53%
 
January 2021
 
37,500

 
37,500

Swap - cash flow
 
1.46%
(1) 
January 2021
 
100,000

 
100,000

Swap - cash flow
 
1.47%
(1) 
January 2021
 
47,500

 
47,500

Swap - cash flow
 
1.47%
(1) 
January 2021
 
47,500

 
47,500

Swap - cash flow
 
1.47%
(1) 
January 2021
 
47,500

 
47,500

Swap - cash flow
 
1.47%
(1) 
January 2021
 
47,500

 
47,500

Swap - cash flow
 
2.60%
 
October 2021
 
55,000

 
55,000

Swap - cash flow
 
2.60%
 
October 2021
 
55,000

 
55,000

Swap - cash flow
 
1.78%
(1) 
January 2022
 
100,000

 
100,000

Swap - cash flow
 
1.78%
(1) 
January 2022
 
50,000

 
50,000

Swap - cash flow
 
1.79%
(1) 
January 2022
 
30,000

 
30,000

Swap - cash flow
 
1.68%
 
April 2022
 
25,000

 
25,000

Swap - cash flow
 
1.68%
 
April 2022
 
25,000

 
25,000

Swap - cash flow
 
1.64%
 
April 2022
 
25,000

 
25,000

Swap - cash flow
 
1.64%
 
April 2022
 
25,000

 
25,000

Swap - cash flow