10-Q 1 peb-20150630x10q.htm 10-Q PEB-2015.06.30-10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
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.)
 
 
7315 Wisconsin Avenue, 1100 West
Bethesda, Maryland
 
20814
(Address of Principal Executive Offices)
 
(Zip Code)
(240) 507-1300
(Registrant’s telephone number, including area code)
 
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.    R  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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).    R  Yes   ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
R
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨ (do not check if a smaller reporting company)
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    R  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at July 20, 2015
Common shares of beneficial interest ($0.01 par value per share)
 
71,853,807
 



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 data)
 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Investment in hotel properties, net
$
2,672,557

 
$
2,343,690

Investment in joint venture
247,312

 
258,828

Ground lease asset, net
30,513

 
30,891

Cash and cash equivalents
33,212

 
52,883

Restricted cash
13,463

 
16,383

Hotel receivables (net of allowance for doubtful accounts of $145 and $139, respectively)
31,615

 
21,320

Deferred financing costs, net
7,527

 
6,246

Prepaid expenses and other assets
49,050

 
40,243

Total assets
$
3,085,249

 
$
2,770,484

LIABILITIES AND EQUITY
 
 
 
Senior unsecured revolving credit facility
$
310,000

 
$
50,000

Term loans
400,000

 
300,000

Mortgage debt (including mortgage loan premium of $2,658 and $4,026, respectively)
437,198

 
493,987

Accounts payable and accrued expenses
132,520

 
106,828

Advance deposits
15,565

 
11,583

Accrued interest
2,499

 
2,382

Distribution payable
29,523

 
23,293

Total liabilities
1,327,305

 
988,073

Commitments and contingencies (Note 11)

 

Shareholders’ equity:
 
 
 
Preferred shares of beneficial interest, $.01 par value (liquidation preference $350,000 at June 30, 2015 and $350,000 at December 31, 2014), 100,000,000 shares authorized; 14,000,000 shares issued and outstanding at June 30, 2015 and 14,000,000 shares issued and outstanding at December 31, 2014
140

 
140

Common shares of beneficial interest, $.01 par value, 500,000,000 shares authorized; 71,735,129 issued and outstanding at June 30, 2015 and 71,553,481 issued and outstanding at December 31, 2014
717

 
716

Additional paid-in capital
1,864,607

 
1,864,739

Accumulated other comprehensive income (loss)
(433
)
 
(341
)
Distributions in excess of retained earnings
(108,926
)
 
(84,163
)
Total shareholders’ equity
1,756,105

 
1,781,091

Non-controlling interests
1,839

 
1,320

Total equity
1,757,944

 
1,782,411

Total liabilities and equity
$
3,085,249

 
$
2,770,484

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


3


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

 
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Room
$
137,443

 
$
102,384

 
$
246,277

 
$
185,953

Food and beverage
46,823

 
35,417

 
90,061

 
67,865

Other operating
13,417

 
9,653

 
24,780

 
19,348

Total revenues
197,683

 
147,454

 
361,118

 
273,166

Expenses:
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Room
30,982

 
24,859

 
58,965

 
47,754

Food and beverage
31,384

 
25,156

 
60,777

 
48,966

Other direct and indirect
53,627

 
39,997

 
103,463

 
77,884

Total hotel operating expenses
115,993

 
90,012

 
223,205

 
174,604

Depreciation and amortization
24,885

 
16,230

 
46,210

 
32,118

Real estate taxes, personal property taxes, property insurance, and ground rent
10,885

 
9,000

 
22,165

 
17,308

General and administrative
6,169

 
5,591

 
13,741

 
11,738

Hotel acquisition costs
4,334

 
236

 
4,465

 
521

Total operating expenses
162,266

 
121,069

 
309,786

 
236,289

Operating income (loss)
35,417

 
26,385

 
51,332

 
36,877

Interest income
621

 
621

 
1,256

 
1,235

Interest expense
(9,256
)
 
(6,256
)
 
(17,577
)
 
(12,331
)
Equity in earnings (loss) of joint venture
3,320

 
4,264

 
(1,128
)
 
1,020

Income (loss) before income taxes
30,102

 
25,014

 
33,883

 
26,801

Income tax (expense) benefit
(3,519
)
 
(2,121
)
 
(130
)
 
213

Net income (loss)
26,583

 
22,893

 
33,753

 
27,014

Net income (loss) attributable to non-controlling interests
92

 
220

 
119

 
263

Net income (loss) attributable to the Company
26,491

 
22,673

 
33,634

 
26,751

Distributions to preferred shareholders
(6,487
)
 
(6,082
)
 
(12,975
)
 
(12,163
)
Net income (loss) attributable to common shareholders
$
20,004

 
$
16,591

 
$
20,659

 
$
14,588

Net income (loss) per share available to common shareholders, basic
$
0.28

 
$
0.26

 
$
0.29

 
$
0.22

Net income (loss) per share available to common shareholders, diluted
$
0.27

 
$
0.26

 
$
0.28

 
$
0.22

Weighted-average number of common shares, basic
71,735,129

 
63,764,929

 
71,696,294

 
63,763,935

Weighted-average number of common shares, diluted
72,425,952

 
64,125,057

 
72,463,419

 
64,150,266


4


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

 
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 
 
Net income (loss)
$
26,583

 
$
22,893

 
$
33,753

 
$
27,014

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative instruments
4,077

 
(462
)
 
(92
)
 
(578
)
Comprehensive income (loss)
30,660

 
22,431

 
33,661

 
26,436

Comprehensive income (loss) attributable to non-controlling interests
105

 
216

 
119

 
258

Comprehensive income (loss) attributable to the Company
$
30,555

 
$
22,215

 
$
33,542

 
$
26,178

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


5


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, 2013
 
13,000,000

 
$
130

 
63,709,628

 
$
637

 
$
1,541,138

 
$
1,086

 
$
(69,652
)
 
$
1,473,339

 
$
1,745

 
$
1,475,084

Issuance of shares, net of offering costs
 

 

 

 

 
(188
)
 

 

 
(188
)
 

 
(188
)
Issuance of common shares for Board of Trustees compensation
 

 

 
13,793

 

 
421

 

 

 
421

 

 
421

Repurchase of common shares
 

 

 
(20,539
)
 

 
(632
)
 

 

 
(632
)
 

 
(632
)
Share-based compensation
 

 

 
62,047

 
1

 
3,424

 

 

 
3,425

 
1,341

 
4,766

Distributions on common shares/units
 

 

 

 

 

 

 
(29,750
)
 
(29,750
)
 
(280
)
 
(30,030
)
Distributions on preferred shares
 

 

 

 

 

 

 
(12,163
)
 
(12,163
)
 
(8
)
 
(12,171
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative instruments
 

 

 

 

 

 
(578
)
 

 
(578
)
 

 
(578
)
Net income (loss)
 

 

 

 

 

 

 
26,751

 
26,751

 
263

 
27,014

Balance at June 30, 2014
 
13,000,000

 
$
130

 
63,764,929

 
$
638

 
$
1,544,163

 
$
508

 
$
(84,814
)
 
$
1,460,625

 
$
3,061

 
$
1,463,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
14,000,000

 
$
140

 
71,553,481

 
$
716

 
$
1,864,739

 
$
(341
)
 
$
(84,163
)
 
$
1,781,091

 
$
1,320

 
$
1,782,411

Issuance of shares, net of offering costs
 

 

 

 

 
(139
)
 

 

 
(139
)
 

 
(139
)
Issuance of common shares for Board of Trustees compensation
 

 

 
8,084

 

 
372

 

 

 
372

 

 
372

Repurchase of common shares
 

 

 
(84,835
)
 

 
(4,094
)
 

 

 
(4,094
)
 

 
(4,094
)
Share-based compensation
 

 

 
258,399

 
1

 
3,729

 

 

 
3,730

 
554

 
4,284

Distributions on common shares/units
 

 

 

 

 

 

 
(45,422
)
 
(45,422
)
 
(147
)
 
(45,569
)
Distributions on preferred shares
 

 

 

 

 

 

 
(12,975
)
 
(12,975
)
 
(7
)
 
(12,982
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative instruments
 

 

 

 

 

 
(92
)
 

 
(92
)
 

 
(92
)
Net income (loss)
 

 

 

 

 

 

 
33,634

 
33,634

 
119

 
33,753

Balance at June 30, 2015
 
14,000,000

 
$
140

 
71,735,129

 
$
717

 
$
1,864,607

 
$
(433
)
 
$
(108,926
)
 
$
1,756,105

 
$
1,839

 
$
1,757,944


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

6


Pebblebrook Hotel Trust
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
For the six months ended June 30,
 
2015
 
2014
Operating activities:
 
 
 
Net income (loss)
$
33,753

 
$
27,014

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
46,210

 
32,118

Share-based compensation
4,284

 
4,766

Amortization of deferred financing costs and mortgage loan premiums
(184
)
 
(212
)
Non-cash ground rent
1,190

 
1,025

Equity in (earnings) loss from joint venture
2,313

 
164

Other
706

 
163

Changes in assets and liabilities:
 
 
 
Restricted cash, net
(161
)
 
(38
)
Hotel receivables
(9,562
)
 
(6,104
)
Prepaid expenses and other assets
(4,160
)
 
(4,156
)
Distributions from joint venture
9,203

 
1,806

Accounts payable and accrued expenses
4,327

 
819

Advance deposits
2,461

 
1,759

Net cash provided by (used in) operating activities
90,380

 
59,124

Investing activities:
 
 
 
Acquisition of hotel properties
(305,146
)
 
(50,336
)
Improvements and additions to hotel properties
(53,353
)
 
(16,119
)
Deposit on hotel properties
(3,000
)
 
(5,000
)
Receipt from note receivable
3,020

 

Purchase of corporate office equipment, software, and furniture
(221
)
 
(28
)
Restricted cash, net
3,081

 
1,246

Property insurance proceeds

 
1,113

Net cash provided by (used in) investing activities
(355,619
)
 
(69,124
)
Financing activities:
 
 
 
Payment of offering costs — common and preferred shares
(139
)
 
(188
)
Payment of deferred financing costs
(2,466
)
 
(10
)
Borrowings under senior revolving credit facility
380,000

 
40,000

Repayments under senior revolving credit facility
(120,000
)
 
(4,000
)
Proceeds from term loan
100,000

 

Repayments of mortgage debt
(55,420
)
 
(4,516
)
Repurchase of common shares
(4,094
)
 
(632
)
Distributions — common shares/units
(39,338
)
 
(25,150
)
Distributions — preferred shares
(12,975
)
 
(12,163
)
Net cash provided by (used in) financing activities
245,568

 
(6,659
)
Net change in cash and cash equivalents
(19,671
)
 
(16,659
)
Cash and cash equivalents, beginning of year
52,883

 
55,136

Cash and cash equivalents, end of period
$
33,212

 
$
38,477

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 June 30, 2015, the Company owned interests in 37 hotels, including 31 wholly owned hotels with a total of 7,402 guest rooms, and a 49% joint venture interest in six hotels with a total of 1,777 guest rooms. The hotels are located in the following markets: Atlanta (Buckhead), Georgia; Bethesda, Maryland; Boston, Massachusetts; Hollywood, California; Los Angeles, California; Miami, Florida; Minneapolis, Minnesota; Naples, Florida; Nashville, Tennessee; New York, New York; Philadelphia, Pennsylvania; Portland, Oregon; San Diego, California; San Francisco, California; Santa Monica, California; Seattle, Washington; Stevenson, Washington; Washington, D.C.; West Hollywood, California; and Los Angeles (Beverly Hills), California.
Substantially all of the Company’s assets are held by, and all of the operations are conducted through, Pebblebrook Hotel, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. At June 30, 2015, 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”), the Company’s taxable REIT subsidiary (“TRS”), which in turn engages third-party eligible independent contractors to manage the hotels. PHL is consolidated into the Company’s financial statements.
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. generally accepted accounting principles (“U.S. GAAP”) and in conformity with the rules and regulations of the 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 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 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, 2014.
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. Investments in entities in which the Company does not control, but has the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method.
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:

8



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 6 for disclosures on the fair value of debt and derivative instruments.
Investment in Hotel Properties
Upon acquisition of hotel properties, the Company allocates the purchase price based on 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.
Acquisition costs are expensed as incurred.
Hotel renovations and replacements of assets that improve or extend the life of the asset are recorded at cost and depreciated over their estimated useful lives. Furniture, fixtures and equipment under 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, 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 generally classify the loss, together with the related operating results, as continuing operations on the statements of operations and classify the assets and related liabilities as held for sale on the balance sheet.

9


Revenue Recognition
Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary amenities. Revenue is recognized when rooms are occupied and services have been rendered. For retail operations, revenue is recognized on a straight-line basis over the lives of the retail leases. The Company collects sales, use, occupancy and similar taxes at its hotels which are presented on a net basis on the statement of operations. 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, which leases 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) attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income (loss) attributable 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
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
On February 18, 2015, the FASB issued ASU No. 2015-02, Consolidation - Amendments to the Consolidation Analysis, which amends the current consolidation guidance affecting both the variable interest entity (VIE) and voting interest entity (VOE) consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The new standard is effective for the Company on January 1, 2016. The Company does not expect ASU No. 2015-02 to have a significant impact on its consolidated financial statements and related disclosures.
On April 7, 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. This standard is effective for periods beginning after December 15, 2015 with early adoption permitted and will be applied on a retrospective basis. The new standard will be effective for the Company on January 1, 2016 and will not have an impact on the Company's financial position, results of operations or cash flows.

10


Note 3. Acquisition of Hotel Properties

The Company finalized the purchase price allocation for the Union Station Hotel, Autograph Collection, which was acquired on December 10, 2014. The final purchase price was allocated as follows: $39.3 million to building and improvements, $5.4 million to furniture and fixtures, and $7.5 million to below (above) market rate contracts and other intangibles.

On May 21, 2015, the Company acquired the 189-room LaPlaya Beach Resort and LaPlaya Beach Club located in Naples, Florida for $185.5 million. The acquisition was funded with available cash and borrowings under the Company's senior unsecured revolving credit facility. The hotel will continue to be managed by Noble House Hotels and Resorts. The Company is finalizing the accounting for this acquisition. The preliminary allocation of the purchase price is as follows: $112.6 million to land, $82.1 million to building and improvements, $6.7 million to furniture and fixtures, and $(16.8) million to below (above) market rate contracts and other intangibles.

On June 11, 2015, the Company acquired the 221-room The Tuscan Fisherman's Wharf, a Best Western Plus Hotel located in San Francisco, California for $122.0 million. The acquisition was funded with available cash and borrowings under the Company's senior unsecured revolving credit facility. The Company is finalizing the accounting for this acquisition. The preliminary allocation of the purchase price is as follows: $29.1 million to land, $90.3 million to building and improvements, and $2.5 million to furniture and fixtures.

The following unaudited pro forma financial information presents the results of the Company for the three and six months ended June 30, 2015 and 2014 as if the hotels acquired in 2015 and 2014 were acquired on January 1, 2014 and 2013, respectively. The following hotels' pro forma results are included in the pro forma table below: Prescott Hotel; The Nines, A Luxury Collection Hotel, Portland; The Westin Colonnade Coral Gables; Hotel Palomar Los Angeles - Beverly Hills; Union Station Hotel, Autograph Collection; Revere Hotel Boston Common; LaPlaya Beach Resort and LaPlaya Beach Club; and The Tuscan Fisherman's Wharf, a Best Western Plus Hotel. The pro forma results below exclude acquisition costs of $4.3 million and $0.2 million for the three months ended June 30, 2015 and 2014, respectively, and $4.5 million and $0.5 million for the six months ended June 30, 2015 and 2014, respectively. The unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of either the results of operations that would have actually occurred had these transactions occurred or the future results of operations (in thousands, except per-share data).
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Total revenues
$
208,893

 
$
199,906

 
$
392,420

 
$
375,006

Operating income (loss)
43,076

 
38,149

 
65,947

 
56,667

Net income (loss) attributable to common shareholders
26,807

 
27,054

 
33,480

 
31,806

Net income (loss) per share available to common shareholders — basic
$
0.37

 
$
0.38

 
$
0.46

 
$
0.44

Net income (loss) per share available to common shareholders — diluted
$
0.37

 
$
0.37

 
$
0.46

 
$
0.44

Note 4. Investment in Hotel Properties
Investment in hotel properties as of June 30, 2015 and December 31, 2014 consisted of the following (in thousands):
 
 
June 30,
2015
 
December 31, 2014
Land
$
499,381

 
$
357,680

Buildings and improvements
2,201,682

 
1,987,050

Furniture, fixtures and equipment
196,425

 
183,016

Construction in progress
11,743

 
10,524

Investment in hotel properties
$
2,909,231

 
$
2,538,270

Less: Accumulated depreciation
(236,674
)
 
(194,580
)
Investment in hotel properties, net
$
2,672,557

 
$
2,343,690


11


Note 5. Investment in Joint Venture
On July 29, 2011, the Company acquired a 49% interest in a joint venture (the “Manhattan Collection joint venture”), which owns six properties in New York, New York. The transaction valued the six hotels at approximately $908.0 million (subject to working capital and similar adjustments). The Company accounts for this investment using the equity method.
In conjunction with the joint venture's refinancing in 2012, the Company provided the joint venture a $50.0 million unsecured special loan which matures at the earlier of July 4, 2018, the closing of any refinancing of the secured loan or the closing date of a portfolio sale (as defined in the loan agreement). The unsecured special loan bears interest at an annual fixed rate of 9.75% and requires interest-only payments through maturity. The unsecured special loan is pre-payable by the joint venture at any time. The unsecured special loan to the joint venture is included in the investment in joint venture on the consolidated balance sheets. Interest income is recorded on the accrual basis and the Company's 49% pro-rata portion of the special loan and related interest income is eliminated.
As of June 30, 2015, the joint venture reported $451.9 million in total assets, which represents the basis of the hotels prior to the Company's investment. The joint venture's total liabilities and members' deficit include $460.0 million in existing first mortgage debt and a $50.0 million unsecured special loan. The Company is not a guarantor of any existing debt of the joint venture except for limited customary carve-outs related to fraud or misapplication of funds.
At the time of the Company’s investment, the estimated fair value of the hotel properties owned by the Manhattan Collection joint venture exceeded the carrying value. This basis difference between the Company’s investment in the joint venture and the Company’s proportionate 49% interest in these depreciable assets held by the joint venture is amortized over the estimated life of the underlying assets and recognized as a component of equity in earnings (loss) of joint venture (referred to as the basis adjustment in the table below).
The summarized results of operations of the Company’s investment in the Manhattan Collection joint venture for the three and six months ended June 30, 2015 and 2014 are presented below (in thousands):
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$
47,538

 
$
50,045

 
$
78,559

 
$
83,973

Total expenses
42,347

 
42,571

 
83,850

 
84,335

Net income (loss)
$
5,191

 
$
7,474

 
$
(5,291
)

$
(362
)
Company’s 49% interest of net income (loss)
2,543

 
3,662

 
(2,593
)
 
(177
)
Basis adjustment
181

 
6

 
280

 
13

Special loan interest income elimination
596

 
596

 
1,185

 
1,184

Equity in earnings (loss) in joint venture
$
3,320

 
$
4,264

 
$
(1,128
)
 
$
1,020


The Company classifies the distributions from its joint venture in the statements of cash flows based upon an evaluation of the specific facts and circumstances of each distribution. For example, distributions from cash generated by property operations are classified as cash flows from operating activities. However, distributions received as a result of property sales are classified as cash flows from investing activities.
Note 6. Debt
Senior Unsecured Revolving Credit Facility
On May 19, 2015, the Company exercised the accordion feature under its amended and restated credit agreement that governs the Company's senior unsecured revolving credit facility and the Company's unsecured term loan facility to increase the aggregate borrowing capacity by $150.0 million to $750.0 million. The Company's $750.0 million credit facility provides for a $450.0 million unsecured revolving credit facility and a $300.0 million unsecured term loan ("First Term Loan"). The revolving credit facility matures in January 2019 with options to extend the maturity date to January 2020. The First Term Loan matures in January 2020. The Company has the ability to increase the aggregate borrowing capacity under the credit agreement to up to $1.0 billion, subject to lender approval. Borrowings on the revolving credit facility bear interest at LIBOR plus 1.55% to 2.30%, 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. As of June 30, 2015 and December 31, 2014, the Company had $310.0 million and $50.0 million, respectively, in outstanding borrowings under the revolving credit facility. As of June 30, 2015, the Company was in compliance with the credit agreement debt

12


covenants. For the three and six months ended June 30, 2015, the Company incurred unused commitment fees of $0.2 million and $0.3 million, respectively. For the three and six months ended June 30, 2014, the Company incurred unused commitment fees of $0.2 million and $0.3 million, respectively.
Unsecured Term Loan Facilities
As of December 31, 2014, the Company had $300.0 million outstanding under the First Term Loan which matures in January 2020. This term loan facility bears interest at a variable rate of LIBOR plus 1.50% to 2.25%, depending on the Company's leverage ratio.
On April 13, 2015, the Company entered into a second unsecured term loan facility ("Second Term Loan"). The Second Term Loan has a $100.0 million capacity and matures in April 2022. The Company drew the full $100.0 million under this facility. The Second Term Loan bears interest at a variable rate of LIBOR plus 1.70% to 2.55%, depending on the Company's leverage ratio.
On June 10, 2015, the Company entered into a third unsecured term loan facility ("Third Term Loan"). The Third Term Loan has a $125.0 million capacity, which may be increased up to $250.0 million, subject to lender approval, and matures in January 2021. This term loan bears interest at a variable rate of LIBOR plus 1.45% to 2.20%, depending on the Company's leverage ratio. In July 2015, the Company borrowed $125.0 million under the Third Term Loan.
As of June 30, 2015 and December 31, 2014, the Company had $400.0 million and $300.0 million, respectively, in outstanding borrowings under the unsecured term loan facilities. Each of the term loan facilities is subject to debt covenants substantially similar to the covenants under the amended and restated credit agreement. As of June 30, 2015, the Company was in compliance with all debt covenants. The Company has entered into interest rate swaps to effectively fix the LIBOR rates for all of its unsecured term loan facilities (see “Derivative and Hedging Activities” below).
Derivative and Hedging Activities
The Company enters into interest rate swap agreements to hedge against interest rate fluctuations. Unrealized gains and losses on the effective portion of hedging instruments are reported in other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense.
Prior to amending and restating the credit facility agreement in October 2014, the Company had entered into interest rate swap agreements with an aggregate notional amount of $100.0 million to hedge the LIBOR rate on its borrowing under the term loan facility through July 13, 2017. Upon amending and restating the credit agreement and drawing down the additional $200.0 million under the term loan facility, the Company entered into additional swap agreements to hedge the full $300.0 million, and, as a result, the First Term Loan had a weighted-average effective interest rate of 2.93% through July 13, 2017 and a weighted-average effective interest rate of 3.51% from July 13, 2017 through January 15, 2020, based on the Company’s leverage ratio at June 30, 2015.
The Company entered into interest rate swap agreements to effectively fix the LIBOR rate for the entire duration of the Second Term Loan, and as a result, the Second Term Loan had a weighted-average effective interest rate of 3.46%, based on the Company’s leverage ratio at June 30, 2015.
In July 2015, the Company entered into interest rate swap agreements to effectively fix the LIBOR rate for the entire duration of the Third Term Loan, and as a result, the Third Term Loan had a weighted-average effective interest rate of 3.29%, based on the Company’s leverage ratio at June 30, 2015.
The Company records all derivative instruments at fair value in the consolidated balance sheets. Fair values of interest rate swaps are determined using the standard market methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. Variable interest rates used in the calculation of projected receipts and payments on the swaps are based on an expectation of future interest rates derived from observable market interest rate curves (Overnight Index Swap curves) and volatilities (level 2 inputs). Derivatives expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. The Company believes it minimizes the credit risk by transacting with major creditworthy financial institutions.
As of June 30, 2015, the Company's derivative instruments were in both asset and liability positions, with aggregate asset and liability fair values of $1.7 million and $2.1 million, respectively, in the accompanying consolidated balance sheets. For the three and six months ended June 30, 2015, there was $4.1 million in unrealized gain and $0.1 million in unrealized loss, respectively, recorded in accumulated other comprehensive income. During the three and six months ended June 30, 2015, the Company reclassified $1.2 million and $2 million, respectively, from accumulated other comprehensive income (loss) to interest expense. During the three and six months ended June 30, 2014, the Company reclassified $0.1 million and $0.3 million, respectively, from accumulated other comprehensive income (loss) to interest expense. The Company expects

13


approximately $4.1 million will be reclassified from accumulated other comprehensive income to net income (loss) in the next 12 months.
Mortgage Debt
Each of the Company’s mortgage loans is secured by a first mortgage lien or by leasehold interests under the ground lease on the underlying property. The mortgages are non-recourse to the Company except for customary carve-outs such as fraud or misapplication of funds.
On March 5, 2015, the Company repaid the mortgage loans totaling $50.7 million on The Nines, A Luxury Collection Hotel, Portland.
Debt Summary
Debt as of June 30, 2015 and December 31, 2014 consisted of the following (dollars in thousands):
 
 
 
 
 
Balance Outstanding as of
 
Interest Rate
 
Maturity Date
 
June 30, 2015
 
December 31, 2014
Senior unsecured revolving credit facility
Floating (1)
 
January 2019
 
$
310,000

 
$
50,000

 
 
 
 
 
 
 
 
Term loans
 
 
 
 
 
 
 
First Term Loan
Floating(2)
 
January 2020
 
300,000

 
300,000

Second Term Loan
Floating(2)
 
April 2022
 
100,000

 

Third Term Loan
Floating(2)
 
January 2021
 

 

Total term loans
 
 
 
 
400,000

 
300,000

 
 
 
 
 
 
 
 
Mortgage loans
 
 
 
 
 
 
 
The Nines, A Luxury Collection Hotel, Portland (3)
7.39%
 
March 2015
 

 
50,725

InterContinental Buckhead Atlanta
4.88%
 
January 2016
 
48,865

 
49,320

Skamania Lodge
5.44%
 
February 2016
 
29,101

 
29,308

DoubleTree by Hilton Bethesda-Washington DC
5.28%
 
February 2016
 
34,298

 
34,575

Embassy Suites San Diego Bay-Downtown
6.28%
 
June 2016
 
63,794

 
64,462

Hotel Modera
5.26%
 
July 2016
 
23,030

 
23,225

Monaco Washington DC
4.36%
 
February 2017
 
43,330

 
43,756

Argonaut Hotel
4.25%
 
March 2017
 
43,418

 
44,006

Sofitel Philadelphia
3.90%
 
June 2017
 
46,322

 
46,968

Hotel Palomar San Francisco
5.94%
 
September 2017
 
26,280

 
26,461

The Westin Gaslamp Quarter San Diego
3.69%
 
January 2020
 
76,102

 
77,155

Mortgage loans at stated value
 
 
 
 
434,540

 
489,961

Mortgage loan premiums (4)
 
 
 
 
2,658

 
4,026

Total mortgage loans
 
 
 
 
$
437,198

 
$
493,987

Total debt
 
 
 
 
$
1,147,198

 
$
843,987

 
________________________ 
(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 senior unsecured credit agreement) plus an applicable margin. The Company has two six-month extension options.
(2) 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. The Company entered into interest rate swaps to effectively fix the interest rate for the First Term Loan, Second Term Loan and Third Term Loan. At June 30, 2015 and December 31, 2014, the Company had interest rate swaps on the full amounts outstanding. See "Derivative and Hedging Activities" above.

14


(3) The interest rate of 7.39% represents a weighted-average interest rate of the three non-recourse mortgage loans assumed in conjunction with the acquisition of The Nines, A Luxury Collection Hotel, Portland.
(4) Loan premiums on assumed mortgages recorded in purchase accounting for the Hotel Palomar San Francisco; Embassy Suites San Diego Bay - Downtown; Hotel Modera; and The Nines, A Luxury Collection Hotel, Portland.
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 mortgage debt as of June 30, 2015 and December 31, 2014 was $444.6 million and $503.9 million, respectively.
The Company was in compliance with all debt covenants as of June 30, 2015.
Note 7. Equity
Common Shares
The Company is authorized to issue up to 500,000,000 common shares of beneficial interest, $.01 par value per share (“common shares”). Each outstanding common share entitles the holder to one vote on each matter submitted to a vote of shareholders. Holders of the Company’s common shares are entitled to receive dividends when authorized by the Company’s board of trustees.
On March 5, 2014, the Company filed a prospectus supplement with the SEC to sell up to $175.0 million in common shares under a new "at the market" offering program (an "ATM program"). At the same time, the Company terminated its prior $170.0 million ATM program. As of June 30, 2015, $159.8 million in common shares remained available for issuance under the $175.0 million ATM program.
Common Dividends
The Company declared the following dividends on common shares/units for the six months ended June 30, 2015:
Dividend per
Share/Unit
 
For the quarter
ended
 
Record Date
 
Payable Date
$
0.31

 
March 31, 2015
 
March 31, 2015
 
April 15, 2015
$
0.31

 
June 30, 2015
 
June 30, 2015
 
July 15, 2015
Preferred Shares
The Company is authorized to issue up to 100,000,000 preferred shares of beneficial interest, $.01 par value per share (“preferred shares”).
As of June 30, 2015 and December 31, 2014, the Company had 5,600,000 of its 7.875% Series A Cumulative Redeemable Preferred Shares ("Series A Preferred Shares"), 3,400,000 of its 8.00% Series B Cumulative Redeemable Preferred Shares ("Series B Preferred Shares") and 5,000,000 of its 6.50% Series C Preferred Shares outstanding.
The Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares (collectively, the “Preferred Shares”) rank senior to the common shares of beneficial interest and on parity with each other with respect to payment of distributions. The Preferred Shares are cumulative redeemable preferred shares, do not have any maturity date and are not subject to mandatory redemption. The Company may not redeem the Series A Preferred Shares, Series B Preferred Shares or Series C Preferred Shares prior to March 11, 2016, September 21, 2016, and March 18, 2018, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. After those dates, the Company may, at its option, redeem the applicable Preferred Shares, in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions through the date of redemption. Upon the occurrence of a change of control, as defined in the Company's declaration of trust, the result of which the Company’s common shares and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE MKT or NASDAQ, or any successor exchanges, the Company may, at its option, redeem the Preferred Shares in whole or in part within 120 days following the change of control by paying $25.00 per share, plus any accrued and unpaid distributions through the date of redemption. If the Company does not exercise its right to redeem the Preferred Shares upon a change of control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares based on a defined formula subject to a share cap. The share cap on each Series A Preferred Share is 2.3234 common shares, each Series B Preferred Share is 3.4483 common shares, and each Series C Preferred Share is 2.0325 common shares.

15


Preferred Dividends
The Company declared the following dividends on preferred shares for the six months ended June 30, 2015:
 
Security Type
 
Dividend  per
Share/Unit
 
For the quarter
ended
 
Record Date
 
Payable Date
7.875% Series A
 
$
0.49

 
March 31, 2015
 
March 31, 2015
 
April 15, 2015
7.875% Series A
 
$
0.49

 
June 30, 2015
 
June 30, 2015
 
July 15, 2015
8.00% Series B
 
$
0.50

 
March 31, 2015
 
March 31, 2015
 
April 15, 2015
8.00% Series B
 
$
0.50

 
June 30, 2015
 
June 30, 2015
 
July 15, 2015
6.50% Series C
 
$
0.41

 
March 31, 2015
 
March 31, 2015
 
April 15, 2015
6.50% Series C
 
$
0.41

 
June 30, 2015
 
June 30, 2015
 
July 15, 2015

Non-controlling Interest of Common Units in Operating Partnership
Holders of Operating Partnership units have certain redemption rights that enable the unit holders to cause the Operating Partnership to redeem their units in exchange for, at the Company’s option, cash per unit equal to the market price of the Company’s common shares at the time of redemption or for the Company’s common shares on a one-for-one basis. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of share splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the Operating Partnership's limited partners or the Company's shareholders.
As of June 30, 2015 and December 31, 2014, the Operating Partnership had 236,351 long-term incentive partnership units (“LTIP units”) outstanding. Of the 236,351 LTIP units outstanding at June 30, 2015, 9,469 units have vested. Only vested LTIP units may be converted to common units of the Operating Partnership, which in turn can be tendered for redemption as described above.
Note 8. Share-Based Compensation Plan
The Company maintains the 2009 Equity Incentive Plan, as amended and restated (the "Plan"), to attract and retain independent trustees, executive officers and other key employees and service providers. The Plan provides for the grant of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards. Share awards under the Plan vest over a period determined by the Board of Trustees, generally over three to five years, with certain awards vesting over periods of up to six years. The Company pays or accrues for dividends on share-based awards. All share awards are subject to full or partial accelerated vesting upon a change in control and upon death or disability or certain other employment termination events as set forth in the award agreements. As of June 30, 2015, there were 767,952 common shares available for issuance under the Plan.
Service Condition Share Awards
From time to time, the Company awards restricted shares under the Plan to members of the Board of Trustees, officers and employees. These shares generally vest over three to five years based on continued service or employment.
The following table provides a summary of service condition restricted share activity as of June 30, 2015:
 
 
Shares
 
Weighted-Average
Grant Date
Fair Value
Unvested at January 1, 2015
129,988

 
$
27.17

Granted
40,507

 
$
48.87

Vested
(50,827
)
 
$
25.70

Forfeited
(990
)
 
$
36.45

Unvested at June 30, 2015
118,678

 
$
35.13

The fair value of each of these service condition restricted share awards is determined based on the closing price of the Company’s common shares on the grant date and compensation expense is recognized on a straight-line basis over the vesting period. For the three and six months ended June 30, 2015, the Company recognized approximately $0.4 million and $0.8 million, respectively, of share-based compensation expense related to these service condition restricted shares in the consolidated statements of operations. For the three and six months ended June 30, 2014, the Company recognized

16


approximately $0.4 million and $0.7 million, respectively, of share-based compensation expense related to these service condition restricted shares in the consolidated statements of operations. As of June 30, 2015, there was $3.3 million of total unrecognized share-based compensation expense related to unvested restricted shares. The unrecognized share-based compensation expense is expected to be recognized over the weighted-average remaining vesting period of 2.8 years.
Performance-Based Equity Awards

On February 8, 2012, the Board of Trustees approved a target award of 72,056 performance-based equity awards to officers and employees of the Company. In February 2015, these awards vested and the Company issued 120,016 and 87,556 common shares to officers and non-executive management employees, respectively. The actual number of common shares that ultimately vested were based on three performance criteria as defined in the agreements for the period of performance from January 1, 2012 through December 31, 2014.

On January 30, 2013, the Board of Trustees approved a target award of 72,118 performance-based equity awards to officers and employees of the Company. These awards vest on January 1, 2016. The actual number of common shares that ultimately vest will range from 0% to 200% of the target award (except for 11,753 target awards to non-executive management employees which have no maximum) and will be determined in 2016 based on three performance criteria as defined in the agreements for the period of performance from January 1, 2013 through December 31, 2015.
On December 13, 2013, the Board of Trustees approved a target award of 252,088 performance-based equity awards to officers and employees of the Company. The awards vest ratably on January 1, 2016, 2017, 2018, 2019 and 2020. The actual number of common shares that ultimately vest will range from 0% to 200% of the target award and will be determined on each vesting date based upon the two performance criteria as defined in the agreements for the period of performance beginning on the grant date and ending on the applicable vesting date.
On February 4, 2014, the Board of Trustees approved a target award of 66,483 performance-based equity awards to officers and employees of the Company. These awards vest on January 1, 2017. The actual number of common shares that ultimately vest will range from 0% to 200% of the target award (except for 12,261 target awards to non-executive management employees which have no maximum) and will be determined in 2017 based on three performance criteria as defined in the agreements for the period of performance from January 1, 2014 through December 31, 2016.
On February 11, 2015, the Board of Trustees approved a target award of 44,962 performance-based equity awards to officers and employees of the Company. These awards vest on January 1, 2018. The actual number of common shares that ultimately vest will range from 0% to 200% of the target award (except for 8,559 target awards to non-executive management employees which have no maximum) and will be determined in 2018 based on three performance criteria as defined in the agreements for the period of performance from January 1, 2015 through December 31, 2017.
The grant date fair value of the performance awards were determined using a Monte Carlo simulation method with the following assumptions:

17


Performance Award Grant Date
 
Percentage of Total Award
 
Grant Date Fair Value by Component ($ in millions)
 
Volatility
 
Interest Rate
 
Dividend Yield
February 8, 2012
 
 
 
 
 
 
 
 
 
 
 
Relative Total Shareholder Return
 
30.00%
 
$0.7
 
33.00%
 
0.34%
 
2.20%
 
Absolute Total Shareholder Return
 
30.00%
 
$0.6
 
33.00%
 
0.34%
 
2.20%
 
EBITDA Comparison
 
40.00%
 
$0.7
 
33.00%
 
0.34%
 
2.20%
 
 
 
 
 
 
 
 
 
 
 
 
January 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Relative Total Shareholder Return
 
30.00%
 
$0.7
 
31.00%
 
0.41%
 
2.20%
 
Absolute Total Shareholder Return
 
30.00%
 
$0.5
 
31.00%
 
0.41%
 
2.20%
 
EBITDA Comparison
 
40.00%
 
$0.7
 
31.00%
 
0.41%
 
2.20%
 
 
 
 
 
 
 
 
 
 
 
 
December 13, 2013
 
 
 
 
 
 
 
 
 
 
 
Relative Total Shareholder Return
 
50.00%
 
$4.7
 
29.00%
 
0.34% - 2.25%
 
2.40%
 
Absolute Total Shareholder Return
 
50.00%
 
$2.9
 
29.00%
 
0.34% - 2.25%
 
2.40%
 
 
 
 
 
 
 
 
 
 
 
 
February 4, 2014
 
 
 
 
 
 
 
 
 
 
 
Relative Total Shareholder Return
 
30.00%
 
$0.7
 
29.00%
 
0.62%
 
2.40%
 
Absolute Total Shareholder Return
 
30.00%
 
$0.5
 
29.00%
 
0.62%
 
2.40%
 
EBITDA Comparison
 
40.00%
 
$0.8
 
29.00%
 
0.62%
 
2.40%
 
 
 
 
 
 
 
 
 
 
 
 
February 11, 2015
 
 
 
 
 
 
 
 
 
 
 
Relative Total Shareholder Return
 
30.00%
 
$0.9
 
22.00%
 
1.02%
 
2.50%
 
Absolute Total Shareholder Return
 
40.00%
 
$0.7
 
22.00%
 
1.02%
 
2.50%
 
EBITDA Comparison
 
30.00%
 
$0.7
 
22.00%
 
1.02%
 
2.50%
In the table above, the Relative Total Shareholder Return and Absolute Total Shareholder Return components are market conditions as defined by ASC 718. The EBITDA Comparison component is a performance condition as defined by ASC 718, and, therefore, compensation expense related to this component will be reassessed at each reporting date based on the Company's estimate of the probable level of achievement, and the accrual of compensation expense will be adjusted as appropriate.
 
Dividends on unvested performance-based equity awards accrue over the vesting period and will be paid on the actual number of shares that vest at the end of the applicable period. The Company recognizes compensation expense on a straight-line basis through the vesting date. As of June 30, 2015, there was approximately $13.7 million of unrecognized compensation expense related to these performance-based equity awards which will be recognized over the weighted-average remaining vesting period of 2.2 years. For the three and six months ended June 30, 2015, the Company recognized $1.5 million and $3.0 million, respectively, in expense related to these awards. For the three and six months ended June 30, 2014, the Company recognized $1.1 million and $2.7 million, respectively, in expense related to these awards.
Long-Term Incentive Partnership Units
LTIP units, which are also referred to as profits interest units, may be issued to eligible participants for the performance of services to or for the benefit of the Operating Partnership. LTIP units are a class of partnership unit in the Operating Partnership and receive, whether vested or not, the same per-unit profit distributions as the other outstanding units in the Operating Partnership, which equal per-share distributions on common shares. LTIP units are allocated their pro-rata share of the Company's net income (loss). Vested LTIP units may be converted by the holder, at any time, into an equal number of common Operating Partnership units and thereafter will possess all of the rights and interests of a common Operating Partnership unit, including the right to redeem the common Operating Partnership unit for a common share in the Company or cash, at the option of the Operating Partnership.

18


As of June 30, 2015, the Operating Partnership had two classes of LTIP units, LTIP Class A and LTIP Class B units, all of which are held by officers of the Company.
LTIP Class A units were granted to executives of the Company concurrent with completion of the Company's initial public offering in December 2009. These LTIP units vest ratably on each of the first five anniversaries of their dates of grant and were valued at $8.50 per LTIP unit at the date of grant using a Monte Carlo simulation method model.
On December 13, 2013, the Board of Trustees approved a grant of 226,882 LTIP Class B units to executive officers of the Company. The LTIP units are subject to time-based vesting in five equal installments beginning January 1, 2016 and ending on January 1, 2020. The fair value of each award was determined based on the closing price of the Company’s common shares on the grant date of $29.19 per unit. The aggregate grant date fair value of the LTIP Class B units was $6.6 million.
As of June 30, 2015, the Company had 236,351 LTIP units outstanding. All LTIP units will vest upon a change in control. As of June 30, 2015, of the 236,351 units outstanding, 9,469 LTIP units have vested, all of which were LTIP Class A units.
For the three and six months ended June 30, 2015, the Company recognized $0.3 million and $0.6 million, respectively, in expense related to these units. For the three and six months ended June 30, 2014, the Company recognized $0.7 million and $1.3 million, respectively, in expense related to these units. As of June 30, 2015, there was $4.9 million of total unrecognized share-based compensation expense related to LTIP units. This unrecognized share-based compensation expense is expected to be recognized over the weighted-average remaining vesting period of 2.3 years. The aggregate expense related to the LTIP unit grants is presented as non-controlling interest in the Company’s consolidated balance sheets.
Note 9. Income Taxes
The Company's TRS, PHL, is subject to federal and state corporate income taxes at statutory tax rates. The Company has estimated PHL's income tax expense (benefit) for the six months ended June 30, 2015 using an estimated combined federal and state statutory tax rate of 38.0%.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, and local jurisdictions, where applicable. As of June 30, 2015 and December 31, 2014, the statute of limitations remains open for all major jurisdictions for tax years dating back to 2012 and 2011, respectively.
Note 10. Earnings Per Share
The following is a reconciliation of basic and diluted earnings per common share (in thousands, except share and per-share data):
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders
$
20,004

 
$
16,591

 
$
20,659

 
$
14,588

Less: dividends paid on unvested share-based compensation
(107
)
 
(125
)
 
(215
)
 
(250
)
Undistributed earnings attributable to share-based compensation

 
(14
)
 

 

Net income (loss) available to common shareholders
$
19,897

 
$
16,452

 
$
20,444

 
$
14,338

Denominator:
 
 
 
 
 
 
 
Weighted-average number of common shares — basic
71,735,129

 
63,764,929

 
71,696,294

 
63,763,935

Effect of dilutive share-based compensation
690,823

 
360,128

 
767,125

 
386,331

Weighted-average number of common shares — diluted
72,425,952

 
64,125,057

 
72,463,419

 
64,150,266

 
 
 
 
 
 
 
 
Net income (loss) per share available to common shareholders — basic
$
0.28

 
$
0.26

 
$
0.29

 
$
0.22

Net income (loss) per share available to common shareholders — diluted
$
0.27

 
$
0.26

 
$
0.28

 
$
0.22

For the three months ended June 30, 2015, 40,111 unvested service condition restricted shares and performance based equity awards were excluded from diluted weighted-average common shares, as their effect would have been anti-dilutive. The LTIP units held by the non-controlling interest holders have been excluded from the denominator of the diluted earnings per

19


share as there would be no effect on the amounts since the limited partners' share of income (loss) would also be added or subtracted to derive net income (loss) available to common shareholders.
Note 11. Commitments and Contingencies
Management Agreements
The Company’s hotel properties are operated pursuant to management agreements with various management companies. The terms of these management agreements range from five years to 20 years, not including renewals, and five years to 52 years, including renewals. Many of the Company’s management agreements are terminable at will by the Company upon paying a termination fee and some are terminable by the Company upon sale of the property, with, in some cases, the payment of termination fees. Most of the agreements also provide the Company the ability to terminate based on failure to achieve defined operating performance thresholds. Termination fees range from zero to up to six times the annual base management and incentive management fees, depending on the agreement and the reason for termination. Certain of the Company’s management agreements are non-terminable except upon the manager’s breach of a material representation or the manager’s failure to meet performance thresholds as defined in the management agreement.
The management agreements require the payment of a base management fee generally between 2% and 4% of hotel revenues. Under certain management agreements, the management companies are also eligible to receive an incentive management fee if hotel operating income, cash flows or other performance measures, as defined in the agreements, exceed certain performance thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on its investment in the hotel. Combined base and incentive management fees were $6.0 million and $10.8 million for the three and six months ended June 30, 2015, respectively, and $4.6 million and $8.4 million for the three and six months ended June 30, 2014, respectively. Base and incentive management fees are included in other indirect expenses in the Company's consolidated statements of operations and comprehensive income.
Reserve Funds
Certain of the Company’s agreements with its hotel managers, franchisors and lenders have provisions for the Company to provide funds, typically 4.0% of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ furniture, fixtures and equipment.
Restricted Cash
At June 30, 2015 and December 31, 2014, the Company had $13.5 million and $16.4 million, respectively, in restricted cash, which consisted of reserves for replacement of furniture and fixtures or reserves to pay for real estate taxes or property insurance under certain hotel management agreements or loan agreements. For purposes of the statement of cash flows, changes in restricted cash caused by changes in required reserves for real estate taxes or property insurance are shown as operating activities. Changes in restricted cash caused by changes in required reserves for furniture and fixtures replacement are shown as investing activities.
Ground and Hotel Leases
The Hotel Monaco Washington DC is subject to a long-term ground lease agreement on the land underlying the hotel. The ground lease expires in 2059. The hotel is required to pay the greater of an annual base rent of $0.2 million or a percentage of gross hotel revenues and gross food and beverage revenues in excess of certain thresholds, as defined in the agreement. The lease contains certain restrictions on modifications that can be made to the hotel structure due to its status as a national historic landmark.
The Argonaut Hotel is subject to a long-term ground lease agreement on the land underlying the hotel. The ground lease expires in 2059. The hotel is required to pay the greater of an annual base rent of $1.3 million or a percentage of rooms revenues, food and beverage revenues and other department revenues in excess of certain thresholds, as defined in the agreement. The lease contains certain restrictions on modifications that can be made to the structure due to its status as a national historic landmark.

The Hotel Palomar San Francisco is subject to a long-term hotel lease for the right to use the ground floor lobby area and floors five through nine of the building and underlying land. The hotel lease expires in 2097. The hotel is required to pay annual base rent and a percentage rent, which is based on gross hotel and gross food and beverage revenues in excess of certain thresholds, as defined in the lease agreement.


20


The Hotel Zephyr Fisherman's Wharf is subject to both a long-term primary ground lease and a secondary sublease. The primary ground lease requires the hotel to make annual base rental payments of $0.1 million and percentage rental payments based on 5% of hotel revenues and 7.5% of retail revenues attributed to guest rooms and retail space added to the hotel property in 1998. Beginning in 2017, the primary ground lease requires the hotel to pay percentage rent based on 6% of total hotel revenues and 7.5% of total retail and parking revenues. The primary ground lease expires in 2062. The secondary sublease requires the hotel to make rental payments based on hotel net income, as defined in the agreement, related to the rooms and retail space in existence prior to the 1998 renovation. The secondary sublease expires in April 2016 at which time the hotel will only be subject to the primary ground lease through its maturity in 2062.

The Prescott Hotel is subject to a long-term hotel lease for the right to use floors three through seven, the basement and the roof of an adjacent, attached building containing 64 of the 160 guest rooms at the property. The hotel lease expires in 2059, with a one time extension option of 30 years. The Company is required to pay annual base rent of approximately $0.5 million, beginning in October 2017. The annual base rent is subject to a fixed increase every year during the remaining lease term. The building portion of the long-term hotel lease assumed was determined to be a capital lease.

The Hotel Palomar Los Angeles - Beverly Hills is subject to a long-term ground lease agreement on the land underlying the hotel. The ground lease expires in 2107, including 19 five-year extension options. The hotel is required to pay annual base rent of approximately $3.5 million through January 2017 and the base rent will be adjusted for consumer price index ("CPI") increases at each five-year extension.

The Union Station Hotel, Autograph Collection is subject to a long-term ground lease agreement on the land underlying the hotel. The ground lease expires in 2105. The hotel is required to pay the greater of annual base rent of $0.1 million or annual real property taxes.

The ground leases and Hotel Palomar San Francisco hotel lease are considered operating leases. The Company records expense on a straight-line basis for leases that provide for minimum rental payments that increase in pre-established amounts over the remaining terms of the leases. Ground rent expense was $2.8 million and $5.5 million for the three and six months ended June 30, 2015, respectively, and $2.1 million and $3.7 million for the three and six months ended June 30, 2014, respectively. Ground rent expense is included in real estate taxes, personal property taxes, property insurance and ground rent in the Company's consolidated statements of operations and comprehensive income.

Litigation
The nature of the operations of hotels exposes the Company's hotels, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. The Company has insurance to cover certain potential material losses. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any material litigation threatened against the Company.
Note 12. Supplemental Information to Statements of Cash Flows
 
 
For the six months ended June 30,
 
2015
 
2014
 
(in thousands)
Interest paid, net of capitalized interest
$
17,587

 
$
12,539

Interest capitalized
$
193

 
$

Income taxes paid
$
1,824

 
$
1,487

Non-Cash Investing and Financing Activities:
 
 
 
Distributions payable on common shares/units
$
23,973

 
$
15,472

Distributions payable on preferred shares
$
5,550

 
$
5,202

Issuance of common shares for Board of Trustees compensation
$
373

 
$
421

Below (above) market rate contracts assumed in connection with acquisition
$
20,110

 
$
2,473

Capital lease obligation assumed in connection with acquisition
$

 
$
10,758

Accrued additions and improvements to hotel properties
$
2,299

 
$
3,697

Write-off of fully depreciated furniture, fixtures and equipment
$
3,550

 
$

Write-off of deferred financing costs
$
321

 
$


21


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

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Pebblebrook Hotel Trust is a Maryland real estate investment trust that conducts its operations so as to qualify as a 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.

Forward-Looking Statements
This report, together with other statements and information publicly disseminated by us, contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may", "will", “should”, "potential", "could", "seek", "assume", "forecast", "believe", "expect", "intend", "anticipate", "estimate", "project" or similar expressions. Forward-looking statements in this report include, among others, statements about our business strategy, including acquisition and development strategies, industry trends, estimated revenues and expenses, our ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and our ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and which could materially affect actual results, performance or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
risks associated with the hotel industry, including competition, increases in employment costs, energy costs and other operating costs, or decreases in demand caused by events beyond our control including, without limitation, actual or threatened terrorist attacks, cyber attacks, any type of flu or disease-related pandemic, or downturns in general and local economic conditions;
the availability and terms of financing and capital and the general volatility of securities markets;
our dependence on third-party managers of our hotels, including our inability to implement strategic business decisions directly;
risks associated with the real estate industry, including environmental contamination and costs of complying with the Americans with Disabilities Act and similar laws;
interest rate increases;
our possible failure to qualify as a REIT under the Code, as amended, and the risk of changes in laws affecting REITs;
the timing and availability of potential hotel acquisitions and our ability to identify and complete hotel acquisitions in accordance with our business strategy;
the possibility of uninsured losses;
risks associated with redevelopment and repositioning projects, including delays and cost overruns; and
the other factors discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as may be updated elsewhere in this report.
Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Overview

Pebblebrook Hotel Trust is an internally managed hotel investment company, organized in October 2009, to opportunistically acquire and invest in hotel properties located primarily in major U.S. cities, with an emphasis on the major gateway coastal markets. As of June 30, 2015, the Company owned interests in 37 hotels, including 31 wholly owned hotels with a total of 7,402 guest rooms, and a 49% joint venture interest in six hotels with a total of 1,777 guest rooms.

22


During the six months ended June 30, 2015, we acquired two hotel properties, the 189-room LaPlaya Beach Resort and LaPlaya Beach Club, in Naples, Florida, for $185.5 million and the 221-room The Tuscan Fisherman's Wharf, a Best Western Plus Hotel, in San Francisco, California for $122.0 million. We also successfully increased the borrowing capacity of our senior unsecured revolving credit facility by $150.0 million to $750.0 million and executed two new unsecured term loans for an aggregrate of $225.0 million.
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. We expect to invest a total of approximately $30.0 million to $50.0 million for the remainder of 2015 on renovation and repositioning projects and other capital improvements.

The U.S. lodging industry is expected to exhibit continued positive fundamentals for the remainder of 2015. Moderate economic growth, a strong U.S. dollar, global volatility, government fiscal deficits and government partisanship have created uncertainty among business and leisure travelers, however, U.S. employment and housing markets have improved. The strength in transient travel, both business and leisure, and low supply growth have resulted in high and increasing occupancy levels in our markets, which has allowed us to drive healthy increases in average daily rates. We expect this to continue in 2015, subject to currency headwinds that can negatively impact international inbound travel, and we believe that our properties have opportunities to continue to achieve significant growth in their operating cash flows and long-term economic values.

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"); average daily rate ("ADR"); occupancy rate ("occupancy"); funds from operations ("FFO"); and earnings before interest, income taxes, depreciation and amortization ("EBITDA"). We evaluate individual hotel and company-wide performance with comparisons to budgets, prior periods and competing properties. ADR, occupancy and RevPAR may be impacted by macroeconomic factors as well as regional and local economies and events. See "Non-GAAP Financial Matters" for further discussion of FFO and EBITDA.

Hotel Operating Statistics

The following table represents the key same-property hotel operating statistics for our wholly owned hotels for the three and six months ended June 30, 2015 and 2014.

 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Total Wholly Owned Portfolio
 
 
 
 
 
 
 
 
Same-Property Occupancy
 
86.4
%
 
87.4
%
 
82.4
%
 
83.8
%
Same-Property ADR
 
$
245.30

 
$
229.96

 
$
236.08

 
$
220.04

Same-Property RevPAR
 
$
211.90

 
$
200.97

 
$
194.45

 
$
184.37

____________
This schedule of hotel results for the three months ended June 30, 2015 and 2014 includes information from all of the hotels we owned as of June 30, 2015, except for the LaPlaya Beach Resort and LaPlaya Beach Club and The Tuscan Fisherman's Wharf, a Best Western Plus Hotel. This schedule of hotel results for the six months ended June 30, 2015 and 2014 includes information from all of the hotels we owned as of June 30, 2015, except for the LaPlaya Beach Resort and LaPlaya Beach Club and The Tuscan Fisherman's Wharf, a Best Western Plus Hotel for Q1 and Q2 in both 2015 and 2014 and Hotel Vintage Portland for Q1 in both 2015 and 2014 because it was closed for renovation for most of the first quarter of 2015. The schedule above does not include the hotel results of our Manhattan Collection joint venture. These hotel results for the respective periods include information reflecting operational performance for some hotels prior to our ownership of those hotels.
Results of Operations
At June 30, 2015 and 2014, we had 31 and 24 wholly owned properties and leasehold interests, respectively. All properties owned during these periods have been included in our results of operations during the respective periods since their dates of acquisition. Based on when a property was acquired, operating results for certain properties are not comparable for the

23


three and six months ended June 30, 2015 and 2014. The properties listed in the table below are hereinafter referred to as "non-comparable properties" for the periods indicated and all other properties are considered and referred to as "comparable properties":
 
 
 
 
 
 
Non-comparable property for the
Property
 
Location
 
Acquisition Date
 
Three Months ended June 30, 2015 and 2014
 
Six Months ended June 30, 2015 and 2014
Prescott Hotel
 
San Francisco, CA
 
May 22, 2014
 
X
 
X
The Nines, A Luxury Collection Hotel, Portland
 
Portland, OR
 
July 17, 2014
 
X
 
X
The Westin Colonnade Coral Gables
 
Miami, FL
 
November 12, 2014
 
X
 
X
Hotel Palomar Los Angeles - Beverly Hills
 
Los Angeles, CA
 
November 20, 2014
 
X
 
X
Union Station Hotel, Autograph Collection
 
Nashville, TN
 
December 10, 2014
 
X
 
X
Revere Hotel Boston Common
 
Boston, MA
 
December 18, 2014
 
X
 
X
LaPlaya Beach Resort and LaPlaya Beach Club
 
Naples, FL
 
May 21, 2015
 
X
 
X
The Tuscan Fisherman's Wharf, a Best Western Plus Hotel
 
San Francisco, CA
 
June 11, 2015
 
X
 
X
Comparison of the three months ended June 30, 2015 to the three months ended June 30, 2014
Revenues — Total hotel revenues increased by $50.2 million, of which $6.1 million was contributed by our comparable properties and $44.1 million was contributed by the non-comparable properties. The increase from our comparable properties is primarily a result of increases in revenues at our properties located on the West Coast as a result of increases in ADR at those hotels, offset by a reduction in revenues of $2.1 million at the W Los Angeles - West Beverly Hills and Hotel Zephyr Fisherman's Wharf, which were under renovation during the second quarter of 2015.
Hotel operating expenses — Total hotel operating expenses increased by $26.0 million. The comparable properties contributed $0.8 million of the increase, which is a result of increases in expenses at our properties offset by a reduction of $1.6 million in expenses primarily due to the closing of the restaurant at the W Los Angeles - West Beverly Hills. The remaining $25.2 million of the increase was from the non-comparable properties.
Depreciation and amortization — Depreciation and amortization expense increased by $8.7 million primarily due to the additional depreciation for the non-comparable properties.
Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, insurance and ground rent increased by $1.9 million primarily due to the non-comparable properties.
Corporate general and administrative — Corporate general and administrative expenses increased by $0.6 million primarily as a result of increases in employee compensation costs. Corporate general and administrative expenses consist of employee compensation costs, legal and professional fees, insurance, state franchise taxes and other expenses.
Hotel acquisition costs — Hotel acquisition costs increased by $4.1 million due to transfer taxes and other acquisition related costs on the two properties acquired during this period compared to the prior period. Typically, hotel property acquisition costs consist of legal fees, other professional fees, transfer taxes and other direct costs associated with our pursuit of hotel investments. As a result, these costs are generally higher when more properties are acquired or when we have significant ongoing acquisition activity.
Interest income — Interest income remained consistent with the prior period.
Interest expense — Interest expense increased by $3.0 million , a result of higher debt balances from mortgage assumptions and credit facility borrowings in connection with non-comparable properties.
Equity in earnings (losses) of joint venture — Equity in earnings of joint venture decreased $0.9 million due to decreases in revenues as a result of decreases in ADR at the Manhattan Collection joint venture hotels.

24


Income tax (expense) benefit — Income tax expense increased $1.4 million due to higher net income at our TRS compared to the prior period.
Non-controlling interests — Non-controlling interests represent the allocation of income or loss of our Operating Partnership to the common units held by the LTIP unit holders.
Distributions to preferred shareholders — Distributions to preferred shareholders increased $0.4 million as a result of the additional issuances of the Series C Preferred Shares in September 2014.
Other Comprehensive Income (loss) — Other comprehensive income increased as a result of the change in the fair values of our interest rate swaps.
Comparison of the six months ended June 30, 2015 to the six months ended June 30, 2014
Revenues — Total hotel revenues increased by $88.0 million, of which $9.8 million was contributed by our comparable properties and $78.2 million was contributed by the non-comparable properties. The increase from our comparable properties is primarily a result of increases in revenues at our properties located on the West Coast as a result of increases in ADR at those hotels, offset by a reduction in revenues of $7.3 million at the W Los Angeles - West Beverly Hills, Hotel Vintage Portland and Hotel Zephyr Fisherman's Wharf, all of which were under renovation during the second quarter of 2015.
Hotel operating expenses — Total hotel operating expenses increased by $48.6 million. The comparable properties contributed $0.9 million of the increase, which is a result of increases in expenses at our properties offset by a reduction of $5.1 million in expenses due to the closing of the restaurant at the W Los Angeles - West Beverly Hills and the renovations at the Hotel Vintage Portland and Hotel Zephyr Fisherman's Wharf. The remaining $47.7 million of the increase was from the non-comparable properties.
Depreciation and amortization — Depreciation and amortization expense increased by $14.1 million primarily due to the additional depreciation for the non-comparable properties.
Real estate taxes, personal property taxes, property insurance and ground rent — Real estate taxes, personal property taxes, insurance and ground rent increased by $4.9 million primarily due to the non-comparable properties.
Corporate general and administrative — Corporate general and administrative expenses increased by $2.0 million primarily as a result of increases in employee compensation costs offset by a reduction in non-cash share-based compensation costs. Corporate general and administrative expenses consist of employee compensation costs, legal and professional fees, insurance, state franchise taxes and other expenses.
Hotel acquisition costs — Hotel acquisition costs increased by $3.9 million due to transfer taxes and other acquisition related costs incurred on the acquisition of the two properties acquired during this period compared to the prior period. Typically, hotel property acquisition costs consist of legal fees, other professional fees, transfer taxes and other direct costs associated with our pursuit of hotel investments. As a result, these costs are generally higher when more properties are acquired or when we have significant ongoing acquisition activity.
Interest income — Interest income remained consistent with the prior period.
Interest expense — Interest expense increased by $5.2 million, a result of higher debt balances from mortgage assumptions in connection with non-comparable properties.
Equity in earnings (losses) of joint venture — Equity in losses of joint venture increased $2.1 million due to decreases in revenues as a result of decreases in occupancy and ADR at the Manhattan Collection joint venture hotels.
Income tax (expense) benefit — Income tax expense increased $0.3 million due to higher net income at our TRS compared to the prior period.
Non-controlling interests — Non-controlling interests represent the allocation of income or loss of our Operating Partnership to the common units held by the LTIP unit holders.
Distributions to preferred shareholders — Distributions to preferred shareholders increased $0.8 million as a result of the additional issuances of the Series C Preferred Shares in September 2014.
Other Comprehensive Income (loss) — Other comprehensive loss decreased as a result of the change in the fair values of our interest rate swaps.

25


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 and EBITDA, 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 the National Association of Real Estate Investment Trusts (NAREIT), which defines FFO as net income (calculated in accordance with GAAP), excluding real estate related depreciation and amortization, gains (losses) from sales of real estate, impairments of real estate assets, 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 and gains (losses) from sales of real estate, both of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance, we believe that FFO provides investors a useful financial measure to evaluate our operating performance.
The following table reconciles net income (loss) to FFO and FFO available to common share and unit holders for the three and six months ended June 30, 2015 and 2014 (in thousands):
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
26,583

 
$
22,893

 
$
33,753

 
$
27,014

Adjustments:
 
 
 
 
 
 
 
Depreciation and amortization
24,828

 
16,186

 
46,090

 
32,030

Depreciation and amortization from joint venture
2,100

 
2,240

 
4,258

 
4,451

FFO
$
53,511

 
$
41,319

 
$
84,101

 
$
63,495

Distribution to preferred shareholders
(6,487
)
 
(6,082
)
 
(12,975
)
 
(12,163
)
FFO available to common share and unit holders
$
47,024

 
$
35,237

 
$
71,126

 
$
51,332

EBITDA is defined as earnings before interest, income taxes, depreciation and amortization. We believe that EBITDA provides investors a useful financial measure to evaluate our operating performance, excluding the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization).
The following table reconciles net income (loss) to EBITDA for the three and six months ended June 30, 2015 and 2014 (in thousands):
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
26,583

 
$
22,893

 
$
33,753

 
$
27,014

Adjustments:
 
 
 
 
 
 
 
Interest expense
9,256

 
6,256

 
17,577

 
12,331

Interest expense from joint venture
2,278

 
2,270

 
4,534

 
4,534

Income tax expense (benefit)
3,519

 
2,121

 
130

 
(213
)
Depreciation and amortization
24,885

 
16,230

 
46,210

 
32,118

Depreciation and amortization from joint venture
2,100

 
2,240

 
4,258

 
4,451

EBITDA
$
68,621

 
$
52,010

 
$
106,462

 
$
80,235

Neither FFO nor EBITDA represent cash generated from operating activities as determined by U.S. GAAP and neither should be considered as an alternative to U.S. GAAP net income (loss), as an indication of our financial performance, or to U.S. GAAP cash flow from operating activities, as a measure of liquidity. In addition, FFO and EBITDA are not indicative of funds available to fund cash needs, including the ability to make cash distributions.
Critical Accounting Policies


26


Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
Recent Accounting Standards
See Note 2, “Summary of Significant Accounting Policies,” to our consolidated interim financial statements for additional information relating to recently issued accounting pronouncements.
Liquidity and Capital Resources
We expect to meet our short-term liquidity requirements through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our senior unsecured revolving credit facility. We expect our existing cash balances and cash provided by operations will be adequate to fund operating requirements, service debt and fund dividends in accordance with the REIT requirements of the federal income tax laws.
We expect to meet our long-term liquidity requirements, such as hotel property acquisitions, property redevelopment, investments in existing or new joint ventures, and debt principal payments and debt maturities, through the net proceeds from additional issuances of common shares, additional issuances of preferred shares, issuances of units of limited partnership interest in our Operating Partnership, secured and unsecured borrowings, and cash provided by operations. The success of our business strategy may depend in part on our ability to access additional capital through issuances of debt and equity securities, which is dependent on favorable market conditions.
We strive to maintain prudent debt leverage and intend to opportunistically enhance our capital position.
Senior Unsecured Credit Facility
On October 16, 2014, we amended and restated the credit agreement governing our unsecured revolving credit facility and unsecured term loan facility. On May 19, 2015, we exercised the agreement's accordion feature to increase the aggregate borrowing capacity by $150.0 million to $750.0 million. Our $750.0 million credit facility provides for a $450.0 million unsecured revolving credit facility and a $300.0 million unsecured term loan ("First Term Loan"). The unsecured revolving credit facility matures in January 2019 with options to extend the maturity date to January 2020 and the First Term Loan matures in January 2020.
As of June 30, 2015, we had $310.0 million outstanding under the revolving credit facility and we had $300.0 million outstanding the First Term Loan. We have the ability to further increase the aggregate borrowing capacity under the credit agreement to up to $1.0 billion, subject to lender approval. We intend to repay indebtedness incurred under our senior unsecured revolving credit facility from time to time out of cash flows from operations and from the net proceeds of issuances of additional equity and debt securities, as market conditions permit.
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 interest rate depends upon our leverage ratio pursuant to the provisions of the credit facility agreement. We entered into interest rate swaps to effectively fix the interest rates of the First Term Loan. At June 30, 2015, we had interest rate swaps with an aggregate notional amount of $300.0 million, and as a result, the First Term Loan had a weighted-average effective interest rate of 2.93% through July 13, 2017 and a weighted-average effective interest rate of 3.51% from July 13, 2017 through January 15, 2020, based on the Company's leverage ratio at June 30, 2015.



27


Debt Summary
Debt as of June 30, 2015 and December 31, 2014 consisted of the following (dollars in thousands):
 
 
 
 
 
Balance Outstanding as of
 
Interest Rate
 
Maturity Date
 
June 30, 2015
 
December 31, 2014
Senior unsecured revolving credit facility
Floating (1)
 
January 2019
 
$
310,000

 
$
50,000

 
 
 
 
 
 
 
 
Term loans
 
 
 
 
 
 
 
First Term Loan
Floating(2)
 
January 2020
 
300,000

 
$
300,000

Second Term Loan
Floating(2)
 
April 2022
 
100,000

 

Third Term Loan
Floating(2)
 
January 2021
 

 

Total term loans
 
 
 
 
400,000

 
300,000

 
 
 
 
 
 
 
 
Mortgage loans
 
 
 
 
 
 
 
The Nines, A Luxury Collection Hotel, Portland (3)
7.39%
 
March 2015
 

 
50,725

InterContinental Buckhead Atlanta
4.88%
 
January 2016
 
48,865

 
49,320

Skamania Lodge
5.44%
 
February 2016
 
29,101

 
29,308

DoubleTree by Hilton Bethesda-Washington DC
5.28%
 
February 2016
 
34,298

 
34,575

Embassy Suites San Diego Bay-Downtown
6.28%
 
June 2016
 
63,794

 
64,462

Hotel Modera
5.26%
 
July 2016
 
23,030

 
23,225

Monaco Washington DC
4.36%
 
February 2017
 
43,330

 
43,756

Argonaut Hotel
4.25%
 
March 2017