Hyatt Hotels Corp - Quarter Report: 2019 June (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 June 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 July 26, 2019, there were 37,747,346 shares of the registrant's Class A common stock, $0.01 par value, outstanding and 67,115,828 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 JUNE 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 | Six Months Ended | ||||||||||||||
June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | ||||||||||||
REVENUES: | |||||||||||||||
Owned and leased hotels | $ | 490 | $ | 485 | $ | 960 | $ | 1,000 | |||||||
Management, franchise, and other fees | 158 | 142 | 299 | 274 | |||||||||||
Amortization of management and franchise agreement assets constituting payments to customers | (6 | ) | (5 | ) | (11 | ) | (10 | ) | |||||||
Net management, franchise, and other fees | 152 | 137 | 288 | 264 | |||||||||||
Other revenues | 28 | 9 | 73 | 20 | |||||||||||
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties | 619 | 502 | 1,209 | 958 | |||||||||||
Total revenues | 1,289 | 1,133 | 2,530 | 2,242 | |||||||||||
DIRECT AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES: | |||||||||||||||
Owned and leased hotels | 367 | 357 | 724 | 741 | |||||||||||
Depreciation and amortization | 83 | 79 | 163 | 162 | |||||||||||
Other direct costs | 30 | 7 | 75 | 15 | |||||||||||
Selling, general, and administrative | 95 | 83 | 223 | 178 | |||||||||||
Costs incurred on behalf of managed and franchised properties | 633 | 500 | 1,238 | 960 | |||||||||||
Direct and selling, general, and administrative expenses | 1,208 | 1,026 | 2,423 | 2,056 | |||||||||||
Net gains and interest income from marketable securities held to fund rabbi trusts | 11 | 6 | 41 | 9 | |||||||||||
Equity earnings (losses) from unconsolidated hospitality ventures | 6 | 2 | 3 | (11 | ) | ||||||||||
Interest expense | (20 | ) | (19 | ) | (39 | ) | (38 | ) | |||||||
Gains on sales of real estate | — | 1 | 1 | 530 | |||||||||||
Asset impairments | (1 | ) | — | (4 | ) | — | |||||||||
Other income (loss), net | 28 | 5 | 79 | (13 | ) | ||||||||||
INCOME BEFORE INCOME TAXES | 105 | 102 | 188 | 663 | |||||||||||
PROVISION FOR INCOME TAXES | (19 | ) | (25 | ) | (39 | ) | (175 | ) | |||||||
NET INCOME | 86 | 77 | 149 | 488 | |||||||||||
NET INCOME AND ACCRETION ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | — | — | |||||||||||
NET INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION | $ | 86 | $ | 77 | $ | 149 | $ | 488 | |||||||
EARNINGS PER SHARE—Basic | |||||||||||||||
Net income | $ | 0.81 | $ | 0.67 | $ | 1.41 | $ | 4.19 | |||||||
Net income attributable to Hyatt Hotels Corporation | $ | 0.81 | $ | 0.67 | $ | 1.41 | $ | 4.19 | |||||||
EARNINGS PER SHARE—Diluted | |||||||||||||||
Net income | $ | 0.80 | $ | 0.66 | $ | 1.39 | $ | 4.12 | |||||||
Net income attributable to Hyatt Hotels Corporation | $ | 0.80 | $ | 0.66 | $ | 1.39 | $ | 4.12 |
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 | Six Months Ended | ||||||||||||||
June 30, 2019 | June 30, 2018 | June 30, 2019 | June 30, 2018 | ||||||||||||
Net income | $ | 86 | $ | 77 | $ | 149 | $ | 488 | |||||||
Other comprehensive income (loss), net of taxes: | |||||||||||||||
Foreign currency translation adjustments, net of tax benefit of $- for the three and six months ended June 30, 2019 and $(1) for the three and six months ended June 30, 2018 | 6 | (46 | ) | — | (23 | ) | |||||||||
Unrealized losses on derivative activity, net of tax benefit of $(3) and $(4) for the three and six months ended June 30, 2019 and $- for the three and six months ended June 30, 2018 | (8 | ) | — | (12 | ) | — | |||||||||
Other comprehensive loss | (2 | ) | (46 | ) | (12 | ) | (23 | ) | |||||||
COMPREHENSIVE INCOME | 84 | 31 | 137 | 465 | |||||||||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — | — | — | — | |||||||||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION | $ | 84 | $ | 31 | $ | 137 | $ | 465 |
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)
June 30, 2019 | December 31, 2018 | ||||||
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 515 | $ | 570 | |||
Restricted cash | 32 | 33 | |||||
Short-term investments | 62 | 116 | |||||
Receivables, net of allowances of $28 and $26 at June 30, 2019 and December 31, 2018, respectively | 497 | 427 | |||||
Inventories | 13 | 14 | |||||
Prepaids and other assets | 147 | 149 | |||||
Prepaid income taxes | 38 | 36 | |||||
Total current assets | 1,304 | 1,345 | |||||
Equity method investments | 222 | 233 | |||||
Property and equipment, net | 3,615 | 3,608 | |||||
Financing receivables, net of allowances | 16 | 13 | |||||
Operating lease right-of-use assets | 505 | — | |||||
Goodwill | 322 | 283 | |||||
Intangibles, net | 471 | 628 | |||||
Deferred tax assets | 172 | 180 | |||||
Other assets | 1,455 | 1,353 | |||||
TOTAL ASSETS | $ | 8,082 | $ | 7,643 | |||
LIABILITIES AND EQUITY | |||||||
CURRENT LIABILITIES: | |||||||
Current maturities of long-term debt | $ | 91 | $ | 11 | |||
Accounts payable | 149 | 151 | |||||
Accrued expenses and other current liabilities | 312 | 361 | |||||
Current contract liabilities | 400 | 388 | |||||
Accrued compensation and benefits | 127 | 150 | |||||
Current operating lease liabilities | 35 | — | |||||
Total current liabilities | 1,114 | 1,061 | |||||
Long-term debt | 1,621 | 1,623 | |||||
Long-term contract liabilities | 461 | 442 | |||||
Long-term operating lease liabilities | 406 | — | |||||
Other long-term liabilities | 833 | 840 | |||||
Total liabilities | 4,435 | 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 June 30, 2019 and December 31, 2018 | — | — | |||||
Class A common stock, $0.01 par value per share, 1,000,000,000 shares authorized, 37,867,014 issued and outstanding at June 30, 2019, and Class B common stock, $0.01 par value per share, 399,110,240 shares authorized, 67,115,828 shares issued and outstanding at June 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 | 3,853 | 3,819 | |||||
Accumulated other comprehensive loss | (212 | ) | (200 | ) | |||
Total stockholders' equity | 3,642 | 3,670 | |||||
Noncontrolling interests in consolidated subsidiaries | 5 | 7 | |||||
Total equity | 3,647 | 3,677 | |||||
TOTAL LIABILITIES AND EQUITY | $ | 8,082 | $ | 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)
Six Months Ended | |||||||
June 30, 2019 | June 30, 2018 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net income | $ | 149 | $ | 488 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Gains on sales of real estate | (1 | ) | (530 | ) | |||
Depreciation and amortization | 163 | 162 | |||||
Release of contingent consideration liability | (27 | ) | — | ||||
Amortization of share awards | 27 | 23 | |||||
Deferred income taxes | 4 | (12 | ) | ||||
Equity (earnings) losses from unconsolidated hospitality ventures | (3 | ) | 11 | ||||
Amortization of management and franchise agreement assets constituting payments to customers | 11 | 10 | |||||
Working capital changes and other | (144 | ) | (122 | ) | |||
Net cash provided by operating activities | 179 | 30 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Purchases of marketable securities and short-term investments | (110 | ) | (439 | ) | |||
Proceeds from marketable securities and short-term investments | 165 | 347 | |||||
Contributions to equity method and other investments | (16 | ) | (24 | ) | |||
Return of equity method and other investments | 24 | 13 | |||||
Acquisitions, net of cash acquired | (18 | ) | (5 | ) | |||
Capital expenditures | (146 | ) | (121 | ) | |||
Proceeds from sales of real estate, net of cash disposed | — | 992 | |||||
Other investing activities | 6 | 11 | |||||
Net cash provided by (used in) investing activities | (95 | ) | 774 | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds from debt | 120 | 20 | |||||
Repayments of debt | (42 | ) | (22 | ) | |||
Repurchases of common stock | (147 | ) | (588 | ) | |||
Contingent consideration paid | (24 | ) | — | ||||
Repayments of redeemable noncontrolling interest in preferred shares in a subsidiary | — | (10 | ) | ||||
Dividends paid | (40 | ) | (35 | ) | |||
Other financing activities | (10 | ) | (12 | ) | |||
Net cash used in financing activities | (143 | ) | (647 | ) | |||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 4 | 1 | |||||
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, INCLUDING CASH CLASSIFIED WITHIN CURRENT ASSETS HELD FOR SALE | (55 | ) | 158 | ||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH RECLASSIFIED TO ASSETS HELD FOR SALE | — | (9 | ) | ||||
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | (55 | ) | 149 | ||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—BEGINNING OF YEAR | 622 | 752 | |||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—END OF PERIOD | $ | 567 | $ | 901 |
See accompanying Notes to condensed consolidated financial statements.
Supplemental disclosure of cash flow information:
June 30, 2019 | June 30, 2018 | ||||||
Cash and cash equivalents | $ | 515 | $ | 628 | |||
Restricted cash (1) | 32 | 254 | |||||
Restricted cash included in other assets (1) | 20 | 19 | |||||
Total cash, cash equivalents, and restricted cash | $ | 567 | $ | 901 | |||
(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. |
Six Months Ended June 30, | |||||||
2019 | 2018 | ||||||
Cash paid during the period for interest | $ | 41 | $ | 37 | |||
Cash paid during the period for income taxes | $ | 34 | $ | 213 | |||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 24 | $ | — | |||
Non-cash investing and financing activities are as follows: | |||||||
Non-cash contributions to equity method investments | $ | 5 | $ | 53 | |||
Change in accrued capital expenditures | $ | 2 | $ | 5 | |||
Non-cash right-of-use assets obtained in exchange for operating lease liabilities | $ | 5 | $ | — | |||
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 | ||||||||||
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 |
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 June 30, 2019, (i) we operated or franchised 428 full service hotels, comprising 150,089 rooms throughout the world, (ii) we operated or franchised 444 select service hotels, comprising 62,948 rooms, of which 383 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 June 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, Hyatt Centric, Hyatt House, Hyatt Place, Joie de Vivre, tommie, Exhale, and Hyatt Residence Club 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 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 payments over the lease term, including optional periods for which it is reasonably certain the renewal option will be exercised.
6
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 applying the optional transition approach, 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) for all leases that are twelve months or less, we exclude these short-term leases 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 |
7
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 an impairment allowance 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. We are currently evaluating the impact of adopting ASU 2016-13.
Fair Value Measurement—In August 2018, the FASB released Accounting Standards Update No. 2018-13 ("ASU 2018-13"), Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements in relation to fair value measurements. The provisions of ASU 2018-13 are to be applied using a prospective or retrospective approach, depending on the amendment and are effective for interim periods and fiscal years beginning after December 15, 2019, with early adoption permitted. ASU 2018-13 will not have a material impact on our condensed consolidated financial statements.
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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 June 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 | $ | 279 | $ | — | $ | — | $ | — | $ | 6 | $ | (9 | ) | $ | 276 | ||||||
Food and beverage | 164 | — | — | — | 3 | — | 167 | ||||||||||||||
Other | 38 | — | — | — | 9 | — | 47 | ||||||||||||||
Owned and leased hotels | 481 | — | — | — | 18 | (9 | ) | 490 | |||||||||||||
Base management fees | — | 61 | 10 | 9 | — | (12 | ) | 68 | |||||||||||||
Incentive management fees | — | 19 | 17 | 9 | — | (6 | ) | 39 | |||||||||||||
Franchise fees | — | 36 | 2 | — | — | — | 38 | ||||||||||||||
Other fees | — | 1 | 3 | 1 | 2 | — | 7 | ||||||||||||||
License fees | — | — | — | — | 6 | — | 6 | ||||||||||||||
Management, franchise, and other fees | — | 117 | 32 | 19 | 8 | (18 | ) | 158 | |||||||||||||
Amortization of management and franchise agreement assets constituting payments to customers | — | (3 | ) | (1 | ) | (2 | ) | — | — | (6 | ) | ||||||||||
Net management, franchise, and other fees | — | 114 | 31 | 17 | 8 | (18 | ) | 152 | |||||||||||||
Other revenues | — | 19 | — | — | 8 | 1 | 28 | ||||||||||||||
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties | — | 575 | 26 | 17 | 1 | — | 619 | ||||||||||||||
Total | $ | 481 | $ | 708 | $ | 57 | $ | 34 | $ | 35 | $ | (26 | ) | $ | 1,289 |
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Six Months Ended June 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 | $ | 545 | $ | — | $ | — | $ | — | $ | 13 | $ | (16 | ) | $ | 542 | ||||||
Food and beverage | 321 | — | — | — | 6 | — | 327 | ||||||||||||||
Other | 73 | — | — | — | 18 | — | 91 | ||||||||||||||
Owned and leased hotels | 939 | — | — | — | 37 | (16 | ) | 960 | |||||||||||||
Base management fees | — | 118 | 22 | 17 | — | (26 | ) | 131 | |||||||||||||
Incentive management fees | — | 33 | 34 | 17 | — | (11 | ) | 73 | |||||||||||||
Franchise fees | — | 68 | 2 | — | — | — | 70 | ||||||||||||||
Other fees | — | 1 | 6 | 3 | 3 | — | 13 | ||||||||||||||
License fees | — | — | — | — | 12 | — | 12 | ||||||||||||||
Management, franchise, and other fees | — | 220 | 64 | 37 | 15 | (37 | ) | 299 | |||||||||||||
Amortization of management and franchise agreement assets constituting payments to customers | — | (7 | ) | (1 | ) | (3 | ) | — | — | (11 | ) | ||||||||||
Net management, franchise, and other fees | — | 213 | 63 | 34 | 15 | (37 | ) | 288 | |||||||||||||
Other revenues | — | 55 | — | — | 17 | 1 | 73 | ||||||||||||||
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties | — | 1,123 | 50 | 34 | 2 | — | 1,209 | ||||||||||||||
Total | $ | 939 | $ | 1,391 | $ | 113 | $ | 68 | $ | 71 | $ | (52 | ) | $ | 2,530 |
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Three Months Ended June 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 | $ | 275 | $ | — | $ | — | $ | — | $ | 6 | $ | (10 | ) | $ | 271 | ||||||
Food and beverage | 169 | — | — | — | 3 | — | 172 | ||||||||||||||
Other | 34 | — | — | — | 8 | — | 42 | ||||||||||||||
Owned and leased hotels | 478 | — | — | — | 17 | (10 | ) | 485 | |||||||||||||
Base management fees | — | 53 | 10 | 9 | — | (13 | ) | 59 | |||||||||||||
Incentive management fees | — | 20 | 17 | 9 | — | (8 | ) | 38 | |||||||||||||
Franchise fees | — | 34 | 1 | — | — | — | 35 | ||||||||||||||
Other fees | — | 1 | 2 | 1 | 1 | — | 5 | ||||||||||||||
License fees | — | — | — | — | 5 | — | 5 | ||||||||||||||
Management, franchise, and other fees | — | 108 | 30 | 19 | 6 | (21 | ) | 142 | |||||||||||||
Amortization of management and franchise agreement assets constituting payments to customers | — | (3 | ) | — | (2 | ) | — | — | (5 | ) | |||||||||||
Net management, franchise, and other fees | — | 105 | 30 | 17 | 6 | (21 | ) | 137 | |||||||||||||
Other revenues | — | — | — | — | 8 | 1 | 9 | ||||||||||||||
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties | — | 461 | 23 | 17 | 1 | — | 502 | ||||||||||||||
Total | $ | 478 | $ | 566 | $ | 53 | $ | 34 | $ | 32 | $ | (30 | ) | $ | 1,133 |
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Six Months Ended June 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 | $ | 572 | $ | — | $ | — | $ | — | $ | 13 | $ | (19 | ) | $ | 566 | ||||||
Food and beverage | 341 | — | — | — | 5 | — | 346 | ||||||||||||||
Other | 72 | — | — | — | 16 | — | 88 | ||||||||||||||
Owned and leased hotels | 985 | — | — | — | 34 | (19 | ) | 1,000 | |||||||||||||
Base management fees | — | 102 | 21 | 16 | — | (27 | ) | 112 | |||||||||||||
Incentive management fees | — | 33 | 34 | 19 | — | (14 | ) | 72 | |||||||||||||
Franchise fees | — | 62 | 1 | — | — | — | 63 | ||||||||||||||
Other fees | — | 9 | 4 | 2 | 2 | — | 17 | ||||||||||||||
License fees | — | — | — | — | 10 | — | 10 | ||||||||||||||
Management, franchise, and other fees | — | 206 | 60 | 37 | 12 | (41 | ) | 274 | |||||||||||||
Amortization of management and franchise agreement assets constituting payments to customers | — | (6 | ) | (1 | ) | (3 | ) | — | — | (10 | ) | ||||||||||
Net management, franchise, and other fees | — | 200 | 59 | 34 | 12 | (41 | ) | 264 | |||||||||||||
Other revenues | — | — | — | — | 17 | 3 | 20 | ||||||||||||||
Revenues for the reimbursement of costs incurred on behalf of managed and franchised properties | — | 881 | 43 | 33 | 1 | — | 958 | ||||||||||||||
Total | $ | 985 | $ | 1,081 | $ | 102 | $ | 67 | $ | 64 | $ | (57 | ) | $ | 2,242 |
Contract Balances
Our contract assets were $3 million and insignificant at June 30, 2019 and December 31, 2018, respectively. At June 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.
Our contract liabilities were as follows:
June 30, 2019 | December 31, 2018 | $ Change | % Change | |||||||||||
Current contract liabilities | $ | 400 | $ | 388 | $ | 12 | 3.0 | % | ||||||
Long-term contract liabilities | 461 | 442 | 19 | 4.3 | % | |||||||||
Total contract liabilities | $ | 861 | $ | 830 | $ | 31 | 3.6 | % |
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Contract liabilities are comprised of the following:
June 30, 2019 | December 31, 2018 | ||||||
Deferred revenue related to the loyalty program | $ | 640 | $ | 596 | |||
Advanced deposits | 68 | 81 | |||||
Initial fees received from franchise owners | 38 | 35 | |||||
Deferred revenue related to system-wide services | 9 | 7 | |||||
Other deferred revenue | 106 | 111 | |||||
Total contract liabilities | $ | 861 | $ | 830 |
The following table summarizes the activity in our contract liabilities:
2019 | 2018 | ||||||
Beginning balance, January 1 | $ | 830 | $ | 772 | |||
Cash received and other | 247 | 217 | |||||
Revenue recognized | (228 | ) | (224 | ) | |||
Ending balance, March 31 | $ | 849 | $ | 765 | |||
Cash received and other | 243 | 216 | |||||
Revenue recognized | (231 | ) | (217 | ) | |||
Ending balance, June 30 | $ | 861 | $ | 764 |
Revenue recognized during the three months ended June 30, 2019 and June 30, 2018 included in the contract liabilities balance at the beginning of each year was $93 million and $84 million, respectively. Revenue recognized during the six months ended June 30, 2019 and June 30, 2018 included in the contract liabilities balance at the beginning of each year was $238 million and $218 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 June 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 $222 million and $233 million at June 30, 2019 and December 31, 2018, respectively.
During the three months ended June 30, 2019, we recognized an $8 million gain in equity earnings (losses) from unconsolidated hospitality ventures on our condensed consolidated statements of income resulting from the
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sale of our ownership interest in an equity method investment within our owned and leased hotels segment and received $23 million of sales proceeds.
During the three months ended June 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 $5 million. During the six months ended June 30, 2018, we recognized $16 million of impairment charges related to these investments in equity earnings (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.
During the three and six months ended June 30, 2018, we recognized $2 million and $10 million of gains, respectively, in equity earnings (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 six months ended June 30, 2018, we received $10 million of sales proceeds.
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 June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Total revenues | $ | 125 | $ | 132 | $ | 241 | $ | 264 | |||||||
Gross operating profit | 49 | 49 | 88 | 88 | |||||||||||
Income (loss) from continuing operations | (1 | ) | 16 | (11 | ) | (3 | ) | ||||||||
Net income (loss) | (1 | ) | 16 | (11 | ) | (3 | ) |
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:
June 30, 2019 | December 31, 2018 | ||||||
Loyalty program (Note 9) | $ | 441 | $ | 397 | |||
Deferred compensation plans held in rabbi trusts (Note 9 and Note 11) | 426 | 367 | |||||
Captive insurance companies | 143 | 133 | |||||
Total marketable securities held to fund operating programs | $ | 1,010 | $ | 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 | (213 | ) | (174 | ) | |||
Marketable securities held to fund operating programs included in other assets | $ | 797 | $ | 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 June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Loyalty program (Note 19) | $ | 10 | $ | 1 | $ | 19 | $ | (3 | ) |
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Net realized and unrealized gains 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 June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Unrealized gains | $ | 9 | $ | 3 | $ | 37 | $ | 2 | |||||||
Realized gains | 2 | 3 | 4 | 7 | |||||||||||
Net gains and interest income from marketable securities held to fund rabbi trusts | $ | 11 | $ | 6 | $ | 41 | $ | 9 |
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:
June 30, 2019 | December 31, 2018 | ||||||
Common shares of Playa N.V. (Note 9) | $ | 94 | $ | 87 | |||
Interest-bearing money market funds | 38 | 14 | |||||
Time deposits | 37 | 100 | |||||
Total marketable securities held for investment purposes | $ | 169 | $ | 201 | |||
Less: current portion of marketable securities held for investment purposes included in cash and cash equivalents and short-term investments | (75 | ) | (114 | ) | |||
Marketable securities held for investment purposes included in other assets | $ | 94 | $ | 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 and $7 million of unrealized gains recognized in other income (loss), net on our condensed consolidated statements of income for the three months ended June 30, 2019 and June 30, 2018, respectively, and $7 million and insignificant unrealized gains recognized in other income (loss), net on our condensed consolidated statements of income for the six months ended June 30, 2019 and June 30, 2018, respectively (see Note 19). We did not sell any shares of common stock during the six months ended June 30, 2019.
Other Investments
Held-to-Maturity Debt Securities—At June 30, 2019 and December 31, 2018, we held $53 million and $49 million, respectively, of investments in held-to-maturity ("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 calculations 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 June 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 three months ended June 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 value
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was in excess of the fair value. The fair value was determined to be a Level Three fair value measure. Subsequent to June 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:
June 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 | $ | 144 | $ | 144 | $ | — | $ | — | $ | — | |||||||||
Mutual funds | 426 | — | — | — | 426 | ||||||||||||||
Common shares | 94 | — | — | — | 94 | ||||||||||||||
Level Two - Significant Other Observable Inputs | |||||||||||||||||||
Time deposits | 51 | — | 42 | — | 9 | ||||||||||||||
U.S. government obligations | 191 | — | — | 39 | 152 | ||||||||||||||
U.S. government agencies | 49 | — | 1 | 6 | 42 | ||||||||||||||
Corporate debt securities | 156 | — | 19 | 23 | 114 | ||||||||||||||
Mortgage-backed securities | 23 | — | — | 5 | 18 | ||||||||||||||
Asset-backed securities | 43 | — | — | 9 | 34 | ||||||||||||||
Municipal and provincial notes and bonds | 2 | — | — | — | 2 | ||||||||||||||
Total | $ | 1,179 | $ | 144 | $ | 62 | $ | 82 | $ | 891 |
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 six months ended June 30, 2019 and June 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
June 30, 2019 | December 31, 2018 | ||||||
Unsecured financing to hotel owners | $ | 158 | $ | 159 | |||
Less: current portion of financing receivables, included in receivables, net | (42 | ) | (45 | ) | |||
Less: allowance for losses | (100 | ) | (101 | ) | |||
Total long-term financing receivables, net of allowances | $ | 16 | $ | 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 | 2 | 2 | |||||
Other adjustments | — | (1 | ) | ||||
Allowance at March 31 | $ | 103 | $ | 109 | |||
Provisions | 1 | 1 | |||||
Other adjustments | — | (1 | ) | ||||
Write-offs | (4 | ) | — | ||||
Allowance at June 30 | $ | 100 | $ | 109 |
Credit Monitoring—Our unsecured financing receivables were as follows:
June 30, 2019 | |||||||||||||||
Gross loan balance (principal and interest) | Related allowance | Net financing receivables | Gross receivables on non-accrual status | ||||||||||||
Loans | $ | 59 | $ | (1 | ) | $ | 58 | $ | — | ||||||
Impaired loans (1) | 45 | (45 | ) | — | 45 | ||||||||||
Total loans | 104 | (46 | ) | 58 | 45 | ||||||||||
Other financing arrangements | 54 | (54 | ) | — | 54 | ||||||||||
Total unsecured financing receivables | $ | 158 | $ | (100 | ) | $ | 58 | $ | 99 |
(1) The unpaid principal balance was $35 million and the average recorded loan balance was $47 million at June 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 $60 million and $59 million at June 30, 2019 and December 31, 2018, respectively.
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6. ACQUISITIONS AND DISPOSITIONS
Acquisitions
Land—During the six months ended June 30, 2019, we acquired $15 million of land through an asset acquisition from an unrelated third party.
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 a $4 million receipt 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 June 30, 2019 | $ | 507 |
As it relates to the $57 million contingent consideration liability recorded at December 31, 2018, of which $6 million remains at June 30, 2019, the following occurred during the six months ended June 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, we released $2 million and $27 million of the contingent liability to other income (loss), net on our condensed consolidated statements of income during the three and six months ended June 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 June 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 are 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 June 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 June 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) | 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 $154 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.
Dispositions
Grand Hyatt San Francisco, Andaz Maui at Wailea Resort, and Hyatt Regency Coconut Point Resort and Spa—During the six months ended June 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 six months ended June 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 six months ended June 30, 2018.
Land Held for Development—A wholly owned subsidiary held undeveloped land in Los Cabos, Mexico. During the three months ended June 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.
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In conjunction with the sale of Hyatt Regency Coconut Point Resort and Spa during the six months ended June 30, 2018, $221 million of proceeds were held as restricted for use in a potential like-kind exchange. Subsequently, $198 million of these proceeds were utilized to acquire two properties in 2018 and the remaining $23 million were released.
In conjunction with the sale of Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch during the year ended December 31, 2017, proceeds of $207 million were initially held as restricted for use in a potential like-kind exchange. However, we did not acquire the identified replacement property within the specified 180 day period and the proceeds were released during the three months ended June 30, 2018.
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 calculating 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 six months ended June 30, 2019. A summary of operating lease expense is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||
2019 | 2019 | ||||||
Minimum rentals | $ | 14 | $ | 25 | |||
Contingent rentals | 24 | 56 | |||||
Total operating lease expense | $ | 38 | $ | 81 |
Supplemental balance sheet information related to finance leases is as follows:
June 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 $14 million of accumulated amortization. |
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Weighted-average remaining lease terms and discount rates are as follows:
June 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 | 1.0 | % |
(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 June 30, 2019 are as follows:
Operating leases | Finance leases | ||||||
2019 (remaining) | $ | 25 | $ | 1 | |||
2020 | 47 | 3 | |||||
2021 | 44 | 2 | |||||
2022 | 42 | 2 | |||||
2023 | 39 | 2 | |||||
Thereafter | 456 | 5 | |||||
Total minimum lease payments | $ | 653 | $ | 15 | |||
Less: amount representing interest | (212 | ) | (4 | ) | |||
Present value of minimum lease payments | $ | 441 | $ | 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 June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Rental income | $ | 6 | $ | 6 | $ | 13 | $ | 13 |
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 June 30, 2019 are as follows:
2019 (remaining) | $ | 13 | |
2020 | 21 | ||
2021 | 18 | ||
2022 | 16 | ||
2023 | 14 | ||
Thereafter | 49 | ||
Total minimum lease receipts | $ | 131 |
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
June 30, 2019 | Weighted- average useful lives in years | December 31, 2018 | ||||||||
Management and franchise agreement intangibles | $ | 382 | 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 | 553 | 713 | ||||||||
Less: accumulated amortization | (82 | ) | (85 | ) | ||||||
Intangibles, net | $ | 471 | $ | 628 |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Amortization expense | $ | 7 | $ | 4 | $ | 10 | $ | 7 |
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9. OTHER ASSETS
June 30, 2019 | December 31, 2018 | ||||||
Marketable securities held to fund rabbi trusts (Note 4) | $ | 426 | $ | 367 | |||
Management and franchise agreement assets constituting payments to customers (1) | 392 | 396 | |||||
Marketable securities held to fund the loyalty program (Note 4) | 324 | 303 | |||||
Long-term investments | 110 | 112 | |||||
Common shares of Playa N.V. (Note 4) | 94 | 87 | |||||
Other | 109 | 88 | |||||
Total other assets | $ | 1,455 | $ | 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 $1,621 million and $1,623 million at June 30, 2019 and December 31, 2018, respectively.
Revolving Credit Facility—During the six months ended June 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 six months ended June 30, 2019, we borrowed $120 million and repaid $40 million on our revolving credit facility. The weighted-average interest rate on these borrowings was 3.53% at June 30, 2019. At June 30, 2019 and December 31, 2018, we had $80 million and no balance outstanding, respectively. At June 30, 2019, we had $1.4 billion available on our revolving credit facility.
Fair Value—We estimated the fair value of debt, excluding finance leases, which consists of $250 million of 5.375% senior notes due 2021 (the "2021 Notes"), $350 million of 3.375% senior notes due 2023 (the "2023 Notes"), $400 million of 4.850% senior notes due 2026 (the "2026 Notes"), and $400 million of 4.375% senior notes due 2028 (the "2028 Notes"), collectively referred to as the "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 calculations is based on the selection of appropriate discount rates. Fluctuations in these assumptions will result in different estimates of fair value.
June 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) | $ | 1,716 | $ | 1,809 | $ | — | $ | 1,664 | $ | 145 |
(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 |
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Interest Rate Locks—At June 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 June 30, 2019. At June 30, 2019 and December 31, 2018, we had $21 million and $4 million of liabilities related to these derivative instruments, respectively, recorded in other long-term liabilities on our condensed consolidated balance sheets.
11. OTHER LONG-TERM LIABILITIES
June 30, 2019 | December 31, 2018 | ||||||
Deferred compensation plans funded by rabbi trusts (Note 4) | $ | 426 | $ | 367 | |||
Income taxes payable | 135 | 131 | |||||
Self-insurance liabilities (Note 13) | 77 | 78 | |||||
Deferred income taxes | 48 | 54 | |||||
Guarantee liabilities (Note 13) | 38 | 76 | |||||
Other | 109 | 134 | |||||
Total other long-term liabilities | $ | 833 | $ | 840 |
12. INCOME TAXES
The effective income tax rates for the three months ended June 30, 2019 and June 30, 2018 were 18.4% and 24.3%, respectively. Our effective tax rate decreased for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, primarily due to a non-recurring benefit related to prior years recognized as a result of an agreement reached by the United States and Swiss tax authorities on Advanced Pricing Agreement terms during the three months ended June 30, 2019. The Advanced Pricing Agreement terms cover tax years 2012 to 2021.
The effective income tax rates for the six months ended June 30, 2019 and June 30, 2018 were 20.7% and 26.4%, respectively. Our effective tax rate decreased for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, due to the aforementioned Advanced Pricing Agreement benefit and a benefit recognized in the first quarter of 2019 to adjust certain deferred tax liabilities.
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 $185 million (including $41 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, $66 million of the payment and related interest would 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 June 30, 2019, we are committed, under certain conditions, to lend or provide certain consideration to, or invest in, various business ventures up to $420 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 $141 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 approximately 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 June 30, 2019 was $263 million, of which
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€180 million ($205 million using exchange rates at June 30, 2019) was related to the four managed hotels in France.
We had $23 million and $47 million of total net performance guarantee liabilities at June 30, 2019 and December 31, 2018, respectively, which included $5 million and $25 million recorded in other long-term liabilities and $18 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 | (4 | ) | (4 | ) | — | (1 | ) | (4 | ) | (5 | ) | |||||||||||||
Performance guarantee expense, net | 20 | 27 | 1 | 1 | 21 | 28 | ||||||||||||||||||
Net payments during the period | (16 | ) | (23 | ) | (3 | ) | (1 | ) | (19 | ) | (24 | ) | ||||||||||||
Foreign currency exchange, net | — | 2 | — | — | — | 2 | ||||||||||||||||||
Ending balance, March 31 | $ | 36 | $ | 60 | $ | 10 | $ | 12 | $ | 46 | $ | 72 | ||||||||||||
Amortization of initial guarantee obligation liability into income | (4 | ) | (4 | ) | (1 | ) | (1 | ) | (5 | ) | (5 | ) | ||||||||||||
Performance guarantee expense (recovery), net | 4 | 9 | (1 | ) | (2 | ) | 3 | 7 | ||||||||||||||||
Net payments during the period | (20 | ) | (27 | ) | (1 | ) | (4 | ) | (21 | ) | (31 | ) | ||||||||||||
Foreign currency exchange, net | — | (2 | ) | — | — | — | (2 | ) | ||||||||||||||||
Ending balance, June 30 | $ | 16 | $ | 36 | $ | 7 | $ | 5 | $ | 23 | $ | 41 |
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 June 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 June 30, 2019 | Other long-term liabilities recorded at December 31, 2018 | Year of guarantee expiration | |||||||||||||
Hotel properties in India (1) | $ | 174 | $ | 174 | $ | 7 | $ | 10 | 2020 | |||||||||
Hotel and residential properties in Brazil (2), (3) | 95 | 40 | 3 | 3 | various, through 2023 | |||||||||||||
Hotel property in Massachusetts (2), (4) | 68 | 17 | 7 | 8 | various, through 2022 | |||||||||||||
Hotel property in Oregon (2), (4) | 40 | 8 | 3 | 4 | various, through 2022 | |||||||||||||
Hotel properties in California (2) | 31 | 13 | 4 | 4 | various, through 2021 | |||||||||||||
Hotel properties in Tennessee (2) | 30 | 13 | 6 | 2 | various, through 2023 | |||||||||||||
Hotel property in Arizona (2), (3) | 25 | — | — | 1 | 2019 | |||||||||||||
Other (2), (5) | 10 | 5 | 3 | 19 | 2022 | |||||||||||||
Total | $ | 473 | $ | 270 | $ | 33 | $ | 51 |
(1) Debt repayment guarantee is denominated in Indian rupees and translated using exchange rates at June 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 $87 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 June 30, 2019, the maximum potential future payments for the property in Massachusetts and the property in Oregon are $41 million and $24 million, respectively. After consideration of recoverability from third parties, our maximum exposure is $3 million and $2 million for the property in Massachusetts and the property in Oregon, respectively, at June 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 six months ended June 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 six months ended June 30, 2019 (see Note 19).
At June 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 $114 million and $128 million at June 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 June 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 $77 million and $78 million at June 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 June 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 $38 million at June 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 June 30, 2019 were $288 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 June 30, 2019, our maximum exposure is not expected to exceed $18 million.
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14. EQUITY
Accumulated Other Comprehensive Loss
Balance at April 1, 2019 | Current period other comprehensive income (loss) before reclassification | Amount reclassified from accumulated other comprehensive loss | Balance at June 30, 2019 | ||||||||||||
Foreign currency translation adjustments | $ | (197 | ) | $ | 6 | $ | — | $ | (191 | ) | |||||
Unrecognized pension cost | (5 | ) | — | — | (5 | ) | |||||||||
Unrealized losses on derivative instruments | (8 | ) | (8 | ) | — | (16 | ) | ||||||||
Accumulated other comprehensive loss | $ | (210 | ) | $ | (2 | ) | $ | — | $ | (212 | ) | ||||
Balance at January 1, 2019 | Current period other comprehensive income (loss) before reclassification | Amount reclassified from accumulated other comprehensive loss | Balance at June 30, 2019 | ||||||||||||
Foreign currency translation adjustments | $ | (191 | ) | $ | — | $ | — | $ | (191 | ) | |||||
Unrecognized pension cost | (5 | ) | — | — | (5 | ) | |||||||||
Unrealized losses on derivative instruments | (4 | ) | (12 | ) | — | (16 | ) | ||||||||
Accumulated other comprehensive loss | $ | (200 | ) | $ | (12 | ) | $ | — | $ | (212 | ) | ||||
Balance at April 1, 2018 | Current period other comprehensive income (loss) before reclassification | Amount reclassified from accumulated other comprehensive loss (a) | Balance at June 30, 2018 | ||||||||||||
Foreign currency translation adjustments | $ | (220 | ) | $ | (61 | ) | $ | 15 | $ | (266 | ) | ||||
Unrecognized pension cost | (7 | ) | — | — | (7 | ) | |||||||||
Unrealized losses on derivative instruments | (3 | ) | — | — | (3 | ) | |||||||||
Accumulated other comprehensive loss | $ | (230 | ) | $ | (61 | ) | $ | 15 | $ | (276 | ) | ||||
(a) The amount reclassified from accumulated other comprehensive loss was included in the net loss recognized upon derecognition of a wholly owned subsidiary in gains on sales of real estate (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 June 30, 2018 | ||||||||||||
Foreign currency translation adjustments | $ | (243 | ) | $ | (38 | ) | $ | 15 | $ | (266 | ) | ||||
Unrecognized pension cost | (7 | ) | — | — | (7 | ) | |||||||||
Unrealized losses on derivative instruments | (3 | ) | — | — | (3 | ) | |||||||||
Accumulated other comprehensive loss | $ | (253 | ) | $ | (38 | ) | $ | 15 | $ | (276 | ) | ||||
(b) The amount reclassified from accumulated other comprehensive loss was included in the net loss recognized upon derecognition of a wholly owned subsidiary in gains on sales of real estate (see Note 6). |
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Share Repurchase—During 2018 and 2017, our board of directors authorized the repurchase of up to $750 million and $1,250 million, respectively, of our common stock. These repurchases may be made from time to time in the open market, in privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan or an accelerated share repurchase transaction, at prices we deem appropriate and subject to market conditions, applicable law, and other factors deemed relevant in our sole discretion. The common stock repurchase program applies to our Class A and Class B common stock. The common stock repurchase program does not obligate us to repurchase any dollar amount or number of shares of common stock and the program may be suspended or discontinued at any time.
During the six months ended June 30, 2019, we repurchased 2,052,536 shares of common stock. The shares of common stock were repurchased at a weighted-average price of $71.85 per share for an aggregate purchase price of $147 million, excluding related insignificant expenses. The shares repurchased during the six months ended June 30, 2019 represented approximately 2% of our total shares of common stock outstanding at December 31, 2018.
During the six months ended June 30, 2018, we entered into the following accelerated share repurchase ("ASR") program with a third-party financial institution to repurchase Class A shares:
Total number of shares repurchased (1) | Weighted-average price per share | Total cash paid | ||||||||
May 2018 ASR | 2,481,341 | $ | 80.60 | $ | 200 | |||||
(1) The delivery of shares resulted in a reduction in weighted-average common shares outstanding for basic and diluted earnings per share. |
During the six months ended June 30, 2018, we repurchased 7,715,794 shares of common stock, including settlement of the May 2018 ASR and 244,260 shares representing the settlement of an ASR program entered into during the fourth quarter of 2017 ("November 2017 ASR"). The shares of common stock were repurchased at a weighted-average price of $78.45 per share and an aggregate purchase price of $608 million, excluding related insignificant expenses. The aggregate purchase price includes $20 million of shares delivered in the settlement of the November 2017 ASR in 2018, for which payment was made during 2017. The shares repurchased during the six months ended June 30, 2018 represented approximately 6% of our total shares of common stock outstanding at December 31, 2017.
The shares of Class A common stock repurchased on the open market were retired and returned to the status of authorized and unissued shares. At June 30, 2019, we had $521 million remaining under the share repurchase authorization.
Dividend—The following tables summarize dividends paid to Class A and Class B shareholders of record:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Class A common stock | $ | 7 | $ | 7 | $ | 14 | $ | 14 | |||||||
Class B common stock | 13 | 10 | 26 | 21 | |||||||||||
Total cash dividends paid | $ | 20 | $ | 17 | $ | 40 | $ | 35 |
Date declared | Dividend per share amount for Class A and Class B | Date of record | Date paid | |||||
February 13, 2019 | $ | 0.19 | February 27, 2019 | March 11, 2019 | ||||
May 17, 2019 | $ | 0.19 | May 29, 2019 | June 10, 2019 | ||||
February 14, 2018 | $ | 0.15 | March 22, 2018 | March 29, 2018 | ||||
May 16, 2018 | $ | 0.15 | June 19, 2018 | June 28, 2018 |
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15. STOCK-BASED COMPENSATION
As part of our Long-Term Incentive Plan ("LTIP"), we award Stock Appreciation Rights ("SARs"), Restricted Stock Units ("RSUs"), and Performance Share Units ("PSUs") to certain employees. Compensation expense and unearned compensation presented below exclude amounts related to employees of our managed hotels and other employees whose payroll is reimbursed, as this expense has been and will continue to be reimbursed by our third-party hotel owners and is recognized within revenues for the reimbursement of costs incurred on behalf of managed and franchised properties and costs incurred on behalf of managed and franchised properties on our condensed consolidated statements of income. Stock-based compensation expense included in selling, general, and administrative expense on our condensed consolidated statements of income related to these awards was as follows: