# Pebblebrook Hotel Trust (PEB) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Pebblebrook Hotel Trust's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1474098/000147409822000035/peb-20211231.htm
Accession: 0001474098-22-000035
Filing date: 2022-02-22
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/PEB/
All MD&A years: /company/PEB/mda/
Next year: /company/PEB/mda/fy2022/ (FY 2022)

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

COVID-19 and Liquidity Update

In March 2020, the World Health Organization declared the novel coronavirus ("COVID-19") to be a global pandemic and the virus spread throughout the United States and the world. As a result of this pandemic and subsequent government mandates, health official recommendations, corporate policy changes and individual responses, hotel demand dramatically declined. In response, we implemented significant cost controls, salary reductions and temporarily suspended operations at 47 of our hotels and resorts in 2020. In addition, to improve liquidity, we raised capital by issuing convertible notes and additional preferred shares as summarized below. As demand improved as a result of an increase in vaccinations and corresponding lifting of governmental restrictions and recommendations, we gradually reopened our hotels and resorts. As of December 31, 2021, all of our hotels and resorts were open, with the exception of Hotel Vitale, whose operations will remain suspended until the completion of its renovations and repositioning, which we expect to occur in the second quarter of 2022.

The COVID-19 pandemic had a significant negative impact on our operations and financial results throughout 2021. Although results improved relative to 2020, we cannot estimate with certainty when travel demand will fully recover. However, we anticipate further recovery in 2022. Leisure travel in 2021 exceeded expectations, particularly at our warmer-weather and resort properties and we expect this trend to continue in 2022. However, business travel continues to be substantially lower.

During 2021, we amended the agreements governing our existing credit facilities, term loan facilities and unsecured senior notes to, among other changes:

•waive quarterly financial covenants until the second quarter of 2022, with substantially less-restrictive covenants through the end of the first quarter of 2023;

•extend or provide the option for us to extend more than $1.0 billion of debt maturities including our revolving credit facility;

•increase pricing until the end of the covenant waiver period; and

•impose certain restrictions during the covenant waiver period on share repurchases, dividends, capital improvements, and hotel property acquisitions.

Based on the amendments to our credit agreements, actions noted above, and assumptions regarding the recovery of demand, we believe we have sufficient liquidity to meet our obligations for the next 12 months. For further discussion on our liquidity, see Liquidity and Capital Resources included in Part II, Item 7 of this Annual Report on Form 10-K.

During the year ended December 31, 2021, other significant transactions included:

•On February 9, 2021, we issued, at a 5.5% premium to par, an additional $250.0 million aggregate principal amount of the convertible notes originally issued in December 2020.

•On April 1, 2021, we sold the Sir Francis Drake for $157.6 million.

•On May 13, 2021, we raised $222.6 million of net proceeds from the issuance of 9,200,000 6.375% Series G Cumulative Redeemable Preferred Shares.

•On June 10, 2021, we sold The Roger New York for $19.0 million.

•On July 22, 2021, we acquired the leasehold interest in Jekyll Island Club Resort for $94.0 million.

•On July 27, 2021, we raised $242.1 million of net proceeds from the issuance of 10,000,000 5.70% Series H Cumulative Redeemable Preferred Shares.

•On August 21, 2021, we redeemed all outstanding 6.375% Series D Cumulative Redeemable Preferred Shares.

•On August 22, 2021, we redeemed all outstanding 6.50% Series C Cumulative Redeemable Preferred Shares.

•On September 9, 2021, we sold Villa Florence San Francisco on Union Square for $87.5 million.

•On September 23, 2021, we acquired the leasehold interest in Margaritaville Hollywood Beach Resort for $270.0 million, including the assumption of a $161.5 million mortgage loan.

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•On October 20, 2021, we acquired Avalon Bed & Breakfast and Duval Gardens for $20.0 million, with both properties consolidating into our Southernmost Beach Resort.

•On December 1, 2021, we acquired the leasehold interest in Estancia La Jolla Hotel & Spa for $108.0 million, including the assumption of a $61.7 million mortgage loan.

•We repaid $431.9 million of debt, consisting of $341.9 million of term loans, $50.0 million of senior unsecured notes and $40.0 million on the senior unsecured credit facility.

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 Measures 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, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","","","For the year ended December 31,"],["","","","","","","2021","","2020"],["Same-Property Occupancy","","","","","","40.4","%","","26.5","%"],["Same-Property ADR","","","","","","$","257.86","","","$","233.25"],["Same-Property RevPAR","","","","","","$","104.12","","","$","61.72"],["Same-Property Total RevPAR","","","","","","$","157.69","","","$","95.15"]]
[[/GREPCENT_TABLE]]

While the operations of many of our hotels were temporarily suspended beginning in March 2020, the above table of hotel operating statistics includes information from all hotels owned as of December 31, 2021 except for the following: Hotel Zena Washington DC for the first and second quarters of 2021 and 2020, as it was closed for renovation during the first and second quarters of 2020; Hotel Vitale for the third and fourth quarters of 2021 and 2020, as it was closed for renovation during the third and fourth quarters of 2021; Jekyll Island Club Resort for the first and second quarters of 2021 and 2020; Margaritaville Hollywood Beach Resort for the first, second and third quarters of 2021 and 2020; Southernmost Beach Resort's 31 additional rooms following the acquisition of Avalon Bed & Breakfast and Duval Gardens for the first, second and third quarters of 2021 and 2020; and Estancia La Jolla Hotel & Spa for all of 2021 and 2020. Also included in the above table is information for Sir Francis Drake and The Roger New York for the first quarter of 2021 and 2020 as well as Villa Florence San Francisco on Union Square for the first and second quarters of 2021 and 2020.

Results of Operations

This section includes comparisons of certain 2021 financial information to the same information for 2020. Year-to-year comparisons of the 2020 financial information to the same information for 2019 are contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 23, 2021.

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At December 31, 2021 and 2020, we had 53 wholly-owned properties and leasehold interests. All properties owned during these periods have been included in our results of operations during the respective periods since their dates of acquisition 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 collectively as "non-comparable properties" for the years ended December 31, 2021 and 2020. All other properties are referred to collectively as "comparable properties":

[[GREPCENT_TABLE]]
[["Property","","Location","","Disposition Date"],["InterContinental Buckhead Atlanta","","Buckhead, GA","","March 6, 2020"],["Sofitel Washington DC Lafayette Square","","Washington, D.C.","","March 6, 2020"],["Union Station Hotel Nashville, Autograph Collection","","Nashville, TN","","July 29, 2020"],["Sir Francis Drake","","San Francisco, CA","","April 1, 2021"],["The Roger New York","","New York, NY","","June 10, 2021"],["Villa Florence San Francisco on Union Square","","San Francisco, CA","","September 9, 2021"],["Property","","Location","","Acquisition Date"],["Jekyll Island Club Resort","","Jekyll Island, GA","","July 22, 2021"],["Margaritaville Hollywood Beach Resort","","Hollywood, FL","","September 23, 2021"],["Estancia La Jolla Hotel & Spa","","La Jolla, CA","","December 1, 2021"]]
[[/GREPCENT_TABLE]]

Comparison of the year ended December 31, 2021 to the year ended December 31, 2020

Revenues — Total revenues increased by $290.2 million, of which $2.9 million was due to the non-comparable properties and the remaining increase was attributable to the comparable properties as a result of an increase in demand from a rebound in leisure travel and easing of governmental restrictions throughout 2021.

Hotel operating expenses — Total hotel operating expenses increased by $117.2 million, primarily due to resuming operations at the comparable properties and returning demand.

Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, property insurance and ground rent decreased by $2.7 million primarily due to a decline in property taxes as a result of successful appeals. The decrease was partially offset by an increase in ground rent on ground leases that have percentage rent and the acquisition of three properties subject to ground leases.

General and administrative — General and administrative expenses consist of employee compensation costs, legal and professional fees, insurance and other expenses. General and administrative expenses decreased by $7.0 million primarily due to a decrease in share-based compensation costs relating to the cancellation of the retention LTIP unit awards and time-based service condition awards in 2020.

Transaction costs — Transaction costs incurred during 2020 were the result of additional transfer taxes paid in connection with the LaSalle merger. Transactions costs incurred during 2021 were immaterial.

Impairment loss — We recognized an impairment loss of $14.9 million in 2021 related to one hotel and an impairment loss of $74.6 million in 2020 related to two hotels and the retail component of a hotel.

(Gain) loss on sale of hotel properties — We recognized a net gain on sale of $64.7 million in 2021 primarily due to the sale of Sir Francis Drake and a net gain on sale of $117.4 million in 2020 primarily due to the sale of InterContinental Buckhead Atlanta.

Other operating expenses — Other operating expenses decreased by $2.5 million primarily due to reductions in pre-opening, hotel management transition and franchise tax expenses.

Interest expense — Interest expense decreased by $7.5 million primarily due to decreased borrowings, as certain term loans, senior unsecured notes and amounts under our senior unsecured credit facility were paid down in 2021. This was partially offset by increased interest on the convertible senior notes and amortization and write-off of deferred financing fees as a result of the partial repayment of certain of the term loans during 2021.

Income tax (expense) benefit — Income tax (expense) benefit was a benefit of $3.7 million in 2020 primarily due to the deferred tax asset recognized in 2020 on the taxable REIT subsidiary's estimated loss. In 2021, we recognized a valuation allowance offsetting the deferred tax asset on the current year taxable REIT subsidiary's loss due to the uncertainty of utilizing the deferred tax asset in the future.

Distributions to preferred shareholders — Distributions to preferred shareholders increased as a result of the issuance of the Series G and Series H Cumulative Redeemable Preferred Shares in May 2021 and July 2021, respectively. This was partially offset by the redemption of the Series C and Series D Cumulative Redeemable Preferred Shares in August 2021.

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Issuance costs of redeemed preferred shares — Issuance costs of redeemed preferred shares increased due to the redemption of the Series C and Series D Cumulative Redeemable Preferred Shares in August 2021. These costs are included in the determination of net income (loss) attributable to common shareholders.

Non-GAAP Financial Measures

Non-GAAP financial measures are measures of our historical or future financial performance that are different from measures calculated and presented in accordance with U.S. GAAP. We report FFO, EBITDA and EBITDAre, which are non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance.

We calculate FFO in accordance with standards established by Nareit, formerly known as the National Association of Real Estate Investment Trusts, which defines FFO as net income (calculated in accordance with U.S. GAAP), excluding real estate related depreciation and amortization, gains (losses) from sales of real estate, impairments of real estate assets (including impairment of real estate related joint ventures), the cumulative effect of changes in accounting principles and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. By excluding the effect of real estate related depreciation and amortization including our share of the joint venture depreciation and amortization, gains (losses) from sales of real estate and impairments of real estate assets (including impairment of real estate related joint ventures), all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance, we believe that FFO provides investors a useful financial measure to evaluate our operating performance.

The following table reconciles net income (loss) to FFO and FFO available to common share and unit holders for the years ended December 31, 2021, 2020 and 2019 (in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","","For the year ended December 31,"],["","","","","","","","","","","","","","","2021","","2020","","2019"],["Net income (loss)","","","","","","","","","","","","","","$","(186,372)","","","$","(392,593)","","","$","115,725"],["Adjustments:"],["Real estate depreciation and amortization","","","","","","","","","","","","","","223,813","","","224,124","","","234,591"],["(Gain) loss on sale of hotel properties","","","","","","","","","","","","","","(64,729)","","","(117,401)","","","(2,819)"],["Impairment loss","","","","","","","","","","","","","","14,856","","","74,556","","","\u2014"],["FFO","","","","","","","","","","","","","","$","(12,432)","","","$","(211,314)","","","$","347,497"],["Distribution to preferred shareholders","","","","","","","","","","","","","","(42,105)","","","(32,556)","","","(32,556)"],["Issuance costs of redeemed preferred shares","","","","","","","","","","","","","","(8,055)","","","\u2014","","","\u2014"],["FFO available to common share and unit holders","","","","","","","","","","","","","","$","(62,592)","","","$","(243,870)","","","$","314,941"]]
[[/GREPCENT_TABLE]]

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).

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The following table reconciles net income (loss) to EBITDA and EBITDAre for the years ended December 31, 2021, 2020 and 2019 (in thousands):

[[GREPCENT_TABLE]]
[["","","","","","","","For the year ended December 31,"],["","","","","","","","","","","","","","2021","","2020","","2019"],["Net income (loss)","","","","","","","","","","","","","$","(186,372)","","","$","(392,593)","","","$","115,725"],["Adjustments:"],["Interest expense","","","","","","","","","","","","","96,633","","","104,098","","","108,474"],["Income tax expense (benefit)","","","","","","","","","","","","","61","","","(3,697)","","","5,172"],["Depreciation and amortization","","","","","","","","","","","","","224,251","","","224,560","","","234,880"],["EBITDA","","","","","","","","","","","","","$","134,573","","","$","(67,632)","","","$","464,251"],["(Gain) loss on sale of hotel properties","","","","","","","","","","","","","(64,729)","","","(117,401)","","","(2,819)"],["Impairment loss","","","","","","","","","","","","","14,856","","","74,556","","","\u2014"],["EBITDAre","","","","","","","","","","","","","$","84,700","","","$","(110,477)","","","$","461,432"]]
[[/GREPCENT_TABLE]]

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.

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

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.

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New Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K for recently issued accounting pronouncements that may affect us.

Liquidity and Capital Resources

Our primary sources of liquidity are cash provided by our operations, borrowings under our credit facilities, net proceeds from equity and debt offerings, and net proceeds from property sales. Our primary cash requirements in the short term (i.e., those requiring cash before January 1, 2023) will be to fund property lease obligations, interest and current principal on debt, capital improvements, dividends on common and preferred shares, and working capital of our property operations. We believe our cash and cash equivalents, restricted cash and the amount available on our senior unsecured revolving credit facility, which totaled $730.1 million as of December 31, 2021, along with cash generated from ongoing operations will be sufficient to satisfy our short-term cash requirements. As of December 31, 2021 we had no off-balance sheet arrangements.

In order to maintain our qualification as a REIT, we must pay dividends to our shareholders of at least 90% of our taxable income. As a result of this requirement, we cannot rely on retained earnings to fund long-term liquidity requirements such as hotel property acquisitions, redevelopements and repayments of long-term debt. As such, we expect to continue to raise capital through equity and debt offerings to fund our growth.

For a discussion on the impact of COVID-19 on our liquidity, see Overview.

Our material cash requirements include the following contractual and other obligations.

Debt

Our outstanding debt consisted of floating- and fixed-rate unsecured term loans, convertible senior notes, senior unsecured notes and mortgage loans with varying maturities. Our total debt had an aggregate face value of $2.5 billion as of December 31, 2021, as summarized below.

[[GREPCENT_TABLE]]
[["","December 31, 2021"],["","(in thousands)"],["Revolving credit facilities","$","\u2014"],["Term loans","1,433,068"],["Convertible senior notes","750,000"],["Senior unsecured notes","50,000"],["Mortgage loans","222,873"],["Total debt at face value","$","2,455,941"]]
[[/GREPCENT_TABLE]]

For further discussion on the components of our debt, see Note 5, Debt, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

We have the option to extend certain of our current debt maturities with the payment of extension fees. Assuming we exercise all extension options available in our debt agreements, we expect that future principal and interest payments associated with our debt obligations outstanding as of December 31, 2021 will be $2.7 billion through their maturity, with $136.8 million payable before January 1, 2023. We intend to pay amounts due with available cash, borrowings under our revolving credit facility, or refinance with long term debt.

In February 2021 and December 2021, we amended the agreements governing our existing credit facilities, term loan facilities and senior notes to, among other things, waive financial covenants until the second quarter of 2022 (with substantially less-restrictive covenants through the end of the first quarter of 2023), extend certain debt maturity dates and increase the interest rate spread. For a further discussion of these amendments, see Note 5, Debt, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

We are in compliance with all covenants governed by our existing credit facilities, term loan and senior note facilities.

Our mortgage loans contain customary provisions regarding events of default, as well as customary cash management, cash trap and lockbox provisions. Cash trap provisions are triggered if the hotel's performance is below a certain threshold. Once triggered, all of the cash flow generated by the hotel is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our lender.

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The mortgage loans associated with Margaritaville Hollywood Beach Resort and Estancia La Jolla Hotel & Spa both triggered the cash trap provisions prior to our acquisition of those hotel properties, and therefore cash from hotel operations is being held by the lender in the cash management accounts and reflected as restricted cash in our consolidated balance sheets. Cash will be released from the lockbox once the hotel reaches profitability levels that terminate the cash trap or the loan is paid off. These loans may remain subject to cash trap provisions for a substantial period of time which could limit our liquidity and ability to pay dividends or reduce debt balances. We expect that we will exceed the thresholds necessary to exit the cash trap provisions of these agreements in 2022.

Hotel, ground and finance lease obligations

Our properties that are subject to hotel, ground or finance leases, as noted in Note 11, Commitment and Contingencies, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K, 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.

Future fixed minimum payments associated with our hotel, ground and finance leases total $1.8 billion as of December 31, 2021, with $20.4 million payable within the next 12 months.

Purchase commitments

As of December 31, 2021, we had $7.3 million of outstanding purchase commitments, all of which will be paid within the next 12 months. These purchase commitments represent outstanding purchase orders and contracts that have been executed for capital and renovation projects at our properties. See Capital Investments for discussion on planned capital investments.

Preferred dividends

We expect to pay aggregate annual dividends of approximately $45.4 million on our outstanding Series E, Series F, Series G and Series H Cumulative Redeemable Preferred Shares within the next 12 months and in future years until the shares are redeemed. For further discussion on our preferred shares, see Note 7, Equity, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Sources and Uses of Cash

Our principal sources of cash are cash from operations, draws on our credit facilities, net proceeds from equity and debt offerings, and net proceeds from property sales. Our principal uses of cash are asset acquisitions, debt service payments, the redemption of equity securities, capital investments, operating costs, corporate expenses and dividends.

Operating activities. Our net cash provided by (used in) operating activities was $70.8 million for the year ended December 31, 2021 and $(201.8) million for the year ended December 31, 2020. Fluctuations in our net cash provided by or (used in) operating activities are primarily the result of changes in hotel revenues, operating cash requirements and corporate expenses. The increase in cash provided by (used in) operations in 2021 as compared to 2020 is due to the resumption of operations at our hotels, as we temporarily suspended operations at 47 of our hotels and resorts in 2020.

Investing Activities. Our net cash provided by (used in) investing activities was $(81.6) million for the year ended December 31, 2021 and $250.1 million for the year ended December 31, 2020. Fluctuations in our net cash provided by or (used in) investing activities are primarily the result of acquisition and disposition activities, as well as capital improvements and additions to our properties.

•During the year ended December 31, 2021, we invested $83.8 million in improvements to our hotel properties, received $255.9 million from the sales of three hotel properties and purchased three hotel properties using cash of $253.5 million.

•During the year ended December 31, 2020, we invested $125.0 million in improvements to our hotel properties and received $375.1 million from the sales of three hotel properties.

Financing Activities. Our net cash provided by (used in) financing activities was $(33.3) million for the year ended December 31, 2021 and $31.1 million for the year ended December 31, 2020. Fluctuations in our net cash provided by or (used in) financing activities are primarily the result of our issuance and repurchase of debt and equity securities and distributions paid on our preferred and common shares.

•During the year ended December 31, 2021, we received gross proceeds of $480.0 million from the issuance of our Series G and Series H Preferred Shares, which was partially offset by the payment $15.9 million in offering costs; received proceeds from the issuance of convertible notes and other debt of $268.6 million; repaid $392.2 million in other debt and $40.0 million of revolving credit facilities borrowings; used $250.0 million to redeem all our Series C and Series D Preferred Shares; paid $44.7 million in preferred and common distributions; purchased $21.0 million in Capped Call Transactions; and paid $14.5 million in financing fees.

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•During the year ended December 31, 2020, we borrowed $760.1 million under the revolving credit facilities and $513.0 million in other debt; repaid $885.1 million of revolving credit facilities borrowings and $213.0 million in other debt; paid $86.5 million in preferred and common distributions; purchased $38.3 million in Capped Call Transactions; and paid $16.4 million in financing fees.

Capital Investments

We maintain and intend to continue maintaining all of our hotels in good repair and condition, in conformity with applicable laws and regulations, in accordance with franchisor standards when applicable and in accordance with 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.

Certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guest rooms, 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 any, 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, 2021, we invested $83.8 million in capital investments to reposition and improve our properties, primarily the renovations of Hotel Vitale, Southernmost Beach Resort and L'Auberge Del Mar.

Depending on market conditions, and in some instances subject to approval from governmental authorities, we expect to invest an additional $100.0 million to $120.0 million in capital investments in 2022, which includes normal hotel capital refurbishments, return of investment projects and major capital projects.

In 2022 we intend to complete or commence the following capital projects:

•$40.0 million redevelopment of Paradise Point Resort & Spa into Paradise Point, a Margaritaville Island Resort San Diego, which will commence upon the approval of governmental authorities;

•$28.0 million transformation of Hotel Vitale into 1 Hotel San Francisco, which commenced in 2021 and is expected to reopen in the second quarter of 2022;

•$20.0 million to $22.0 million renovation of Hilton San Diego Gaslamp Quarter, which will commence in 2022 and is expected to be completed in the first quarter of 2023;

•$20.0 million to $22.0 million renovation of Jekyll Island Club Resort, which will commence in 2022 and is expected to be completed in the third quarter of 2023;

•$20.0 million redevelopment of Solamar Hotel into Margaritaville Hotel San Diego Gaslamp Quarter, which will commence in 2022 and is expected to be completed in the first quarter of 2023; and

•$18.0 million to $21.0 million renovation of Estancia La Jolla Hotel & Spa, which will commence in 2022 and is expected to be completed in 2024.

Common Share Repurchase Program and ATM Program

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, 2021. As of December 31, 2021, $56.6 million of common shares remained available for repurchase under this program. The credit agreements governing our existing indebtedness prohibit us from repurchasing common shares until we have certified compliance with certain financial covenants through June 30, 2022.

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

On April 29, 2021, we filed a prospectus supplement with the SEC to sell up to $200.0 million of common shares under an "at the market" offering program (the "ATM program"). No common shares were issued or sold under the ATM program during the year ended December 31, 2021. As of December 31, 2021, $200.0 million of common shares remained available for issuance under the ATM program.

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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

For discussion on the seasonality of our hotels' operations, see Part I, Item 1 of this Annual Report on Form 10-K.

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. We believe we minimize the credit risk by transacting with major credit-worthy financial institutions.

As of December 31, 2021, we have interest rate swap agreements with an aggregate notional amount of $1.3 billion to hedge variable interest rates on our unsecured term loans. We have designated these pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges. For a further discussion of our derivative instruments see Note 5, Debt, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.