Hyatt Hotels Corp - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
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 No. 001-34521
HYATT HOTELS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 20-1480589 | |||||
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
150 North Riverside Plaza
8th Floor, Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 750-1234
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | |||
Class A common stock | H | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At October 25, 2019, there were 36,582,951 shares of the registrant's Class A common stock, $0.01 par value, outstanding and 66,163,274 shares of the registrant's Class B common stock, $0.01 par value, outstanding.
HYATT HOTELS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
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. | ||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions of dollars, except per share amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||
REVENUES: | |||||||||||||||
Owned and leased hotels | $ | 430 | $ | 450 | $ | 1,390 | $ | 1,450 | |||||||
Management, franchise, and other fees | 148 | 133 | 447 | 407 | |||||||||||
Amortization of management and franchise agreement assets constituting payments to customers | (5 | ) | (5 | ) | (16 | ) | (15 | ) | |||||||
Net management, franchise, and other fees | 143 | 128 | 431 | 392 | |||||||||||
Other revenues | 25 | 7 | 98 | 27 | |||||||||||
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties | 617 | 489 | 1,826 | 1,447 | |||||||||||
Total revenues | 1,215 | 1,074 | 3,745 | 3,316 | |||||||||||
DIRECT AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES: | |||||||||||||||
Owned and leased hotels | 346 | 354 | 1,070 | 1,095 | |||||||||||
Depreciation and amortization | 85 | 81 | 248 | 243 | |||||||||||
Other direct costs | 28 | 8 | 103 | 23 | |||||||||||
Selling, general, and administrative | 83 | 82 | 306 | 260 | |||||||||||
Costs incurred on behalf of managed and franchised properties | 633 | 487 | 1,871 | 1,447 | |||||||||||
Direct and selling, general, and administrative expenses | 1,175 | 1,012 | 3,598 | 3,068 | |||||||||||
Net gains and interest income from marketable securities held to fund rabbi trusts | — | 10 | 41 | 19 | |||||||||||
Equity losses from unconsolidated hospitality ventures | (5 | ) | (6 | ) | (2 | ) | (17 | ) | |||||||
Interest expense | (19 | ) | (19 | ) | (58 | ) | (57 | ) | |||||||
Gains on sales of real estate | 373 | 239 | 374 | 769 | |||||||||||
Asset impairments | (9 | ) | (21 | ) | (13 | ) | (21 | ) | |||||||
Other income (loss), net | 25 | (9 | ) | 104 | (22 | ) | |||||||||
INCOME BEFORE INCOME TAXES | 405 | 256 | 593 | 919 | |||||||||||
PROVISION FOR INCOME TAXES | (109 | ) | (19 | ) | (148 | ) | (194 | ) | |||||||
NET INCOME | 296 | 237 | 445 | 725 | |||||||||||
NET INCOME AND ACCRETION ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | — | — | |||||||||||
NET INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION | $ | 296 | $ | 237 | $ | 445 | $ | 725 | |||||||
EARNINGS PER SHARE—Basic | |||||||||||||||
Net income | $ | 2.84 | $ | 2.12 | $ | 4.23 | $ | 6.31 | |||||||
Net income attributable to Hyatt Hotels Corporation | $ | 2.84 | $ | 2.12 | $ | 4.23 | $ | 6.31 | |||||||
EARNINGS PER SHARE—Diluted | |||||||||||||||
Net income | $ | 2.80 | $ | 2.09 | $ | 4.17 | $ | 6.21 | |||||||
Net income attributable to Hyatt Hotels Corporation | $ | 2.80 | $ | 2.09 | $ | 4.17 | $ | 6.21 |
See accompanying Notes to condensed consolidated financial statements.
1
HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions of dollars)
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||
Net income | $ | 296 | $ | 237 | $ | 445 | $ | 725 | |||||||
Other comprehensive income (loss), net of taxes: | |||||||||||||||
Foreign currency translation adjustments, net of tax benefit of $(1) for the three and nine months ended September 30, 2019 and $- and $(1) for the three and nine months ended September 30, 2018, respectively | (27 | ) | 71 | (27 | ) | 48 | |||||||||
Unrealized gains (losses) on derivative activity, net of tax benefit of $(3) and $(7) for the three and nine months ended September 30, 2019, respectively, and net of tax expense of $1 for the three and nine months ended September 30, 2018 | (9 | ) | 3 | (21 | ) | 3 | |||||||||
Other comprehensive income (loss) | (36 | ) | 74 | (48 | ) | 51 | |||||||||
COMPREHENSIVE INCOME | 260 | 311 | 397 | 776 | |||||||||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | — | — | |||||||||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION | $ | 260 | $ | 311 | $ | 397 | $ | 776 |
See accompanying Notes to condensed consolidated financial statements.
2
HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except share and per share amounts)
(Unaudited)
September 30, 2019 | December 31, 2018 | ||||||
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 660 | $ | 570 | |||
Restricted cash | 140 | 33 | |||||
Short-term investments | 63 | 116 | |||||
Receivables, net of allowances of $30 and $26 at September 30, 2019 and December 31, 2018, respectively | 434 | 427 | |||||
Inventories | 12 | 14 | |||||
Prepaids and other assets | 129 | 149 | |||||
Prepaid income taxes | 21 | 36 | |||||
Assets held for sale | 17 | — | |||||
Total current assets | 1,476 | 1,345 | |||||
Equity method investments | 229 | 233 | |||||
Property and equipment, net | 3,519 | 3,608 | |||||
Financing receivables, net of allowances | 19 | 13 | |||||
Operating lease right-of-use assets | 488 | — | |||||
Goodwill | 322 | 283 | |||||
Intangibles, net | 453 | 628 | |||||
Deferred tax assets | 147 | 180 | |||||
Other assets | 1,476 | 1,353 | |||||
TOTAL ASSETS | $ | 8,129 | $ | 7,643 | |||
LIABILITIES AND EQUITY | |||||||
CURRENT LIABILITIES: | |||||||
Current maturities of long-term debt | $ | 11 | $ | 11 | |||
Accounts payable | 144 | 151 | |||||
Accrued expenses and other current liabilities | 315 | 361 | |||||
Current contract liabilities | 404 | 388 | |||||
Accrued compensation and benefits | 137 | 150 | |||||
Current operating lease liabilities | 33 | — | |||||
Total current liabilities | 1,044 | 1,061 | |||||
Long-term debt | 1,612 | 1,623 | |||||
Long-term contract liabilities | 471 | 442 | |||||
Long-term operating lease liabilities | 395 | — | |||||
Other long-term liabilities | 846 | 840 | |||||
Total liabilities | 4,368 | 3,966 | |||||
Commitments and contingencies (see Note 13) | |||||||
EQUITY: | |||||||
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized and none outstanding at September 30, 2019 and December 31, 2018 | — | — | |||||
Class A common stock, $0.01 par value per share, 1,000,000,000 shares authorized, 36,811,374 issued and outstanding at September 30, 2019, and Class B common stock, $0.01 par value per share, 398,432,856 shares authorized, 66,438,444 shares issued and outstanding at September 30, 2019. Class A common stock, $0.01 par value per share, 1,000,000,000 shares authorized, 39,507,817 issued and outstanding at December 31, 2018, and Class B common stock, $0.01 par value per share, 399,110,240 shares authorized, 67,115,828 shares issued and outstanding at December 31, 2018 | 1 | 1 | |||||
Additional paid-in capital | — | 50 | |||||
Retained earnings | 4,003 | 3,819 | |||||
Accumulated other comprehensive loss | (248 | ) | (200 | ) | |||
Total stockholders' equity | 3,756 | 3,670 | |||||
Noncontrolling interests in consolidated subsidiaries | 5 | 7 | |||||
Total equity | 3,761 | 3,677 | |||||
TOTAL LIABILITIES AND EQUITY | $ | 8,129 | $ | 7,643 |
See accompanying Notes to condensed consolidated financial statements.
3
HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
Nine Months Ended | |||||||
September 30, 2019 | September 30, 2018 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net income | $ | 445 | $ | 725 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Gains on sales of real estate | (374 | ) | (769 | ) | |||
Depreciation and amortization | 248 | 243 | |||||
Release of contingent consideration liability | (29 | ) | — | ||||
Amortization of share awards | 32 | 28 | |||||
Deferred income taxes | 32 | (7 | ) | ||||
Asset impairments | 13 | 43 | |||||
Equity losses from unconsolidated hospitality ventures | 2 | 17 | |||||
Amortization of management and franchise agreement assets constituting payments to customers | 16 | 15 | |||||
Distributions from unconsolidated hospitality ventures | 10 | 10 | |||||
Working capital changes and other | (121 | ) | (173 | ) | |||
Net cash provided by operating activities | 274 | 132 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Purchases of marketable securities and short-term investments | (196 | ) | (572 | ) | |||
Proceeds from marketable securities and short-term investments | 255 | 426 | |||||
Contributions to equity method and other investments | (39 | ) | (52 | ) | |||
Return of equity method and other investments | 26 | 24 | |||||
Acquisitions, net of cash acquired | (18 | ) | (263 | ) | |||
Capital expenditures | (244 | ) | (195 | ) | |||
Proceeds from sales of real estate, net of cash disposed | 461 | 1,334 | |||||
Proceeds from financing receivables | 46 | — | |||||
Other investing activities | 7 | 10 | |||||
Net cash provided by investing activities | 298 | 712 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds from long-term debt, net of issuance costs $- and $4, respectively | 180 | 416 | |||||
Repayments of debt | (187 | ) | (230 | ) | |||
Repurchases of common stock | (280 | ) | (654 | ) | |||
Contingent consideration paid | (24 | ) | — | ||||
Repayments of redeemable noncontrolling interest in preferred shares in a subsidiary | — | (10 | ) | ||||
Dividends paid | (60 | ) | (52 | ) | |||
Other financing activities | (9 | ) | (13 | ) | |||
Net cash used in financing activities | (380 | ) | (543 | ) | |||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 6 | 3 | |||||
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | 198 | 304 | |||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—BEGINNING OF YEAR | 622 | 752 | |||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—END OF PERIOD | $ | 820 | $ | 1,056 |
See accompanying Notes to condensed consolidated financial statements.
Supplemental disclosure of cash flow information:
September 30, 2019 | September 30, 2018 | ||||||
Cash and cash equivalents | $ | 660 | $ | 1,014 | |||
Restricted cash (1) | 140 | 23 | |||||
Restricted cash included in other assets (1) | 20 | 19 | |||||
Total cash, cash equivalents, and restricted cash | $ | 820 | $ | 1,056 | |||
(1) Restricted cash generally represents sales proceeds pursuant to like-kind exchanges, captive insurance subsidiary requirements, debt service on bonds, escrow deposits, and other arrangements. |
Nine Months Ended | |||||||
September 30, 2019 | September 30, 2018 | ||||||
Cash paid during the period for interest | $ | 78 | $ | 72 | |||
Cash paid during the period for income taxes | $ | 52 | $ | 267 | |||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 38 | $ | — | |||
Non-cash investing and financing activities are as follows: | |||||||
Non-cash contributions to equity method investments | $ | 8 | $ | 53 | |||
Non-cash issuance of financing receivables | $ | 1 | $ | 45 | |||
Change in accrued capital expenditures | $ | 11 | $ | 7 | |||
Non-cash right-of-use assets obtained in exchange for operating lease liabilities | $ | 8 | $ | — | |||
See accompanying Notes to condensed consolidated financial statements.
4
HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions of dollars)
(Unaudited)
Total | Common Stock Amount | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests in Consolidated Subsidiaries | ||||||||||||||||||
BALANCE—January 1, 2018 | $ | 3,839 | $ | 1 | $ | 967 | $ | 3,118 | $ | (253 | ) | $ | 6 | ||||||||||
Total comprehensive income | 434 | — | — | 411 | 23 | — | |||||||||||||||||
Repurchase of common stock | (75 | ) | — | (75 | ) | — | — | — | |||||||||||||||
Employee stock plan issuance | 1 | — | 1 | — | — | — | |||||||||||||||||
Share-based payment activity | 13 | — | 13 | — | — | — | |||||||||||||||||
Cash dividends of $0.15 per share (see Note 14) | (18 | ) | — | — | (18 | ) | — | — | |||||||||||||||
BALANCE—March 31, 2018 | 4,194 | 1 | 906 | 3,511 | (230 | ) | 6 | ||||||||||||||||
Total comprehensive income | 31 | — | — | 77 | (46 | ) | — | ||||||||||||||||
Repurchase of common stock | (513 | ) | — | (513 | ) | — | — | — | |||||||||||||||
Directors compensation | 2 | — | 2 | — | — | — | |||||||||||||||||
Employee stock plan issuance | 1 | — | 1 | — | — | — | |||||||||||||||||
Share-based payment activity | 3 | — | 3 | — | — | — | |||||||||||||||||
Cash dividends of $0.15 per share (see Note 14) | (17 | ) | — | — | (17 | ) | — | — | |||||||||||||||
BALANCE—June 30, 2018 | 3,701 | 1 | 399 | 3,571 | (276 | ) | 6 | ||||||||||||||||
Total comprehensive income | 311 | — | — | 237 | 74 | — | |||||||||||||||||
Repurchase of common stock | (66 | ) | — | (66 | ) | — | — | — | |||||||||||||||
Employee stock plan issuance | 1 | — | 1 | — | — | — | |||||||||||||||||
Share-based payment activity | 5 | — | 5 | — | — | — | |||||||||||||||||
Cash dividends of $0.15 per share (see Note 14) | (17 | ) | — | — | (17 | ) | — | — | |||||||||||||||
BALANCE—September 30, 2018 | $ | 3,935 | $ | 1 | $ | 339 | $ | 3,791 | $ | (202 | ) | $ | 6 | ||||||||||
BALANCE—January 1, 2019 | $ | 3,677 | $ | 1 | $ | 50 | $ | 3,819 | $ | (200 | ) | $ | 7 | ||||||||||
Total comprehensive income | 53 | — | — | 63 | (10 | ) | — | ||||||||||||||||
Noncontrolling interests | (1 | ) | — | — | — | — | (1 | ) | |||||||||||||||
Repurchase of common stock | (102 | ) | — | (71 | ) | (31 | ) | — | — | ||||||||||||||
Employee stock plan issuance | 1 | — | 1 | — | — | — | |||||||||||||||||
Share-based payment activity | 20 | — | 20 | — | — | — | |||||||||||||||||
Cash dividends of $0.19 per share (see Note 14) | (20 | ) | — | — | (20 | ) | — | — | |||||||||||||||
BALANCE—March 31, 2019 | 3,628 | 1 | — | 3,831 | (210 | ) | 6 | ||||||||||||||||
Total comprehensive income | 84 | — | — | 86 | (2 | ) | — | ||||||||||||||||
Noncontrolling interests | (1 | ) | — | — | — | — | (1 | ) | |||||||||||||||
Repurchase of common stock | (45 | ) | — | (1 | ) | (44 | ) | — | — | ||||||||||||||
Directors compensation | 1 | — | 1 | — | — | — | |||||||||||||||||
Employee stock plan issuance | 1 | — | 1 | — | — | — | |||||||||||||||||
Share-based payment activity | (1 | ) | — | (1 | ) | — | — | — | |||||||||||||||
Cash dividends of $0.19 per share (see Note 14) | (20 | ) | — | — | (20 | ) | — | — | |||||||||||||||
BALANCE—June 30, 2019 | 3,647 | 1 | — | 3,853 | (212 | ) | 5 | ||||||||||||||||
Total comprehensive income | 260 | — | — | 296 | (36 | ) | — | ||||||||||||||||
Repurchase of common stock | (133 | ) | — | (7 | ) | (126 | ) | — | — | ||||||||||||||
Employee stock plan issuance | 2 | — | 2 | — | — | — | |||||||||||||||||
Share-based payment activity | 5 | — | 5 | — | — | — | |||||||||||||||||
Cash dividends of $0.19 per share (see Note 14) | (20 | ) | — | — | (20 | ) | — | — | |||||||||||||||
BALANCE—September 30, 2019 | $ | 3,761 | $ | 1 | $ | — | $ | 4,003 | $ | (248 | ) | $ | 5 |
See accompanying Notes to condensed consolidated financial statements.
5
HYATT HOTELS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions of dollars, unless otherwise indicated)
(Unaudited)
1. ORGANIZATION
Hyatt Hotels Corporation, a Delaware corporation, and its consolidated subsidiaries (collectively "Hyatt Hotels Corporation") provide hospitality and other services on a worldwide basis through the development, ownership, operation, management, franchising, and licensing of hospitality and wellness-related businesses. We develop, own, operate, manage, franchise, license, or provide services to a portfolio of properties, consisting of full service hotels, select service hotels, resorts, and other properties, including branded spas and fitness studios, timeshare, fractional, and other forms of residential, vacation, and condominium ownership units. At September 30, 2019, (i) we operated or franchised 434 full service hotels, comprising 151,995 rooms throughout the world, (ii) we operated or franchised 453 select service hotels, comprising 64,500 rooms, of which 390 hotels are located in the United States, and (iii) our portfolio included 6 franchised all-inclusive Hyatt-branded resorts, comprising 2,403 rooms, and 3 destination wellness resorts, comprising 410 rooms. At September 30, 2019, our portfolio of properties operated in 63 countries around the world. Additionally, through strategic relationships, we provide certain reservation and/or loyalty program services to hotels that are unaffiliated with our hotel portfolio and which operate under other tradenames or marks owned by such hotel or licensed by third parties.
As used in these Notes and throughout this Quarterly Report on Form 10-Q, (i) the terms "Hyatt," "Company," "we," "us," or "our" mean Hyatt Hotels Corporation and its consolidated subsidiaries, (ii) the term "properties" refers to hotels, resorts, and other properties, including branded spas and fitness studios, and residential, vacation, and condominium ownership units that we develop, own, operate, manage, franchise, or to which we provide services or license our trademarks, (iii) "Hyatt portfolio of properties" or "portfolio of properties" refers to hotels and other properties that we develop, own, operate, manage, franchise, license, or provide services to, including under the Park Hyatt, Miraval, Grand Hyatt, Alila, Andaz, The Unbound Collection by Hyatt, Destination, Hyatt Regency, Hyatt, Hyatt Ziva, Hyatt Zilara, Thompson Hotels, Hyatt Centric, Caption by Hyatt, Joie de Vivre, Hyatt House, Hyatt Place, tommie, Hyatt Residence Club and Exhale brands, (iv) the term "worldwide hotel portfolio" includes our full and select service hotels, and (v) the term "worldwide property portfolio" includes our wellness and all-inclusive resorts, branded spas and fitness studios, and residential, vacation, and condominium ownership units in addition to our worldwide hotel portfolio.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes required by GAAP for complete annual financial statements. As a result, this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the "2018 Form 10-K").
We have eliminated all intercompany accounts and transactions in our condensed consolidated financial statements. We consolidate entities under our control, including entities where we are deemed to be the primary beneficiary.
Management believes the accompanying condensed consolidated financial statements reflect all adjustments, which are all of a normal recurring nature, considered necessary for a fair presentation of the interim periods.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Standards
Leases—In February 2016, the Financial Accounting Standards Board ("FASB") released Accounting Standards Update No. 2016-02 ("ASU 2016-02"), Leases (Topic 842). ASU 2016-02 requires lessees to record lease contracts on the balance sheet by recognizing a right-of-use ("ROU") asset and lease liability with certain practical expedients available. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make fixed minimum lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of fixed minimum lease
6
payments over the lease term, including optional periods for which it is reasonably certain the renewal option will be exercised.
In July 2018, the FASB released Accounting Standards Update No. 2018-11 ("ASU 2018-11"), Leases (Topic 842): Targeted Improvements, providing entities with an additional optional transition method. The provisions of ASU 2016-02, and all related ASUs, are effective for interim periods and fiscal years beginning after December 15, 2018, with early adoption permitted.
We adopted ASU 2016-02 utilizing the optional transition approach under ASU 2018-11 and applied the package of practical expedients beginning January 1, 2019. As a result of utilizing the optional transition method, our reporting for periods prior to January 1, 2019 continue to be reported in accordance with Leases (Topic 840).
We elected the following additional practical expedients: (i) for office space, land, and hotel leases, we do not separate the lease and nonlease components, which primarily relate to common area maintenance and utilities, (ii) we combine lease and nonlease components for those leases where we are the lessor, and (iii) we exclude all leases that are twelve months or less from the ROU assets and lease liabilities.
For leases in place upon adoption, we used the remaining lease term as of January 1, 2019 in determining the incremental borrowing rate ("IBR"). For the initial measurement of the lease liabilities for leases commencing on or after January 1, 2019, the IBR at the lease commencement date was applied.
For operating leases, the adoption of ASU 2016-02 resulted in the initial recognition of ROU assets of $512 million and related lease liabilities of $452 million on our condensed consolidated balance sheet at January 1, 2019. Upon adoption, we reclassified $103 million of intangibles, net related to below market leases and $49 million of deferred rent and other lease liabilities to the operating ROU assets. The net tax impact upon adoption was insignificant. The adoption of ASU 2016-02 did not significantly impact our accounting for finance leases or for those leases where we are the lessor. Additionally, the adoption of ASU 2016-02 did not materially affect our condensed consolidated statements of income or our condensed consolidated statements of cash flows.
The impact on our condensed consolidated balance sheet upon adoption of ASU 2016-02 was as follows:
December 31, 2018 | January 1, 2019 | ||||||||||
As reported | Effect of the adoption of ASU 2016-02 | As adjusted | |||||||||
ASSETS | |||||||||||
Prepaids and other assets | $ | 149 | $ | (2 | ) | $ | 147 | ||||
Intangibles, net | 628 | (103 | ) | 525 | |||||||
Other assets | 1,353 | (7 | ) | 1,346 | |||||||
Operating lease right-of-use assets | — | 512 | 512 | ||||||||
TOTAL ASSETS | $ | 7,643 | $ | 400 | $ | 8,043 | |||||
LIABILITIES AND EQUITY | |||||||||||
Accounts payable | $ | 151 | $ | (1 | ) | $ | 150 | ||||
Accrued expenses and other current liabilities | 361 | (2 | ) | 359 | |||||||
Current operating lease liabilities | — | 34 | 34 | ||||||||
Long-term operating lease liabilities | — | 418 | 418 | ||||||||
Other long-term liabilities | 840 | (49 | ) | 791 | |||||||
Total liabilities | 3,966 | 400 | 4,366 | ||||||||
Total equity | 3,677 | — | 3,677 | ||||||||
TOTAL LIABILITIES AND EQUITY | $ | 7,643 | $ | 400 | $ | 8,043 |
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Intangibles - Goodwill and Other - Internal-Use Software—In August 2018, the FASB released Accounting Standards Update No. 2018-15 ("ASU 2018-15"), Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The provisions of ASU 2018-15 are to be applied using a prospective or retrospective approach and are effective for interim periods and fiscal years beginning after December 15, 2019, with early adoption permitted. We early adopted ASU 2018-15 on January 1, 2019 on a prospective basis which did not materially impact our condensed consolidated financial statements.
Future Adoption of Accounting Standards
Financial Instruments - Credit Losses—In June 2016, the FASB released Accounting Standards Update No. 2016-13 ("ASU 2016-13"), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the existing impairment model for most financial assets from an incurred loss impairment model to a current expected credit loss model, which requires an entity to recognize allowances for credit losses equal to its current estimate of all contractual cash flows the entity does not expect to collect. ASU 2016-13 also requires credit losses relating to available-for-sale ("AFS") debt securities to be recognized through an allowance for credit losses. The provisions of ASU 2016-13 are to be applied using a modified retrospective approach and are effective for interim periods and fiscal years beginning after December 15, 2019, with early adoption permitted.
While we continue to evaluate the impact of adopting ASU 2016-13, we do not expect a material impact upon adoption related to receivables at our owned and leased properties, AFS debt securities, and debt repayment guarantees. We are continuing to evaluate other potential impacts on our condensed consolidated financial statements, including the impact on our remaining receivables, held-to-maturity ("HTM") debt securities, and financing receivables.
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3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregated Revenues
The following tables present our revenues disaggregated by the nature of the product or service:
Three Months Ended September 30, 2019 | |||||||||||||||||||||
Owned and leased hotels | Americas management and franchising | ASPAC management and franchising | EAME/SW Asia management and franchising | Corporate and other | Eliminations | Total | |||||||||||||||
Rooms revenues | $ | 259 | $ | — | $ | — | $ | — | $ | 4 | $ | (11 | ) | $ | 252 | ||||||
Food and beverage | 131 | — | — | — | 3 | — | 134 | ||||||||||||||
Other | 35 | — | — | — | 9 | — | 44 | ||||||||||||||
Owned and leased hotels | 425 | — | — | — | 16 | (11 | ) | 430 | |||||||||||||
Base management fees | — | 55 | 11 | 10 | — | (12 | ) | 64 | |||||||||||||
Incentive management fees | — | 13 | 17 | 9 | — | (6 | ) | 33 | |||||||||||||
Franchise fees | — | 36 | 1 | — | — | — | 37 | ||||||||||||||
Other fees | — | 2 | 3 | 2 | 1 | — | 8 | ||||||||||||||
License fees | — | — | — | — | 6 | — | 6 | ||||||||||||||
Management, franchise, and other fees | — | 106 | 32 | 21 | 7 | (18 | ) | 148 | |||||||||||||
Amortization of management and franchise agreement assets constituting payments to customers | — | (4 | ) | — | (1 | ) | — | — | (5 | ) | |||||||||||
Net management, franchise, and other fees | — | 102 | 32 | 20 | 7 | (18 | ) | 143 | |||||||||||||
Other revenues | — | 16 | — | — | 9 | — | 25 | ||||||||||||||
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties | — | 565 | 30 | 20 | 2 | — | 617 | ||||||||||||||
Total | $ | 425 | $ | 683 | $ | 62 | $ | 40 | $ | 34 | $ | (29 | ) | $ | 1,215 |
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Nine Months Ended September 30, 2019 | |||||||||||||||||||||
Owned and leased hotels | Americas management and franchising | ASPAC management and franchising | EAME/SW Asia management and franchising | Corporate and other | Eliminations | Total | |||||||||||||||
Rooms revenues | $ | 804 | $ | — | $ | — | $ | — | $ | 17 | $ | (27 | ) | $ | 794 | ||||||
Food and beverage | 452 | — | — | — | 9 | — | 461 | ||||||||||||||
Other | 108 | — | — | — | 27 | — | 135 | ||||||||||||||
Owned and leased hotels | 1,364 | — | — | — | 53 | (27 | ) | 1,390 | |||||||||||||
Base management fees | — | 173 | 33 | 27 | — | (38 | ) | 195 | |||||||||||||
Incentive management fees | — | 46 | 51 | 26 | — | (17 | ) | 106 | |||||||||||||
Franchise fees | — | 104 | 3 | — | — | — | 107 | ||||||||||||||
Other fees | — | 3 | 9 | 5 | 4 | — | 21 | ||||||||||||||
License fees | — | — | — | — | 18 | — | 18 | ||||||||||||||
Management, franchise, and other fees | — | 326 | 96 | 58 | 22 | (55 | ) | 447 | |||||||||||||
Amortization of management and franchise agreement assets constituting payments to customers | — | (11 | ) | (1 | ) | (4 | ) | — | — | (16 | ) | ||||||||||
Net management, franchise, and other fees | — | 315 | 95 | 54 | 22 | (55 | ) | 431 | |||||||||||||
Other revenues | — | 71 | — | — | 26 | 1 | 98 | ||||||||||||||
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties | — | 1,688 | 80 | 54 | 4 | — | 1,826 | ||||||||||||||
Total | $ | 1,364 | $ | 2,074 | $ | 175 | $ | 108 | $ | 105 | $ | (81 | ) | $ | 3,745 |
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Three Months Ended September 30, 2018 | |||||||||||||||||||||
Owned and leased hotels | Americas management and franchising | ASPAC management and franchising | EAME/SW Asia management and franchising | Corporate and other | Eliminations | Total | |||||||||||||||
Rooms revenues | $ | 276 | $ | — | $ | — | $ | — | $ | 5 | $ | (7 | ) | $ | 274 | ||||||
Food and beverage | 133 | — | — | — | 2 | — | 135 | ||||||||||||||
Other | 34 | — | — | — | 7 | — | 41 | ||||||||||||||
Owned and leased hotels | 443 | — | — | — | 14 | (7 | ) | 450 | |||||||||||||
Base management fees | — | 48 | 11 | 9 | — | (13 | ) | 55 | |||||||||||||
Incentive management fees | — | 14 | 16 | 10 | — | (7 | ) | 33 | |||||||||||||
Franchise fees | — | 32 | 1 | — | — | — | 33 | ||||||||||||||
Other fees | — | 1 | 2 | 2 | 2 | — | 7 | ||||||||||||||
License fees | — | — | — | — | 5 | — | 5 | ||||||||||||||
Management, franchise, and other fees | — | 95 | 30 | 21 | 7 | (20 | ) | 133 | |||||||||||||
Amortization of management and franchise agreement assets constituting payments to customers | — | (4 | ) | — | (1 | ) | — | — | (5 | ) | |||||||||||
Net management, franchise, and other fees | — | 91 | 30 | 20 | 7 | (20 | ) | 128 | |||||||||||||
Other revenues | — | — | — | — | 5 | 2 | 7 | ||||||||||||||
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties | — | 447 | 24 | 16 | 2 | — | 489 | ||||||||||||||
Total | $ | 443 | $ | 538 | $ | 54 | $ | 36 | $ | 28 | $ | (25 | ) | $ | 1,074 |
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Nine Months Ended September 30, 2018 | |||||||||||||||||||||
Owned and leased hotels | Americas management and franchising | ASPAC management and franchising | EAME/SW Asia management and franchising | Corporate and other | Eliminations | Total | |||||||||||||||
Rooms revenues | $ | 848 | $ | — | $ | — | $ | — | $ | 18 | $ | (26 | ) | $ | 840 | ||||||
Food and beverage | 474 | — | — | — | 7 | — | 481 | ||||||||||||||
Other | 106 | — | — | — | 23 | — | 129 | ||||||||||||||
Owned and leased hotels | 1,428 | — | — | — | 48 | (26 | ) | 1,450 | |||||||||||||
Base management fees | — | 150 | 32 | 25 | — | (40 | ) | 167 | |||||||||||||
Incentive management fees | — | 47 | 50 | 29 | — | (21 | ) | 105 | |||||||||||||
Franchise fees | — | 94 | 2 | — | — | — | 96 | ||||||||||||||
Other fees | — | 10 | 6 | 4 | 4 | — | 24 | ||||||||||||||
License fees | — | — | — | — | 15 | — | 15 | ||||||||||||||
Management, franchise, and other fees | — | 301 | 90 | 58 | 19 | (61 | ) | 407 | |||||||||||||
Amortization of management and franchise agreement assets constituting payments to customers | — | (10 | ) | (1 | ) | (4 | ) | — | — | (15 | ) | ||||||||||
Net management, franchise, and other fees | — | 291 | 89 | 54 | 19 | (61 | ) | 392 | |||||||||||||
Other revenues | — | — | — | — | 22 | 5 | 27 | ||||||||||||||
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties | — | 1,328 | 67 | 49 | 3 | — | 1,447 | ||||||||||||||
Total | $ | 1,428 | $ | 1,619 | $ | 156 | $ | 103 | $ | 92 | $ | (82 | ) | $ | 3,316 |
Contract Balances
Our contract assets were $2 million and insignificant at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019, the contract assets were included in receivables, net. As our profitability hurdles are generally calculated on a full-year basis, we expect our contract asset balance to be insignificant at year end.
Contract liabilities are comprised of the following:
September 30, 2019 | December 31, 2018 | ||||||
Deferred revenue related to the loyalty program | $ | 657 | $ | 596 | |||
Advanced deposits | 77 | 81 | |||||
Initial fees received from franchise owners | 39 | 35 | |||||
Deferred revenue related to system-wide services | 11 | 7 | |||||
Other deferred revenue | 91 | 111 | |||||
Total contract liabilities | $ | 875 | $ | 830 |
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The following table summarizes the activity in our contract liabilities:
2019 | 2018 | ||||||
Beginning balance, January 1 | $ | 830 | $ | 772 | |||
Cash received and other | 490 | 433 | |||||
Revenue recognized | (459 | ) | (441 | ) | |||
Ending balance, June 30 | $ | 861 | $ | 764 | |||
Cash received and other | 265 | 223 | |||||
Revenue recognized | (251 | ) | (222 | ) | |||
Ending balance, September 30 | $ | 875 | $ | 765 |
Revenue recognized during the three months ended September 30, 2019 and September 30, 2018 included in the contract liabilities balance at the beginning of each year was $80 million and $81 million, respectively. Revenue recognized during the nine months ended September 30, 2019 and September 30, 2018 included in the contract liabilities balance at the beginning of each year was $318 million and $299 million, respectively. This revenue primarily relates to the loyalty program, which is recognized net of redemption reimbursements paid to third parties, and advanced deposits.
Revenue Allocated to Remaining Performance Obligations
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted revenue expected to be recognized in future periods was approximately $130 million at September 30, 2019, of which we expect to recognize approximately 20% as revenue over the next 12 months and the remainder thereafter.
We did not estimate revenues expected to be recognized related to our unsatisfied performance obligations for the following:
• | Deferred revenue related to the loyalty program and revenue from base and incentive management fees as the revenue is allocated to a wholly unperformed performance obligation in a series; |
• | Revenues related to royalty fees as they are considered sales-based royalty fees; |
• | Revenues received for free nights granted through our co-branded credit cards as the awards are required to be redeemed within 12 months; and |
• | Revenues related to advanced bookings at owned and leased hotels as each stay has a duration of 12 months or less. |
4. DEBT AND EQUITY SECURITIES
Equity Method Investments
Equity method investments were $229 million and $233 million at September 30, 2019 and December 31, 2018, respectively.
During the nine months ended September 30, 2019, we recognized $8 million of gains in equity losses from unconsolidated hospitality ventures on our condensed consolidated statements of income resulting from sales activity related to certain equity method investments within our owned and leased hotels segment. During the three and nine months ended September 30, 2019, we received $2 million and $25 million of sales proceeds, respectively.
During the three and nine months ended September 30, 2019, we recognized $6 million and $7 million of impairment charges, respectively, primarily related to one unconsolidated hospitality venture in equity losses from unconsolidated hospitality ventures on our condensed consolidated statements of income as the carrying value was in excess of fair value. The fair value was determined to be a Level Three fair value measure, and the impairment was deemed other-than-temporary.
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During the three and nine months ended September 30, 2018, we recognized $1 million and $11 million of net gains, respectively, in equity losses from unconsolidated hospitality ventures on our condensed consolidated statements of income resulting from sales activity related to certain equity method investments within our owned and leased hotels segment. During the three and nine months ended September 30, 2018, we received $7 million and $17 million of sales proceeds, respectively.
During the nine months ended September 30, 2018, we completed an asset acquisition of our partner's interest in certain unconsolidated hospitality ventures in Brazil for a net purchase price of approximately $4 million. During the nine months ended September 30, 2018, we recognized $16 million of impairment charges related to these investments in equity losses from unconsolidated hospitality ventures on our condensed consolidated statements of income as the carrying value was in excess of fair value. The fair value was determined to be a Level Three fair value measure, and the impairment was deemed other-than-temporary.
The following table presents summarized financial information for all unconsolidated hospitality ventures in which we hold an investment accounted for under the equity method:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Total revenues | $ | 130 | $ | 135 | $ | 371 | $ | 399 | |||||||
Gross operating profit | 51 | 53 | 139 | 141 | |||||||||||
Income (loss) from continuing operations | 9 | (12 | ) | (2 | ) | (15 | ) | ||||||||
Net income (loss) | 9 | (12 | ) | (2 | ) | (15 | ) |
Marketable Securities
We hold marketable securities with readily determinable fair values to fund certain operating programs and for investment purposes. Additionally, we periodically transfer available cash and cash equivalents to purchase marketable securities for investment purposes.
Marketable Securities Held to Fund Operating Programs—Marketable securities held to fund operating programs, which are recorded at fair value and included on our condensed consolidated balance sheets, were as follows:
September 30, 2019 | December 31, 2018 | ||||||
Loyalty program (Note 9) | $ | 453 | $ | 397 | |||
Deferred compensation plans held in rabbi trusts (Note 9 and Note 11) | 419 | 367 | |||||
Captive insurance companies | 136 | 133 | |||||
Total marketable securities held to fund operating programs | $ | 1,008 | $ | 897 | |||
Less: current portion of marketable securities held to fund operating programs included in cash and cash equivalents, short-term investments, and prepaids and other assets | (205 | ) | (174 | ) | |||
Marketable securities held to fund operating programs included in other assets | $ | 803 | $ | 723 |
Net realized and unrealized gains (losses) and interest income from marketable securities held to fund the loyalty program are recognized in other income (loss), net on our condensed consolidated statements of income:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Loyalty program (Note 19) | $ | 5 | $ | 1 | $ | 24 | $ | (2 | ) |
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Net realized and unrealized gains (losses) and interest income from marketable securities held to fund rabbi trusts are recognized in net gains and interest income from marketable securities held to fund rabbi trusts on our condensed consolidated statements of income:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Unrealized gains (losses) | $ | (2 | ) | $ | 5 | $ | 35 | $ | 7 | ||||||
Realized gains | 2 | 5 | 6 | 12 | |||||||||||
Net gains and interest income from marketable securities held to fund rabbi trusts | $ | — | $ | 10 | $ | 41 | $ | 19 |
Our captive insurance companies hold marketable securities which are classified as AFS debt securities and are invested in U.S. government agencies, time deposits, and corporate debt securities. We classify these investments as current or long-term, based on their contractual maturity dates, which range from 2019 through 2024.
Marketable Securities Held for Investment Purposes—Marketable securities held for investment purposes, which are recorded at fair value and included on our condensed consolidated balance sheets, were as follows:
September 30, 2019 | December 31, 2018 | ||||||
Interest-bearing money market funds | $ | 202 | $ | 14 | |||
Common shares of Playa N.V. (Note 9) | 95 | 87 | |||||
Time deposits | 37 | 100 | |||||
Total marketable securities held for investment purposes | $ | 334 | $ | 201 | |||
Less: current portion of marketable securities held for investment purposes included in cash and cash equivalents and short-term investments | (239 | ) | (114 | ) | |||
Marketable securities held for investment purposes included in other assets | $ | 95 | $ | 87 |
We hold common shares of Playa Hotels & Resorts N.V. ("Playa N.V.") which are accounted for as an equity security with a readily determinable fair value as we do not have the ability to significantly influence the operations of the entity. The fair value of the common shares is classified as Level One in the fair value hierarchy as we are able to obtain market available pricing information. The remeasurement of our investment at fair value resulted in $1 million of unrealized gains and $14 million of unrealized losses for the three months ended September 30, 2019 and September 30, 2018, respectively, and $8 million of unrealized gains and $14 million of unrealized losses for the nine months ended September 30, 2019 and September 30, 2018, respectively, recognized in other income (loss), net on our condensed consolidated statements of income (see Note 19). We did not sell any shares of common stock during the nine months ended September 30, 2019.
Other Investments
HTM Debt Securities—At September 30, 2019 and December 31, 2018, we held $56 million and $49 million, respectively, of investments in HTM debt securities, which are investments in third-party entities that own certain of our hotels and are recorded within other assets on our condensed consolidated balance sheets. The securities are mandatorily redeemable between 2020 and 2025. The amortized cost of our investments approximates fair value. We estimated the fair value of our investments using internally developed discounted cash flow models based on current market inputs for similar types of arrangements. Based upon the lack of available market data, our investments are classified as Level Three within the fair value hierarchy. The primary sensitivity in these models is based on the selection of appropriate discount rates. Fluctuations in these assumptions could result in different estimates of fair value.
Equity Securities Without a Readily Determinable Fair Value—At September 30, 2019 and December 31, 2018, we held $9 million of investments in equity securities without a readily determinable fair value, which represent investments in entities where we do not have the ability to significantly influence the operations of the entity. These investments are recorded within other assets on our condensed consolidated balance sheets.
Due to ongoing operating cash flow shortfalls in the business underlying an equity security during the nine months ended September 30, 2018, we recognized a $22 million impairment charge for our full investment balance in other income (loss), net on our condensed consolidated statements of income (see Note 19) as the carrying
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value was in excess of the fair value. The fair value was determined to be a Level Three fair value measure. During the three months ended September 30, 2018, the entity in which we held our investment disposed of its assets.
Fair Value—We measured the following financial assets at fair value on a recurring basis:
September 30, 2019 | Cash and cash equivalents | Short-term investments | Prepaids and other assets | Other assets | |||||||||||||||
Level One - Quoted Prices in Active Markets for Identical Assets | |||||||||||||||||||
Interest-bearing money market funds | $ | 308 | $ | 308 | $ | — | $ | — | $ | — | |||||||||
Mutual funds | 419 | — | — | — | 419 | ||||||||||||||
Common shares | 95 | — | — | — | 95 | ||||||||||||||
Level Two - Significant Other Observable Inputs | |||||||||||||||||||
Time deposits | 49 | — | 41 | — | 8 | ||||||||||||||
U.S. government obligations | 195 | — | — | 34 | 161 | ||||||||||||||
U.S. government agencies | 58 | — | 2 | 7 | 49 | ||||||||||||||
Corporate debt securities | 155 | — | 20 | 21 | 114 | ||||||||||||||
Mortgage-backed securities | 23 | — | — | 4 | 19 | ||||||||||||||
Asset-backed securities | 38 | — | — | 7 | 31 | ||||||||||||||
Municipal and provincial notes and bonds | 2 | — | — | — | 2 | ||||||||||||||
Total | $ | 1,342 | $ | 308 | $ | 63 | $ | 73 | $ | 898 |
December 31, 2018 | Cash and cash equivalents | Short-term investments | Prepaids and other assets | Other assets | |||||||||||||||
Level One - Quoted Prices in Active Markets for Identical Assets | |||||||||||||||||||
Interest-bearing money market funds | $ | 88 | $ | 88 | $ | — | $ | — | $ | — | |||||||||
Mutual funds | 367 | — | — | — | 367 | ||||||||||||||
Common shares | 87 | — | — | — | 87 | ||||||||||||||
Level Two - Significant Other Observable Inputs | |||||||||||||||||||
Time deposits | 113 | — | 104 | — | 9 | ||||||||||||||
U.S. government obligations | 169 | — | — | 37 | 132 | ||||||||||||||
U.S. government agencies | 52 | — | 2 | 7 | 43 | ||||||||||||||
Corporate debt securities | 151 | — | 10 | 25 | 116 | ||||||||||||||
Mortgage-backed securities | 23 | — | — | 5 | 18 | ||||||||||||||
Asset-backed securities | 46 | — | — | 10 | 36 | ||||||||||||||
Municipal and provincial notes and bonds | 2 | — | — | — | 2 | ||||||||||||||
Total | $ | 1,098 | $ | 88 | $ | 116 | $ | 84 | $ | 810 |
During the three and nine months ended September 30, 2019 and September 30, 2018, there were no transfers between levels of the fair value hierarchy. We do not have non-financial assets or non-financial liabilities required to be measured at fair value on a recurring basis.
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5. FINANCING RECEIVABLES
September 30, 2019 | December 31, 2018 | ||||||
Unsecured financing to hotel owners | $ | 119 | $ | 159 | |||
Less: current portion of financing receivables, included in receivables, net | — | (45 | ) | ||||
Less: allowance for losses | (100 | ) | (101 | ) | |||
Total long-term financing receivables, net of allowances | $ | 19 | $ | 13 |
Allowance for Losses and Impairments—The following table summarizes the activity in our unsecured financing receivables allowance:
2019 | 2018 | ||||||
Allowance at January 1 | $ | 101 | $ | 108 | |||
Provisions | 3 | 3 | |||||
Other adjustments | — | (2 | ) | ||||
Write-offs | (4 | ) | — | ||||
Allowance at June 30 | $ | 100 | $ | 109 | |||
Provisions | 1 | 2 | |||||
Other adjustments | (1 | ) | — | ||||
Write-offs | — | (12 | ) | ||||
Allowance at September 30 | $ | 100 | $ | 99 |
Credit Monitoring—Our unsecured financing receivables were as follows:
September 30, 2019 | |||||||||||||||
Gross loan balance (principal and interest) | Related allowance | Net financing receivables | Gross receivables on non-accrual status | ||||||||||||
Loans | $ | 17 | $ | (1 | ) | $ | 16 | $ | — | ||||||
Impaired loans (1) | 44 | (44 | ) | — | 44 | ||||||||||
Total loans | 61 | (45 | ) | 16 | 44 | ||||||||||
Other financing arrangements | 58 | (55 | ) | 3 | 58 | ||||||||||
Total unsecured financing receivables | $ | 119 | $ | (100 | ) | $ | 19 | $ | 102 |
(1) The unpaid principal balance was $34 million and the average recorded loan balance was $47 million at September 30, 2019.
December 31, 2018 | |||||||||||||||
Gross loan balance (principal and interest) | Related allowance | Net financing receivables | Gross receivables on non-accrual status | ||||||||||||
Loans | $ | 58 | $ | — | $ | 58 | $ | — | |||||||
Impaired loans (2) | 50 | (50 | ) | — | 50 | ||||||||||
Total loans | 108 | (50 | ) | 58 | 50 | ||||||||||
Other financing arrangements | 51 | (51 | ) | — | 51 | ||||||||||
Total unsecured financing receivables | $ | 159 | $ | (101 | ) | $ | 58 | $ | 101 |
Fair Value—We estimated the fair value of financing receivables, which are classified as Level Three in the fair value hierarchy, to be approximately $20 million and $59 million at September 30, 2019 and December 31, 2018, respectively.
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6. ACQUISITIONS AND DISPOSITIONS
Acquisitions
Land—During the nine months ended September 30, 2019, we acquired $15 million of land through an asset acquisition from an unrelated third party to develop a hotel in Austin, Texas and subsequently signed a purchase and sale agreement to sell the land and related construction in progress. At September 30, 2019, these assets are classified as held for sale within our owned and leased hotels segment on our condensed consolidated balance sheet, and the sale closed subsequent to September 30, 2019.
Two Roads Hospitality LLC—During the year ended December 31, 2018, we acquired all of the outstanding equity interests of Two Roads Hospitality LLC ("Two Roads") in a business combination for a purchase price of $405 million. The transaction also included potential additional consideration including (i) up to $96 million if the sellers completed specific actions with respect to certain of the acquired management agreements within 120 days from the date of acquisition and (ii) up to $8 million in the event of the execution of certain potential new management agreements related to the development of certain potential new deals previously identified and generated by the sellers or affiliates of the sellers within one year of the closing of the transaction. One of the sellers is indirectly owned by a limited partnership affiliated with the brother of our Executive Chairman.
We closed on the transaction on November 30, 2018 and paid cash of $415 million, net of $37 million cash acquired. Cash paid at closing was inclusive of a $36 million payment of the aforementioned additional consideration and $4 million of other purchase price adjustments. Related to the $68 million of potential additional consideration, we recorded a $57 million contingent liability in accrued expenses and other current liabilities on our condensed consolidated balance sheet at December 31, 2018, which represented our estimate of the remaining expected consideration to be paid.
Net assets acquired were determined as follows:
Cash paid, net of cash acquired | $ | 415 | |
Cash acquired | 37 | ||
Contingent consideration liability | 57 | ||
Net assets acquired at December 31, 2018 | $ | 509 | |
Post-acquisition working capital adjustments | (2 | ) | |
Net assets acquired at September 30, 2019 | $ | 507 |
As it relates to the $57 million contingent consideration liability recorded at December 31, 2018, of which $4 million remains at September 30, 2019, the following occurred during the nine months ended September 30, 2019:
• | The sellers completed the aforementioned specific actions with respect to certain management agreements, and we paid $24 million of additional consideration to the sellers. |
• | For those management agreements where the specific actions were not completed or payment is no longer probable, we released $2 million and $29 million of the contingent liability to other income (loss), net on our condensed consolidated statements of income during the three and nine months ended September 30, 2019, respectively (see Note 19). |
The acquisition includes management and license agreements for operating and pipeline hotels primarily across North America and Asia under five hospitality brands. Our condensed consolidated balance sheets at September 30, 2019 and December 31, 2018 reflect preliminary estimates of the fair value of the assets acquired and liabilities assumed. The fair values, which are classified as Level Three in the fair value hierarchy, are based on information that was available as of the date of acquisition and estimated using discounted future cash flow models and relief from royalty method, including revenue projections based on the expected contract terms and long-term growth rates.
During 2019, the estimated fair values of assets and liabilities were revised as we refined our analysis of contract terms and renewal assumptions which affected the underlying cash flows in the valuation. This resulted in a $34 million reduction in intangibles, net with an offsetting increase in goodwill on our condensed consolidated balance sheet at September 30, 2019. We continue to evaluate the underlying inputs and assumptions used in our valuation and accordingly, these estimates are subject to change during the one year measurement period.
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The following table summarizes the preliminary fair value of the identifiable net assets acquired at September 30, 2019:
Cash | $ | 32 | |
Receivables | 20 | ||
Other current assets | 2 | ||
Equity method investment | 2 | ||
Property and equipment | 2 | ||
Indefinite-lived intangibles (1) | 96 | ||
Management agreement intangibles (2), (5) | 209 | ||
Goodwill (3) | 194 | ||
Other assets (4) | 25 | ||
Total assets | $ | 582 | |
Advanced deposits | $ | 20 | |
Other current liabilities | 22 | ||
Other long-term liabilities (4) | 33 | ||
Total liabilities | 75 | ||
Total net assets acquired | $ | 507 |
(1) Includes intangibles attributable to the Destination, Alila, and Thompson brands.
(2) Amortized over useful lives of 1 to 19 years, with a weighted-average useful life of approximately 12 years.
(3) The goodwill, of which $152 million is tax deductible, is attributable to the growth opportunities Hyatt expects to realize by expanding into new markets and enhancing guest experiences through a distinctive collection of lifestyle brands and recorded in the Americas management and franchising segment.
(4) Includes $13 million of prior year tax liabilities relating to certain foreign filing positions, including $4 million of interest and penalties. We recorded an offsetting indemnification asset which we expect to collect under contractual arrangements.
(5) See Note 8 for impairment discussion.
Hyatt Regency Phoenix—During the three months ended September 30, 2018, we completed an asset acquisition of Hyatt Regency Phoenix from an unrelated third party for a purchase price of approximately $139 million, net of $1 million of proration adjustments. Assets acquired and recorded in our owned and leased hotels segment consist primarily of $136 million of property and equipment. The purchase of Hyatt Regency Phoenix was designated as replacement property in a like-kind exchange (see "Like-Kind Exchange Agreements" below).
Hyatt Regency Indian Wells Resort & Spa—During the three months ended September 30, 2018, we completed an asset acquisition of Hyatt Regency Indian Wells Resort & Spa from an unrelated third party for a net purchase price of approximately $120 million. Assets acquired and recorded in our owned and leased hotels segment consist primarily of $119 million of property and equipment. The purchase of Hyatt Regency Indian Wells Resort & Spa was designated as replacement property in a like-kind exchange (see "Like-Kind Exchange Agreements" below).
Dispositions
Hyatt Regency Atlanta—During the three months ended September 30, 2019, we sold Hyatt Regency Atlanta to an unrelated third party for approximately $346 million, net of closing costs and proration adjustments, and accounted for the transaction as an asset disposition. We entered into a long-term management agreement for the property upon sale. The sale resulted in a $272 million pre-tax gain which was recognized in gains on sales of real estate on our condensed consolidated statements of income during the three and nine months ended September 30, 2019. The operating results and financial position of this hotel prior to the sale remain within our owned and leased hotels segment.
Land and Lease Assignment—During the three months ended September 30, 2019, we sold the property adjacent to Grand Hyatt San Francisco and assigned the related Apple store lease to an unrelated third party for approximately $115 million, net of closing costs and proration adjustments, and accounted for the transaction as an asset disposition. The sale resulted in a $101 million pre-tax gain which was recognized in gains on sales of real estate on our condensed consolidated statements of income during the three and nine months ended
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September 30, 2019. The operating results and financial position of this property prior to the sale remain within our owned and leased hotels segment.
Hyatt Regency Mexico City—During the three months ended September 30, 2018, we sold the shares of the entity which owns Hyatt Regency Mexico City, an investment in an unconsolidated hospitality venture, and adjacent land, a portion of which will be developed as Park Hyatt Mexico City, ("HRMC transaction") to an unrelated third party for approximately $405 million and accounted for the transaction as an asset disposition. We entered into long-term management agreements for the properties upon sale. We received $360 million of proceeds and issued $46 million of unsecured financing receivables which were repaid in full during the nine months ended September 30, 2019 (see Note 5). The sale resulted in a pre-tax gain of approximately $240 million which was recognized in gains on sales of real estate on our condensed consolidated statements of income during the three and nine months ended September 30, 2018. In connection with the disposition, we recognized a $21 million goodwill impairment charge in asset impairments on our condensed consolidated statements of income during the three and nine months ended September 30, 2018. The assets disposed represented the entirety of the related reporting unit and therefore, no business operations remained to support the related goodwill, which was therefore impaired. The operating results and financial position prior to the sale remain within our owned and leased hotels segment.
Grand Hyatt San Francisco, Andaz Maui at Wailea Resort, and Hyatt Regency Coconut Point Resort and Spa—During the nine months ended September 30, 2018, we sold Grand Hyatt San Francisco, Andaz Maui at Wailea Resort together with adjacent land, and Hyatt Regency Coconut Point Resort and Spa to an unrelated third party as a portfolio for approximately $992 million, net of closing costs and proration adjustments, and accounted for the transaction as an asset disposition. We entered into long-term management agreements for the properties upon sale. The sale resulted in a $531 million pre-tax gain which was recognized in gains on sales of real estate on our condensed consolidated statements of income during the nine months ended September 30, 2018. The operating results and financial position of these hotels prior to the sale remain within our owned and leased hotels segment. Although we concluded the disposal of these properties did not qualify as discontinued operations, the disposal was considered to be material. Pre-tax net income attributable to the three properties was $15 million during the nine months ended September 30, 2018.
Land Held for Development—A wholly owned subsidiary held undeveloped land in Los Cabos, Mexico. During the nine months ended September 30, 2018, an unrelated third party invested in the subsidiary in exchange for a 50% ownership interest resulting in derecognition of the subsidiary. Our remaining interest was recorded at a fair value of $45 million as an equity method investment.
Like-Kind Exchange Agreements
Periodically, we enter into like-kind exchange agreements upon the disposition or acquisition of certain properties. Pursuant to the terms of these agreements, the proceeds from the sales are placed into an escrow account administered by a qualified intermediary and are unavailable for our use until released. The proceeds are recorded as restricted cash on our condensed consolidated balance sheets and released (i) if they are utilized as part of a like-kind exchange agreement, (ii) if we do not identify a suitable replacement property within 45 days after the agreement date, or (iii) when a like-kind exchange agreement is not completed within the remaining allowable time period.
In conjunction with the sale of the property adjacent to Grand Hyatt San Francisco during the three months ended September 30, 2019, $115 million of proceeds were held as restricted for use in a potential like-kind exchange.
In conjunction with the sale of Hyatt Regency Coconut Point Resort and Spa during the nine months ended September 30, 2018, $221 million of proceeds were held as restricted for use in a potential like-kind exchange. During the three months ended September 30, 2018, $198 million of these proceeds were utilized to acquire Hyatt Regency Phoenix and Hyatt Regency Indian Wells Resort & Spa and the remaining $23 million were released.
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7. LEASES
Lessee—We primarily lease land, buildings, office space, spas and fitness centers, and equipment. We determine if an arrangement is an operating or finance lease at inception. For our hotel management agreements, we apply judgment in order to determine whether the contract is accounted for as a lease or management agreement based on the specific facts and circumstances of each agreement. In evaluating whether an agreement constitutes a lease, we review the contractual terms to determine which party obtains both the economic benefits and control of the assets. In arrangements where we control the assets and obtain the economic benefits, we account for the contract as a lease.
Certain of our leases include options to extend the lease term by 1 to 99 years. We include lease extension options in our operating ROU assets and lease liabilities when it is reasonably certain that we will exercise the options. The range of extension options included in our operating ROU assets and lease liabilities is approximately 1 to 20 years. Our lease agreements do not contain any significant residual value guarantees or restrictive covenants.
As our leases do not provide an implicit borrowing rate, we use our estimated IBR to determine the present value of our lease payments and apply a portfolio approach. We apply judgment in estimating the IBR including factors related to currency risk and our credit risk. We also give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when determining our IBR.
Our operating leases may include the following terms: (i) fixed minimum lease payments, (ii) variable lease payments based on a percentage of the hotel's profitability measure, as defined in the lease, (iii) lease payments equal to the greater of a minimum or variable lease payments based on a percentage of the hotel's profitability measure, as defined in the lease, or (iv) lease payments adjusted for changes in an index or market value. Future lease payments that are contingent are not included in the measurement of the operating lease liability or in the future maturities table below.
Total lease expense related to short-term leases and finance leases was insignificant for the three and nine months ended September 30, 2019. A summary of operating lease expense is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
2019 | 2019 | ||||||
Minimum rentals | $ | 12 | $ | 37 | |||
Contingent rentals | 22 | 78 | |||||
Total operating lease expense | $ | 34 | $ | 115 |
Supplemental balance sheet information related to finance leases is as follows:
September 30, 2019 | |||
Property and equipment, net (1) | $ | 9 | |
Current maturities of long-term debt | 2 | ||
Long-term debt | 9 | ||
Total finance lease liabilities | $ | 11 | |
(1) Finance lease assets are net of $13 million of accumulated amortization. |
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Weighted-average remaining lease terms and discount rates are as follows:
September 30, 2019 | ||
Weighted-average remaining lease term in years | ||
Operating leases (1) | 21 | |
Finance leases | 7 | |
Weighted-average discount rate | ||
Operating leases | 3.7 | % |
Finance leases | 0.9 | % |
(1) Certain of our hotel and land leases have nominal or contingent rental payments. As such, this results in a lower weighted-average remaining lease term. |
The maturities of lease liabilities in accordance with Leases (Topic 842) in each of the next five years and thereafter at September 30, 2019 are as follows:
Operating leases | Finance leases | ||||||
2019 (remaining) | $ | 12 | $ | — | |||
2020 | 47 | 3 | |||||
2021 | 44 | 2 | |||||
2022 | 42 | 2 | |||||
2023 | 39 | 2 | |||||
Thereafter | 452 | 5 | |||||
Total minimum lease payments | $ | 636 | $ | 14 | |||
Less: amount representing interest | (208 | ) | (3 | ) | |||
Present value of minimum lease payments | $ | 428 | $ | 11 |
The future minimum lease payments from our 2018 Form 10-K as filed in accordance with Leases (Topic 840) in each of the next five years and thereafter are as follows:
Years ending December 31, | Operating leases | Capital leases | |||||
2019 | $ | 46 | $ | 3 | |||
2020 | 42 | 3 | |||||
2021 | 42 | 2 | |||||
2022 | 38 | 2 | |||||
2023 | 35 | 2 | |||||
Thereafter | 448 | 5 | |||||
Total minimum lease payments | $ | 651 | $ | 17 | |||
Less: amount representing interest | (5 | ) | |||||
Present value of minimum lease payments | $ | 12 |
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Lessor—We lease retail space under operating leases at our owned hotel locations. Rental payments are primarily fixed with certain variable payments based on a contractual percentage of revenues. We recognized rental income within owned and leased hotels revenues on our condensed consolidated statements of income as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Rental income | $ | 5 | $ | 7 | $ | 18 | $ | 20 |
The future minimum lease receipts in accordance with Leases (Topic 842) scheduled to be received in each of the next five years and thereafter at September 30, 2019 are as follows:
2019 (remaining) | $ | 5 | |
2020 | 16 | ||
2021 | 12 | ||
2022 | 11 | ||
2023 | 8 | ||
Thereafter | 14 | ||
Total minimum lease receipts | $ | 66 |
The future minimum lease receipts from our 2018 Form 10-K as filed in accordance with Leases (Topic 840) scheduled to be received in each of the next five years and thereafter are as follows:
Years ending December 31, | |||
2019 | $ | 22 | |
2020 | 18 | ||
2021 | 16 | ||
2022 | 15 | ||
2023 | 11 | ||
Thereafter | 48 | ||
Total minimum lease receipts | $ | 130 |
8. INTANGIBLES, NET
September 30, 2019 | Weighted- average useful lives in years | December 31, 2018 | ||||||||
Management and franchise agreement intangibles | $ | 371 | 18 | $ | 390 | |||||
Lease related intangibles | — | — | 121 | |||||||
Brand and other indefinite-lived intangibles | 149 | — | 180 | |||||||
Advanced booking intangibles | 14 | 6 | 14 | |||||||
Other definite-lived intangibles | 8 | 6 | 8 | |||||||
Intangibles | 542 | 713 | ||||||||
Less: accumulated amortization | (89 | ) | (85 | ) | ||||||
Intangibles, net | $ | 453 | $ | 628 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Amortization expense | $ | 8 | $ | 3 | $ | 18 | $ | 10 |
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During the three and nine months ended September 30, 2019, we recognized $9 million and $13 million of impairment charges related to management agreement intangibles, respectively, for contracts that terminated or will terminate in the near-term. The impairment charges were recognized in asset impairments on our condensed consolidated statements of income, primarily on the Americas management and franchising segment.
9. OTHER ASSETS
September 30, 2019 | December 31, 2018 | ||||||
Marketable securities held to fund rabbi trusts (Note 4) | $ | 419 | $ | 367 | |||
Management and franchise agreement assets constituting payments to customers (1) | 409 | 396 | |||||
Marketable securities held to fund the loyalty program (Note 4) | 338 | 303 | |||||
Long-term investments | 111 | 112 | |||||
Common shares of Playa N.V. (Note 4) | 95 | 87 | |||||
Other | 104 | 88 | |||||
Total other assets | $ | 1,476 | $ | 1,353 | |||
(1) Includes cash consideration as well as other forms of consideration provided, such as debt repayment or performance guarantees. |
10. DEBT
Long-term debt, net of current maturities, was $1,612 million and $1,623 million at September 30, 2019 and December 31, 2018, respectively.
Senior Notes—During the nine months ended September 30, 2018, we issued $400 million of 4.375% senior notes due 2028, at an issue price of 99.866% (the "2028 Notes"). We received $396 million of net proceeds from the sale of the 2028 Notes, after deducting $4 million of underwriting discounts and other offering expenses. We used a portion of the proceeds from the issuance of the 2028 Notes to redeem our 6.875% senior notes due 2019 (the "2019 Notes"), and the remainder was used for general corporate purposes. Interest on the 2028 Notes is payable semi-annually on March 15 and September 15 of each year, beginning on March 15, 2019.
The 2028 Notes, together with our $250 million of 5.375% senior notes due 2021 (the "2021 Notes"), $350 million of 3.375% senior notes due 2023 (the "2023 Notes"), and $400 million of 4.850% senior notes due 2026 (the "2026 Notes"), are collectively referred to as the "Senior Notes."
Debt Redemption—During the nine months ended September 30, 2018, we redeemed all of our outstanding 2019 Notes, of which there was $196 million of aggregate principal outstanding, at a redemption price of approximately $203 million, which was calculated in accordance with the terms of the 2019 Notes and included principal and accrued interest plus a make-whole premium. The $7 million loss on extinguishment of debt was recognized in other income (loss), net on our condensed consolidated statements of income (see Note 19).
Revolving Credit Facility—During the nine months ended September 30, 2018, we refinanced our $1.5 billion senior unsecured revolving credit facility with a syndicate of lenders, extending the maturity of the facility to January 2023. During the nine months ended September 30, 2019, we had $180 million of borrowings and repayments on our revolving credit facility. The weighted-average interest rate on these borrowings was 3.46% at September 30, 2019. At September 30, 2019 and December 31, 2018, we had no balance outstanding. At September 30, 2019, we had $1.5 billion available on our revolving credit facility.
Fair Value—We estimated the fair value of debt, excluding finance leases, which consists of our Senior Notes, bonds, and other long-term debt. Our Senior Notes and bonds are classified as Level Two due to the use and weighting of multiple market inputs in the final price of the security. We estimated the fair value of other debt instruments using a discounted cash flow analysis based on current market inputs for similar types of arrangements. Based upon the lack of available market data, we have classified our revolving credit facility and other debt instruments as Level Three. The primary sensitivity in these models is based on the selection of appropriate discount rates. Fluctuations in these assumptions will result in different estimates of fair value.
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September 30, 2019 | |||||||||||||||||||
Carrying value | Fair value | Quoted prices in active markets for identical assets (Level One) | Significant other observable inputs (Level Two) | Significant unobservable inputs (Level Three) | |||||||||||||||
Debt (1) | $ | 1,627 | $ | 1,745 | $ | — | $ | 1,685 | $ | 60 |
(1) Excludes $11 million of finance lease obligations and $15 million of unamortized discounts and deferred financing fees.
December 31, 2018 | |||||||||||||||||||
Carrying value | Fair value | Quoted prices in active markets for identical assets (Level One) | Significant other observable inputs (Level Two) | Significant unobservable inputs (Level Three) | |||||||||||||||
Debt (2) | $ | 1,638 | $ | 1,651 | $ | — | $ | 1,584 | $ | 67 |
Interest Rate Locks—At September 30, 2019, we had outstanding interest rate locks with $275 million notional value and mandatory settlement dates of 2021. The interest rate locks hedge a portion of the risk of changes in the benchmark interest rate associated with long-term debt we anticipate issuing in the future. The outstanding derivative instruments are designated as cash flow hedges and deemed highly effective both at inception and at September 30, 2019.
During the three and nine months ended September 30, 2019, we recognized $13 million and $30 million of pre-tax losses, respectively, and during the three and nine months ended September 30, 2018, we recognized $3 million and $2 million of pre-tax gains, respectively, in unrealized gains (losses) on derivative activity on our condensed consolidated statements of comprehensive income. At September 30, 2019 and December 31, 2018, we had $34 million and $4 million of liabilities related to these derivative instruments, respectively, recorded in other long-term liabilities on our condensed consolidated balance sheets. We estimated the fair values of interest rate locks, which are classified as Level Two in the fair value hierarchy, using discounted cash flow models. The primary sensitivity in these models is based on forward and discount curves.
During the three months ended September 30, 2018, we settled interest rate locks with $225 million notional value upon issuance of the 2028 Notes.
11. OTHER LONG-TERM LIABILITIES
September 30, 2019 | December 31, 2018 | ||||||
Deferred compensation plans funded by rabbi trusts (Note 4) | $ | 419 | $ | 367 | |||
Income taxes payable | 145 | 131 | |||||
Self-insurance liabilities (Note 13) | 79 | 78 | |||||
Deferred income taxes | 47 | 54 | |||||
Guarantee liabilities (Note 13) | 37 | 76 | |||||
Other | 119 | 134 | |||||
Total other long-term liabilities | $ | 846 | $ | 840 |
12. INCOME TAXES
The effective income tax rates for the three months ended September 30, 2019 and September 30, 2018 were 26.9% and 7.7%, respectively. The effective income tax rates for the nine months ended September 30, 2019 and September 30, 2018 were 25.0% and 21.2%, respectively. Our effective tax rate increased for the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, primarily due to the low effective tax rate on the HRMC transaction in 2018.
We are currently under field exam by the Internal Revenue Service ("IRS") for tax years 2015 through 2017. U.S. tax years 2009 through 2011 are before the U.S. Tax Court concerning the tax treatment of the loyalty program. Additionally, U.S. tax years 2012 through 2014 are pending the outcome of the issue currently in U.S. Tax Court. If the IRS' position to include loyalty program contributions as taxable income to the Company is upheld, it would result in an income tax payment of $188 million (including $44 million of estimated interest, net of federal tax benefit) for all assessed years that would be partially offset by a deferred tax asset. As future tax benefits will be recognized at the reduced U.S. corporate income tax rate, $67 million of the payment and related interest would
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have an impact on the effective tax rate, if recognized. We believe we have an adequate uncertain tax liability recorded in connection with this matter.
13. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, we enter into various commitments, guarantees, surety bonds, and letter of credit agreements, which are discussed below:
Commitments—At September 30, 2019, we are committed, under certain conditions, to lend or provide certain consideration to, or invest in, various business ventures up to $395 million, net of any related letters of credit, including a commitment to purchase land and a hotel under construction in Portland, Oregon from the developer for a remaining purchase price of approximately $140 million upon substantial completion of construction.
Performance Guarantees—Certain of our contractual agreements with third-party hotel owners require us to guarantee payments to the owners if specified levels of operating profit are not achieved by their hotels.
Our most significant performance guarantee relates to four managed hotels in France that we began managing in the second quarter of 2013 ("the four managed hotels in France"), which has a term of seven years and less than one year remaining. This guarantee has a maximum cap, but does not have an annual cap. The remaining maximum exposure related to our performance guarantees at September 30, 2019 was $252 million, of which €180 million ($196 million using exchange rates at September 30, 2019) was related to the four managed hotels in France.
We had $13 million and $47 million of total net performance guarantee liabilities at September 30, 2019 and December 31, 2018, respectively, which included $4 million and $25 million recorded in other long-term liabilities and $9 million and $22 million in accrued expenses and other current liabilities on our condensed consolidated balance sheets, respectively.
The four managed hotels in France | Other performance guarantees | All performance guarantees | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Beginning balance, January 1 | $ | 36 | $ | 58 | $ | 11 | $ | 13 | $ | 47 | $ | 71 | ||||||||||||
Initial guarantee obligation liability | — | — | 1 | — | 1 | — | ||||||||||||||||||
Amortization of initial guarantee obligation liability into income | (8 | ) | (8 | ) | (1 | ) | (2 | ) | (9 | ) | (10 | ) | ||||||||||||
Performance guarantee expense (recovery), net | 24 | 36 | — | (1 | ) | 24 | 35 | |||||||||||||||||
Net payments during the period | (36 | ) | (50 | ) | (4 | ) | (5 | ) | (40 | ) | (55 | ) | ||||||||||||
Ending balance, June 30 | $ | 16 | $ | 36 | $ | 7 | $ | 5 | $ | 23 | $ | 41 | ||||||||||||
Amortization of initial guarantee obligation liability into income | (4 | ) | (3 | ) | (1 | ) | (1 | ) | (5 | ) | (4 | ) | ||||||||||||
Performance guarantee expense (recovery), net | (1 | ) | 3 | 2 | 3 | 1 | 6 | |||||||||||||||||
Net (payments) receipts during the period | (3 | ) | (9 | ) | (2 | ) | 2 | (5 | ) | (7 | ) | |||||||||||||
Foreign currency exchange, net | (1 | ) | 1 | — | — | (1 | ) | 1 | ||||||||||||||||
Ending balance, September 30 | $ | 7 | $ | 28 | $ | 6 | $ | 9 | $ | 13 | $ | 37 |
Additionally, we enter into certain management contracts where we have the right, but not an obligation, to make payments to certain hotel owners if their hotels do not achieve specified levels of operating profit. If we choose not to fund the shortfall, the hotel owner has the option to terminate the management contract. At September 30, 2019 and December 31, 2018, there were no amounts recognized on our condensed consolidated balance sheets related to these performance test clauses.
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Debt Repayment and Other Guarantees—We enter into various debt repayment and other guarantees in order to assist property owners and unconsolidated hospitality ventures in obtaining third-party financing or to obtain more favorable borrowing terms. Included within debt repayment and other guarantees are the following:
Property description | Maximum potential future payments | Maximum exposure net of recoverability from third parties | Other long-term liabilities recorded at September 30, 2019 | Other long-term liabilities recorded at December 31, 2018 | Year of guarantee expiration | |||||||||||||
Hotel properties in India (1) | $ | 169 | $ | 169 | $ | 6 | $ | 10 | 2020 | |||||||||
Hotel and residential properties in Brazil (2), (3) | 97 | 40 | 3 | 3 | various, through 2023 | |||||||||||||
Hotel properties in Tennessee (2) | 44 | 20 | 9 | 2 | various, through 2023 | |||||||||||||
Hotel property in Massachusetts (2), (4) | 40 | 14 | 7 | 8 | various, through 2022 | |||||||||||||
Hotel properties in California (2) | 31 | 12 | 3 | 4 | various, through 2021 | |||||||||||||
Hotel property in Oregon (2), (4) | 28 | 7 | 3 | 4 | various, through 2022 | |||||||||||||
Hotel property in Arizona (2), (3) | 25 | — | — | 1 | 2019 | |||||||||||||
Other (2), (5) | 10 | 5 | 2 | 19 | 2022 | |||||||||||||
Total | $ | 444 | $ | 267 | $ | 33 | $ | 51 |
(1) Debt repayment guarantee is denominated in Indian rupees and translated using exchange rates at September 30, 2019. We have the contractual right to recover amounts funded from an unconsolidated hospitality venture, which is a related party. We expect our maximum exposure to be $85 million, taking into account our partner's 50% ownership interest in the unconsolidated hospitality venture. Under certain events or conditions, we have the right to force the sale of the properties in order to recover amounts funded.
(2) We have agreements with our unconsolidated hospitality venture partners, the respective hotel owners, or other third parties to recover certain amounts funded under the debt repayment guarantee; the recoverability mechanism may be in the form of cash, financing receivable, or HTM debt security.
(3) If certain funding thresholds are met or if certain events occur, we have the ability to assume control of the property. With respect to properties in Brazil, this right only exists for the residential property.
(4) In conjunction with the debt repayment guarantees, we are subject to completion guarantees whereby the parties agree to substantially complete the construction of the project by a specified date. In the event of default, we are obligated to complete construction using the funds available from the outstanding loan. Any additional funds paid by us are subject to partial recovery in the form of cash. At September 30, 2019, the maximum potential future payments for the property in Massachusetts and the property in Oregon are $13 million and $12 million, respectively. After consideration of recoverability from third parties, our maximum exposure is insignificant for both the property in Massachusetts and the property in Oregon at September 30, 2019.
(5) At December 31, 2018, other-long term liabilities included a debt repayment guarantee for a hotel property in Washington State. During the nine months ended September 30, 2019, the debt was refinanced, and we are no longer a guarantor. As a result, we recognized a $15 million release of our debt repayment guarantee liability in other income (loss), net on our condensed consolidated statements of income for the nine months ended September 30, 2019 (see Note 19).
At September 30, 2019, we are not aware of, nor have we received notification that hotel owners are not current on their debt service obligations where we have provided a debt repayment guarantee.
Guarantee Liabilities Fair Value—We estimated the fair value of our guarantees to be $112 million and $128 million at September 30, 2019 and December 31, 2018, respectively. Based upon the lack of available market data, we have classified our guarantees as Level Three in the fair value hierarchy.
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Insurance—We obtain commercial insurance for potential losses for general liability, workers' compensation, automobile liability, employment practices, crime, property, cyber risk, and other miscellaneous coverages. A portion of the risk is retained on a self-insurance basis primarily through U.S.-based and licensed captive insurance companies that are wholly owned subsidiaries of Hyatt and generally insure our deductibles and retentions. Reserve requirements are established based on actuarial projections of ultimate losses. Reserves for losses in our captive insurance companies to be paid within 12 months are $40 million and $38 million at September 30, 2019 and December 31, 2018, respectively, and are classified within accrued expenses and other current liabilities on our condensed consolidated balance sheets, while reserves for losses in our captive insurance companies to be paid in future periods are $79 million and $78 million at September 30, 2019 and December 31, 2018, respectively, and are included in other long-term liabilities on our condensed consolidated balance sheets.
Collective Bargaining Agreements—At September 30, 2019, approximately 22% of our U.S.-based employees were covered by various collective bargaining agreements, generally providing for basic pay rates, working hours, other conditions of employment, and orderly settlement of labor disputes. Certain employees are covered by union-sponsored, multi-employer pension and health plans pursuant to agreements between us and various unions. Generally, labor relations have been maintained in a normal and satisfactory manner, and we believe our employee relations are good.
Surety Bonds—Surety bonds issued on our behalf were $46 million at September 30, 2019 and primarily relate to workers' compensation, taxes, licenses, construction liens, and utilities related to our lodging operations.
Letters of Credit—Letters of credit outstanding on our behalf at September 30, 2019 were $286 million, which relate to our ongoing operations, hotel properties under development in the U.S., collateral for estimated insurance claims, and securitization of our performance under our debt repayment guarantees associated with the hotel properties in India and the residential property in Brazil, which are only called upon if we default on our guarantees. The letters of credit outstanding do not reduce the available capacity under our revolving credit facility (see Note 10).
Capital Expenditures—As part of our ongoing business operations, significant expenditures are required to complete renovation projects that have been approved.
Other—We act as general partner of various partnerships owning hotel properties that are subject to mortgage indebtedness. These mortgage agreements generally limit the lender's recourse to security interests in assets financed and/or other assets of the partnership(s) and/or the general partner(s) thereof.
In conjunction with financing obtained for our unconsolidated hospitality ventures, certain managed hotels, and other properties, we may provide standard indemnifications to the lender for loss, liability, or damage occurring as a result of our actions or actions of the other unconsolidated hospitality venture partners, respective hotel owners, or other third parties.
As a result of certain dispositions, we have agreed to provide customary indemnifications to third-party purchasers for certain liabilities incurred prior to sale and for breach of certain representations and warranties made during the sales process, such as representations of valid title, authority, and environmental issues that may not be limited by a contractual monetary amount. These indemnification agreements survive until the applicable statutes of limitation expire or until the agreed upon contract terms expire.
We are subject, from time to time, to various claims and contingencies related to lawsuits, taxes, and environmental matters, as well as commitments under contractual obligations. Many of these claims are covered under our current insurance programs, subject to deductibles. Although the ultimate liability for these matters cannot be determined at this point, based on information currently available, we do not expect the ultimate resolution of such claims and litigation to have a material effect on our condensed consolidated financial statements.
During the year ended December 31, 2018, we received a notice from the Indian tax authorities assessing additional service tax on our operations in India. We appealed this decision and do not believe a loss is probable, and therefore, we have not recognized a liability in connection with this matter. At September 30, 2019, our maximum exposure is not expected to exceed $18 million.
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14. EQUITY
Accumulated Other Comprehensive Loss
Balance at July 1, 2019 | Current period other comprehensive income (loss) before reclassification | Amount reclassified from accumulated other comprehensive loss | Balance at September 30, 2019 | ||||||||||||
Foreign currency translation adjustments | $ | (191 | ) | $ | (27 | ) | $ | — | $ | (218 | ) | ||||
Unrecognized pension cost | (5 | ) | — | — | (5 | ) | |||||||||
Unrealized losses on derivative instruments | (16 | ) | (9 | ) | — | (25 | ) | ||||||||
Accumulated other comprehensive loss | $ | (212 | ) | $ | (36 | ) | $ | — | $ | (248 | ) | ||||
Balance at January 1, 2019 | Current period other comprehensive income (loss) before reclassification | Amount reclassified from accumulated other comprehensive loss | Balance at September 30, 2019 | ||||||||||||
Foreign currency translation adjustments | $ | (191 | ) | $ | (27 | ) | $ | — | $ | (218 | ) | ||||
Unrecognized pension cost | (5 | ) | — | — | (5 | ) | |||||||||
Unrealized losses on derivative instruments | (4 | ) | (21 | ) | — | (25 | ) | ||||||||
Accumulated other comprehensive loss | $ | (200 | ) | $ | (48 | ) | $ | — | $ | (248 | ) | ||||
Balance at July 1, 2018 | Current period other comprehensive income (loss) before reclassification | Amount reclassified from accumulated other comprehensive loss (a) | Balance at September 30, 2018 | ||||||||||||
Foreign currency translation adjustments | $ | (266 | ) | $ | 9 | $ | 62 | $ | (195 | ) | |||||
Unrecognized pension cost | (7 | ) | — | — | (7 | ) | |||||||||
Unrealized losses on derivative instruments | (3 | ) | 3 | — | — | ||||||||||
Accumulated other comprehensive loss | $ | (276 | ) | $ | 12 | $ | 62 | $ | (202 | ) | |||||
(a) The amounts reclassified from accumulated other comprehensive loss include the gain recognized in gains on sales of real estate related to the HRMC transaction (see Note 6). | |||||||||||||||
Balance at January 1, 2018 | Current period other comprehensive income (loss) before reclassification | Amount reclassified from accumulated other comprehensive loss (b) | Balance at September 30, 2018 | ||||||||||||
Foreign currency translation adjustments | $ | (243 | ) | $ | (29 | ) | $ | 77 | $ | (195 | ) | ||||
Unrecognized pension cost | (7 | ) | — |