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Park Hotels & Resorts Inc. - Quarter Report: 2018 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2018

OR

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

For the transition period from            to           

Commission File Number 001-37795

 

Park Hotels & Resorts Inc.

(Exact name of registrant as specified in its charter)

 

 Delaware

 

36-2058176

(State or Other jurisdiction of

incorporation or organization)

 

(I.R.S Employer

Identification Number)

 

1775 Tysons Blvd., 7th Floor, Tysons, VA

 

22102

(Address of Principal Executive Offices)

 

(Zip Code)

(571) 302-5757

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). 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

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

The number of shares of common stock outstanding on July 27, 2018 was 201,178,415.

 

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Page

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

2

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

 

2

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017

 

3

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017

 

4

 

Condensed Consolidated Statements of Equity for the Six Months Ended June 30, 2018 and 2017

 

5

 

Notes to Condensed Consolidated Financial Statements

 

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

26

Item 4.

Controls and Procedures

 

26

 

 

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

27

Item 1A.

Risk Factors

 

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

Item 3.

Defaults Upon Senior Securities

 

27

Item 4.

Mine Safety Disclosures

 

27

Item 5.

Other Information

 

27

Item 6.

Exhibits

 

28

 

 

 

 

 

Signatures

 

29

 

1


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

PARK HOTELS & RESORTS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Property and equipment, net

 

$

7,999

 

 

$

8,311

 

Assets held for sale, net

 

 

 

 

 

37

 

Investments in affiliates

 

 

56

 

 

 

84

 

Goodwill

 

 

607

 

 

 

606

 

Intangibles, net

 

 

27

 

 

 

41

 

Cash and cash equivalents

 

 

421

 

 

 

364

 

Restricted cash

 

 

17

 

 

 

15

 

Accounts receivable, net of allowance for doubtful accounts of $1 and $1

 

 

180

 

 

 

125

 

Prepaid expenses

 

 

46

 

 

 

48

 

Other assets

 

 

98

 

 

 

83

 

TOTAL ASSETS (variable interest entities - $241 and $240)

 

$

9,451

 

 

$

9,714

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Debt

 

$

2,947

 

 

$

2,961

 

Accounts payable and accrued expenses

 

 

181

 

 

 

215

 

Due to hotel manager

 

 

107

 

 

 

141

 

Due to Hilton Grand Vacations

 

 

138

 

 

 

138

 

Deferred income tax liabilities

 

 

36

 

 

 

65

 

Other liabilities

 

 

285

 

 

 

232

 

Total liabilities (variable interest entities - $216 and $217)

 

 

3,694

 

 

 

3,752

 

Commitments and contingencies - refer to Note 12

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share, 6,000,000,000 shares authorized,

  201,253,015 shares issued and 201,178,717 shares outstanding as of June 30,

  2018 and 214,873,778 shares issued and 214,845,244 shares outstanding as

  of December 31, 2017

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

3,581

 

 

 

3,825

 

Retained earnings

 

 

2,231

 

 

 

2,229

 

Accumulated other comprehensive loss

 

 

(8

)

 

 

(45

)

Total stockholders' equity

 

 

5,806

 

 

 

6,011

 

Noncontrolling interests

 

 

(49

)

 

 

(49

)

Total equity

 

 

5,757

 

 

 

5,962

 

TOTAL LIABILITIES AND EQUITY

 

$

9,451

 

 

$

9,714

 

 

Refer to the notes to the unaudited condensed consolidated financial statements.

 

2


PARK HOTELS & RESORTS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in millions, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

$

451

 

 

$

469

 

 

$

869

 

 

$

901

 

Food and beverage

 

 

205

 

 

 

200

 

 

 

388

 

 

 

392

 

Ancillary hotel

 

 

58

 

 

 

48

 

 

 

108

 

 

 

95

 

Other

 

 

17

 

 

 

16

 

 

 

34

 

 

 

29

 

Total revenues

 

 

731

 

 

 

733

 

 

 

1,399

 

 

 

1,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

 

112

 

 

 

118

 

 

 

224

 

 

 

231

 

Food and beverage

 

 

131

 

 

 

132

 

 

 

257

 

 

 

263

 

Other departmental and support

 

 

155

 

 

 

166

 

 

 

311

 

 

 

330

 

Other property-level

 

 

50

 

 

 

51

 

 

 

103

 

 

 

102

 

Management and franchise fees

 

 

39

 

 

 

39

 

 

 

72

 

 

 

73

 

Depreciation and amortization

 

 

69

 

 

 

73

 

 

 

139

 

 

 

143

 

Corporate general and administrative

 

 

15

 

 

 

16

 

 

 

31

 

 

 

30

 

Other

 

 

18

 

 

 

15

 

 

 

35

 

 

 

28

 

Total expenses

 

 

589

 

 

 

610

 

 

 

1,172

 

 

 

1,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sales of assets, net

 

 

7

 

 

 

 

 

 

96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

149

 

 

 

123

 

 

 

323

 

 

 

217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

 

1

 

 

 

2

 

 

 

1

 

Interest expense

 

 

(31

)

 

 

(31

)

 

 

(62

)

 

 

(61

)

Equity in earnings from investments in affiliates

 

 

8

 

 

 

8

 

 

 

12

 

 

 

12

 

Loss on foreign currency transactions

 

 

(4

)

 

 

(4

)

 

 

(3

)

 

 

(3

)

Other gain (loss), net

 

 

108

 

 

 

(1

)

 

 

108

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

231

 

 

 

96

 

 

 

380

 

 

 

165

 

Income tax (expense) benefit

 

 

(13

)

 

 

19

 

 

 

(13

)

 

 

2,300

 

Net income

 

 

218

 

 

 

115

 

 

 

367

 

 

 

2,465

 

Net income attributable to noncontrolling interests

 

 

(2

)

 

 

(3

)

 

 

(1

)

 

 

(3

)

Net income attributable to stockholders

 

$

216

 

 

$

112

 

 

$

366

 

 

$

2,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax benefit (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustment, net of tax of $1, $0, $1,

   and $0

 

 

 

 

 

7

 

 

 

37

 

 

 

14

 

Total other comprehensive income

 

 

 

 

 

7

 

 

 

37

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

218

 

 

$

122

 

 

$

404

 

 

$

2,479

 

Comprehensive income attributable to noncontrolling interests

 

 

(2

)

 

 

(3

)

 

 

(1

)

 

 

(3

)

Comprehensive income attributable to stockholders

 

$

216

 

 

$

119

 

 

$

403

 

 

$

2,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Basic

 

$

1.07

 

 

$

0.52

 

 

$

1.77

 

 

$

11.79

 

Earnings per share - Diluted

 

$

1.07

 

 

$

0.52

 

 

$

1.77

 

 

$

11.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - Basic

 

 

200

 

 

 

214

 

 

 

205

 

 

 

208

 

Weighted average shares outstanding - Diluted

 

 

201

 

 

 

215

 

 

 

206

 

 

 

214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.88

 

 

$

0.43

 

 

$

1.31

 

 

$

0.86

 

Refer to the notes to the unaudited condensed consolidated financial statements.

3


PARK HOTELS & RESORTS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

367

 

 

$

2,465

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

139

 

 

 

143

 

Gain on sales of assets, net

 

 

(96

)

 

 

 

Equity in earnings from investments in affiliates

 

 

(12

)

 

 

(12

)

Loss on foreign currency transactions

 

 

3

 

 

 

3

 

Other (gain) loss, net

 

 

(108

)

 

 

1

 

Share-based compensation expense

 

 

8

 

 

 

7

 

Amortization of deferred financing costs

 

 

2

 

 

 

2

 

Distributions from unconsolidated affiliates

 

 

6

 

 

 

7

 

Deferred income taxes

 

 

(3

)

 

 

(2,312

)

Changes in operating assets and liabilities

 

 

(158

)

 

 

(30

)

Net cash provided by operating activities

 

 

148

 

 

 

274

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(86

)

 

 

(86

)

Proceeds from asset dispositions, net

 

 

368

 

 

 

 

Proceeds from the sale of investments in affiliates

 

 

150

 

 

 

 

Insurance proceeds for property damage claims

 

 

35

 

 

 

 

Investments in affiliates

 

 

 

 

 

(1

)

Distributions from unconsolidated affiliates

 

 

 

 

 

1

 

Net cash provided by (used in) investing activities

 

 

467

 

 

 

(86

)

Financing Activities:

 

 

 

 

 

 

 

 

Dividends paid

 

 

(204

)

 

 

(202

)

Distributions to noncontrolling interests

 

 

(1

)

 

 

(2

)

Tax withholdings on share-based compensation

 

 

(2

)

 

 

(2

)

Repurchase of common stock

 

 

(348

)

 

 

 

Net transfers to Parent

 

 

 

 

 

(9

)

Net cash used in financing activities

 

 

(555

)

 

 

(215

)

Effect of exchange rate changes on cash and cash equivalents and restricted cash

 

 

(1

)

 

 

1

 

Net increase (decrease) in cash and cash equivalents and restricted cash

 

 

59

 

 

 

(26

)

Cash and cash equivalents and restricted cash, beginning of period

 

 

379

 

 

 

350

 

Cash and cash equivalents and restricted cash, end of period

 

$

438

 

 

$

324

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

Dividends paid in stock

 

$

 

 

$

441

 

Dividends declared but unpaid

 

 

177

 

 

 

92

 

 

Refer to the notes to the unaudited condensed consolidated financial statements.

4


PARK HOTELS & RESORTS INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited, in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Non-

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Interests

 

 

Total

 

Balance as of December 31, 2017

 

 

215

 

 

$

2

 

 

$

3,825

 

 

$

2,229

 

 

$

(45

)

 

$

(49

)

 

$

5,962

 

Share-based compensation

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Net income

 

 

 

 

 

 

 

 

 

 

 

366

 

 

 

 

 

 

1

 

 

 

367

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

37

 

Dividends and dividend equivalents

 

 

 

 

 

 

 

 

 

 

 

(266

)

 

 

 

 

 

 

 

 

(266

)

Repurchase of common stock

 

 

(14

)

 

 

 

 

 

(250

)

 

 

(98

)

 

 

 

 

 

 

 

 

(348

)

Distributions to noncontrolling

   interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Balance as of June 30, 2018

 

 

201

 

 

$

2

 

 

$

3,581

 

 

$

2,231

 

 

$

(8

)

 

$

(49

)

 

$

5,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Net Parent

 

 

controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Investment

 

 

Interests

 

 

Total

 

Balance as of December 31, 2016

 

 

 

 

$

 

 

$

 

 

$

 

 

$

(67

)

 

$

3,939

 

 

$

(49

)

 

$

3,823

 

Net transfers to Parent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

(9

)

Issuance of common stock and

   reclassification of former Parent

   investment

 

 

198

 

 

 

2

 

 

 

3,928

 

 

 

 

 

 

 

 

 

(3,930

)

 

 

 

 

 

 

Share-based compensation

 

 

1

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,462

 

 

 

 

 

 

 

 

 

3

 

 

 

2,465

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

14

 

Dividends

 

 

16

 

 

 

 

 

 

(110

)

 

 

(185

)

 

 

 

 

 

 

 

 

 

 

 

(295

)

Distributions to noncontrolling

  interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Balance as of June 30, 2017

 

 

215

 

 

$

2

 

 

$

3,823

 

 

$

2,277

 

 

$

(53

)

 

$

 

 

$

(48

)

 

$

6,001

 

 

Refer to the notes to the unaudited condensed consolidated financial statements.

5


PARK HOTELS & RESORTS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1: Organization

Park Hotels & Resorts Inc. (“we,” “us,” “our” or the “Company”) is a Delaware corporation that owns a portfolio of premium-branded hotels and resorts primarily located in prime United States (“U.S.”) markets. On January 3, 2017, Hilton Worldwide Holdings Inc. (“Hilton” or “Parent”) completed the spin-off of a portfolio of hotels and resorts that established Park Hotels & Resorts Inc. as an independent, publicly traded company. The spin-off transaction was effected through a pro rata distribution of Park Hotels & Resorts Inc. stock to existing Hilton stockholders.

For U.S. federal income tax purposes, we intend to elect to be taxed as a real estate investment trust (“REIT”), effective for our tax year ending December 31, 2017. We are currently, and expect to continue to be, organized and operate in a REIT qualified manner. From the spin-off date, Park Intermediate Holdings LLC (our “Operating Company”), directly or indirectly, holds all of our assets and conducts all of our operations. We own 100% of the interests in our Operating Company.

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

Principles of Consolidation

The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows, in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All significant intercompany transactions and balances within the financial statements have been eliminated.

These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2017 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim results are not necessarily indicative of full year performance.

Reclassifications

Certain line items on the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2017 and condensed consolidated statements of cash flows for the six months ended June 30, 2017 have been reclassified to conform to the current period presentation.

Summary of Significant Accounting Policies

Our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 1, 2018, contains a discussion of the significant accounting policies. There have been no significant changes to our significant accounting policies since December 31, 2017.

Recently Issued Accounting Pronouncements

Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), which supersedes existing guidance on accounting for leases in Leases (Topic 840) and generally requires all leases to be recognized in the statement of financial position.

6


We anticipate recognizing a right of use asset and corresponding lease obligation liability for our long-term leases that are currently accounted for as operating leases. Although early adoption is permitted, we expect to adopt these new ASUs on a modified retrospective basis when the requirements become effective January 1, 2019. We are currently evaluating the effect that these ASUs will have on our consolidated financial statements.

Note 3: Dispositions

During the six months ended June 30, 2018, we sold our interests in 12 consolidated hotels listed in the table below and received total gross proceeds of $387 million. We recognized a net gain of approximately $96 million, including the reclassification of a currency translation adjustment of $31 million from accumulated other comprehensive loss into earnings concurrent with the dispositions, which is included in gain on sales of assets, net in our condensed consolidated statements of comprehensive income.  

Additionally, in May 2018, we and the other owners of our unconsolidated affiliates that owned the Hilton Berlin hotel sold our interests for gross proceeds of approximately $375 million, before customary closing adjustments, of which our pro rata share was approximately $150 million. We recognized a net gain of approximately $108 million, including the reclassification of a currency translation adjustment of $8 million from accumulated other comprehensive loss into earnings concurrent with the disposition, which is included in other gain, net in our condensed consolidated statements of comprehensive income.  

 

Hotel

 

Location

 

Month Sold

Hilton Rotterdam

 

Rotterdam, Netherlands

 

January 2018

 

 

 

 

 

Embassy Suites Portfolio(1)

 

 

 

February 2018

Embassy Suites by Hilton Kansas City Overland Park

 

Overland Park, Kansas

 

 

Embassy Suites by Hilton San Rafael Marin County

 

San Rafael, California

 

 

Embassy Suites by Hilton Atlanta Perimeter Center

 

Atlanta, Georgia

 

 

 

 

 

 

 

UK Portfolio(1)

 

 

 

February 2018

Hilton Blackpool

 

Blackpool, United Kingdom

 

 

Hilton Belfast

 

Belfast, United Kingdom

 

 

Hilton London Angel Islington

 

London, United Kingdom

 

 

Hilton Edinburgh Grosvenor

 

Edinburgh, United Kingdom

 

 

Hilton Coylumbridge

 

Aviemore, United Kingdom

 

 

Hilton Bath City

 

Bath, United Kingdom

 

 

Hilton Milton Keynes

 

Milton Keynes, United Kingdom

 

 

 

 

 

 

 

Hilton Durban

 

Durban, South Africa

 

February 2018

 

 

 

 

 

Hilton Berlin(2)

 

Berlin, Germany

 

May 2018

 

(1)

Hotels were sold as a portfolio.

(2)

Unconsolidated joint venture.

 

Note 4: Property and Equipment

Property and equipment were:

 

 

 

June 30, 2018

 

 

December 31, 2017(1)

 

 

 

(in millions)

 

Land

 

$

3,335

 

 

$

3,364

 

Buildings and leasehold improvements

 

 

5,672

 

 

 

5,911

 

Furniture and equipment

 

 

937

 

 

 

966

 

Construction-in-progress

 

 

150

 

 

 

117

 

 

 

 

10,094

 

 

 

10,358

 

Accumulated depreciation and amortization

 

 

(2,095

)

 

 

(2,047

)

 

 

$

7,999

 

 

$

8,311

 

 

(1)

Excludes $31 million of property and equipment, net classified as held for sale as of December 31, 2017.

 

7


Depreciation of property and equipment, including capital lease assets, was $69 million and $72 million during the three months ended June 30, 2018 and 2017, respectively, and $139 million and $141 million during the six months ended June 30, 2018 and 2017, respectively.

As of June 30, 2018 and December 31, 2017, property and equipment included approximately $1 million and $20 million, respectively, of capital lease assets primarily consisting of buildings and leasehold improvements, net of $0 million and $10 million, respectively, of accumulated depreciation. Certain capital lease assets were disposed of in connection with the sale of our UK portfolio in February 2018.

Hurricanes Irma and Maria

In September 2017, Hurricanes Irma and Maria caused damage and disruption at certain of our hotels in Florida and the Caribe Hilton in Puerto Rico. We incurred $20 million of expenses and recognized a loss of $54 million for property and equipment that was damaged during the hurricanes during the year ended December 31, 2017. During the six months ended June 30, 2018, we incurred an additional $37 million of expenses, and based upon additional information obtained during the period, we recognized an additional loss of $22 million for property and equipment that was damaged during the hurricanes. These amounts were offset by the recognition of an additional insurance receivable of $59 million.

Our insurance coverage provides us with reimbursement for the replacement cost for the damage to these hotels, which includes certain clean-up and repair costs, exceeding the applicable deductibles, in addition to loss of business. During the six months ended June 30, 2018, we received $43 million of insurance proceeds, of which $7 million relates to business interruption. Business interruption proceeds are included within ancillary hotel revenue in our condensed consolidated statements of comprehensive income.  As of June 30, 2018, the insurance receivable, which is included within other assets in our condensed consolidated balance sheets, is $80 million.

Note 5: Consolidated Variable Interest Entities ("VIEs") and Investments in Affiliates

Consolidated VIEs

We consolidate three VIEs that own hotels in the U.S. We are the primary beneficiary of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our VIEs are only available to settle the obligations of these entities. Our condensed consolidated balance sheets include the following assets and liabilities of these entities:

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

(in millions)

 

Property and equipment, net

 

$

224

 

 

$

215

 

Cash and cash equivalents

 

 

9

 

 

 

14

 

Restricted cash

 

 

3

 

 

 

7

 

Accounts receivable, net

 

 

4

 

 

 

2

 

Prepaid expenses

 

 

1

 

 

 

2

 

Debt

 

 

207

 

 

 

207

 

Accounts payable and accrued expenses

 

 

7

 

 

 

8

 

Due to hotel manager

 

 

1

 

 

 

1

 

Other liabilities

 

 

1

 

 

 

1

 

 

During the six months ended June 30, 2018 and 2017, we did not provide any financial or other support to these VIEs that we were not previously contractually required to provide, nor do we intend to provide any such support in the future.

Unconsolidated Entities

Investments in affiliates were:

 

 

 

Ownership %

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

(in millions)

 

Hilton Berlin(1)

 

40%

 

 

$

 

 

$

33

 

Hilton San Diego Bayfront

 

25%

 

 

 

22

 

 

 

20

 

All others (7 hotels)

 

20% - 50%

 

 

 

34

 

 

 

31

 

 

 

 

 

 

 

$

56

 

 

$

84

 

 

(1)

Disposed of in May 2018.  Refer to Note 3: “Dispositions” for additional information.    

8


 

The affiliates in which we own investments accounted for under the equity method had total debt of approximately $957 million and $962 million as of June 30, 2018 and December 31, 2017, respectively. Substantially all the debt is secured solely by the affiliates’ assets or is guaranteed by other partners without recourse to us.

Note 6: Debt

Debt balances, including obligations for capital leases, and associated interest rates as of June 30, 2018, were:

 

 

 

 

 

 

 

Principal balance as of

 

 

 

Interest Rate

at June 30, 2018

 

Maturity Date

 

June 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

(in millions)

 

SF CMBS Loan(1)

 

4.11%

 

November 2023

 

$

725

 

 

$

725

 

HHV CMBS Loan(1)

 

4.20%

 

November 2026

 

 

1,275

 

 

 

1,275

 

Mortgage loans

 

Average rate of

4.16%

 

2020 to 2026(2)

 

 

207

 

 

 

207

 

Term loan

 

L + 1.55%

 

December 2021

 

 

750

 

 

 

750

 

Revolving credit facility(3)

 

L + 1.60%

 

December 2021(2)

 

 

 

 

 

 

Capital lease obligations(4)

 

3.07%

 

2021 to 2022

 

 

1

 

 

 

16

 

 

 

 

 

 

 

 

2,958

 

 

 

2,973

 

Less: unamortized deferred financing costs and

   discount

 

 

 

 

 

 

(11

)

 

 

(12

)

 

 

 

 

 

 

$

2,947

 

 

$

2,961

 

 

(1)

In October 2016, we entered into a $725 million commercial mortgaged-back securities (“CMBS”) loan secured by the Hilton San Francisco Union Square and the Parc 55 Hotel San Francisco (“SF CMBS Loan”) and a $1.275 billion CMBS loan secured by the Hilton Hawaiian Village (“HHV CMBS Loan”).

(2)

Assumes the exercise of all extensions that are exercisable solely at our option.

(3)

$1 billion available.

(4)

Capital lease obligations of $15 million were disposed of in connection with the sale of our UK portfolio in February 2018.

Mortgage Loans

We are required to deposit with lenders certain cash reserves for restricted uses. As of June 30, 2018 and December 31, 2017, our condensed consolidated balance sheets included $13 million and $14 million, respectively, of restricted cash related to our CMBS loans and mortgage loans.

Debt Maturities

The contractual maturities of our debt, assuming the exercise of all extensions that are exercisable solely at our option, as of June 30, 2018 were:

 

Year

 

(in millions)

 

2018

 

$

 

2019

 

 

 

2020

 

 

13

 

2021

 

 

751

 

2022

 

 

32

 

Thereafter

 

 

2,162

 

 

 

$

2,958

 

 

9


Note 7: Fair Value Measurements

We did not elect the fair value measurement option for any of our financial assets or liabilities. The fair values of financial instruments not included in the table below are estimated to be equal to their carrying amounts. The fair value of certain financial instruments and the hierarchy level we used to estimate fair values are shown below:

 

 

 

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Hierarchy

Level

 

 

Carrying

Amount

 

 

Fair Value

 

 

Carrying

Amount

 

 

Fair Value

 

 

 

 

 

 

 

(in millions)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SF CMBS Loan

 

 

3

 

 

$

725

 

 

$

706

 

 

$

725

 

 

$

721

 

HHV CMBS Loan

 

 

3

 

 

 

1,275

 

 

 

1,223

 

 

 

1,275

 

 

 

1,256

 

Term Loan

 

 

3

 

 

 

750

 

 

 

738

 

 

 

750

 

 

 

749

 

Mortgage loans

 

 

3

 

 

 

207

 

 

 

201

 

 

 

207

 

 

 

204

 

 

Note 8: Income Taxes

We are organized in conformity with, and operate in a manner that will allow us to elect to be taxed as a REIT, for U.S. federal income tax purposes for our tax year ending December 31, 2017 and we expect to continue to be organized and operate so as to qualify as a REIT. To qualify as a REIT, we must continually satisfy requirements related to, among other things, the real estate qualification of sources of our income, the real estate composition and values of our assets, the amounts we distribute to our stockholders annually and the diversity of ownership of our stock. To the extent we qualify as a REIT, we generally will not be subject to U.S. federal income tax on taxable income generated by our REIT activities that we distribute to our stockholders. Accordingly, no provision for U.S. federal income taxes has been included in our accompanying condensed consolidated financial statements for the three and six months ended June 30, 2018 and 2017 related to our REIT activities other than taxes associated with built-in gains related to our assets owned at the date of our spin-off.

We are and will continue to be subject to U.S. federal income tax on taxable sales of built-in gain property (representing property with an excess of fair value over tax basis held by us on January 4, 2017) during the five-year period following our election to be taxed as a REIT. In addition, we are subject to non-U.S. income tax on foreign held REIT activities. Further, our taxable REIT subsidiaries are generally subject to U.S. federal, state and local, and foreign income taxes (as applicable).

H.R. 1, commonly referred to as The Tax Cuts and Jobs Act of 2017, (the “Act”) was enacted on December 22, 2017. The Act, which amended the Internal Revenue Code of 1986, was the most significant tax legislative development in decades. Major elements of the Act from our perspective include reducing the corporate tax rate; restricting the eligibility for tax deferred like-kind exchange treatment solely to real property; limiting the deductibility of interest expense; the one-time transition tax on foreign cash and unremitted earnings; and the treatment of global intangible low-taxed income for REIT gross income purposes. We have not completed the internal assessment for the tax effects of enactment of the Act; specifically, the analysis to determine the potential tax liability and deferred tax related to a potential sale of ancillary hotel furniture, fixtures, and equipment that may be sold in a like-kind exchange transaction was not able to be completed. Accordingly, Staff Accounting Bulletin 118, issued by the SEC, states that companies that are unable to calculate a reasonable estimate are able to record the adjustment to the tax provision as the information becomes available, but no later than one year from the enactment date. We intend to continue our analysis and recognize the effects of the provision through deferred taxes when the information is available and an assessment is made.

During the three and six months ended June 30, 2018, we recognized $13 million of income tax expense, which includes $4 million of built-in gain tax recognized on assets sold during the period. We recognized an income tax benefit for the three and six months ended June 30, 2017 of approximately $24 million and $2,312 million, respectively, primarily as a result of the derecognition of deferred tax liabilities associated with our intention to be taxed as a REIT.

Note 9: Share-Based Compensation

We issue equity-based awards to our employees pursuant to the 2017 Omnibus Incentive Plan (“2017 Employee Plan”) and our non-employee directors pursuant to the 2017 Stock Plan for Non-Employee Directors (“2017 Director Plan”). The 2017 Employee Plan provides that a maximum of 8,000,000 shares of our common stock may be issued, and as of June 30, 2018, 6,140,981 shares of common stock remain available for future issuance. The 2017 Director Plan provides that a maximum of 450,000 shares of our common stock may be issued, and as of June 30, 2018, 353,029 shares of common stock remain available for future issuance. For both the three months ended June 30, 2018 and 2017 we recognized $4 million of share-based compensation expense. For the six months ended June 30, 2018 and 2017 we recognized $8 million and $7 million, respectively, of share-based compensation expense. As of June 30, 2018, unrecognized compensation expense was $24 million, which is expected to be recognized over a weighted-average period of 1.6 years.

10


 

Restricted Stock Awards

Restricted Stock Awards (“RSAs”) generally vest in annual installments between one and three years from each grant date. The following table provides a summary of RSAs for the six months ended June 30, 2018:

 

 

 

Number of Shares

 

 

Weighted-Average

Grant Date

Fair Value

 

Unvested at January 1, 2018

 

 

461,639

 

 

$

26.47

 

Granted

 

 

309,351

 

 

 

26.47

 

Vested

 

 

(162,922

)

 

 

26.48

 

Forfeited

 

 

(9,119

)

 

 

26.13

 

Unvested at June 30, 2018

 

 

598,949

 

 

$

26.47

 

 

Performance Stock Units

Performance Stock Units (“PSUs”) generally vest at the end of a two or three-year performance period and are subject to the achievement of a market condition based on a measure of our total shareholder return relative to the total shareholder return of the companies that comprise the FTSE NAREIT Lodging Resorts Index (that have a market capitalization in excess of $1 billion as of the first day of the applicable performance period). The number of PSUs that may become vested ranges from zero to 200% of the number of PSUs granted to an employee, based on the level of achievement of the foregoing performance measure. The following table provides a summary of PSUs for the six months ended June 30, 2018:  

 

 

 

Number of Shares

 

 

Weighted-Average

Grant Date

Fair Value

 

Unvested at January 1, 2018

 

 

371,557

 

 

$

31.96

 

Granted

 

 

179,485

 

 

 

29.44

 

Vested

 

 

 

 

 

 

Forfeited

 

 

(11,060

)

 

 

30.44

 

Unvested at June 30, 2018

 

 

539,982

 

 

$

31.15

 

The grant date fair values of these awards were determined using a Monte Carlo simulation valuation model with the following assumptions:

 

Expected volatility(1)

 

 

24.0

%

Dividend yield(2)

 

 

 

Risk-free rate

 

 

2.4

%

Expected term

 

2-3 years

 

 

(1)

Due to limited trading history of our common stock, we used the historical and implied volatilities of our peer group in addition to our historical and implied volatilities over the performance period to estimate appropriate expected volatilities.

(2)

Dividends are assumed to be reinvested in shares of our common stock and dividends will not be paid unless shares vest.

11


Note 10: Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share (“EPS”):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in millions, except per share amounts)

 

 

(in millions, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to stockholders

 

$

216

 

 

$

112

 

 

$

366

 

 

$

2,462

 

Earnings allocated to participating securities

 

 

(1

)

 

 

(1

)

 

 

(1

)

 

 

(6

)

Net income attributable to stockholders net of earnings

   allocated to participating securities

 

$

215

 

 

$

111

 

 

$

365

 

 

$

2,456

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

200

 

 

 

214

 

 

 

205

 

 

 

208

 

Unvested restricted shares

 

 

1

 

 

 

1

 

 

 

1

 

 

 

 

Net effect of shares issued with respect to E&P Dividend(1)

 

 

 

 

 

 

 

 

 

 

 

6

 

Weighted average shares outstanding - diluted

 

 

201

 

 

 

215

 

 

 

206

 

 

 

214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS(2)

 

$

1.07

 

 

$

0.52

 

 

$

1.77

 

 

$

11.79

 

Diluted EPS(2)

 

$

1.07

 

 

$

0.52

 

 

$

1.77

 

 

$

11.48

 

 

(1)

Shares issued in connection with the distribution of our C corporation earnings and profits attributable to the period prior to spin-off (“E&P Dividend”).

(2)

Per share amounts are calculated based on unrounded numbers and are calculated independently for each period presented, therefore, the sum of the quarterly EPS does not equal the EPS for the six months.

 

Certain of our outstanding equity awards were excluded from the above calculation of EPS for the three and six months ended June 30, 2018 and 2017, because their effect would have been anti-dilutive.

 

Note 11: Business Segment Information

As of June 30, 2018, we have two operating segments, our consolidated hotels and unconsolidated hotels. Our unconsolidated hotels operating segment does not meet the definition of a reportable segment, thus our consolidated hotels is our only reportable segment. We evaluate our consolidated hotels primarily based on hotel adjusted earnings before interest expense, taxes and depreciation and amortization (“EBITDA”). Hotel Adjusted EBITDA is calculated as EBITDA from hotel operations, adjusted to exclude:

 

Gains or losses on sales of assets for both consolidated and unconsolidated investments;

 

Gains or losses on foreign currency transactions;

 

Share-based compensation expense;

 

Non-cash impairment losses; and

 

Other items that we believe are not representative of our current or future operating performance.

 

12


The following table presents revenues for our consolidated hotels reconciled to our condensed consolidated amounts and Hotel Adjusted EBITDA to net income: 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in millions)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total consolidated hotel revenue

 

$

714

 

 

$

717

 

 

$

1,365

 

 

$

1,388

 

Other revenue

 

 

17

 

 

 

16

 

 

 

34

 

 

 

29

 

Total revenues

 

$

731

 

 

$

733

 

 

$

1,399

 

 

$

1,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Adjusted EBITDA

 

$

228

 

 

$

213

 

 

$

402

 

 

$

393

 

Other revenue

 

 

17

 

 

 

16

 

 

 

34

 

 

 

29

 

Depreciation and amortization expense

 

 

(69

)

 

 

(73

)

 

 

(139

)

 

 

(143

)

Corporate general and administrative

 

 

(15

)

 

 

(16

)

 

 

(31

)

 

 

(30

)

Other expenses

 

 

(18

)

 

 

(15

)

 

 

(35

)

 

 

(28

)

Gain on sales of assets, net

 

 

7

 

 

 

 

 

 

96

 

 

 

 

Interest income

 

 

1

 

 

 

1

 

 

 

2

 

 

 

1

 

Interest expense

 

 

(31

)

 

 

(31

)

 

 

(62

)

 

 

(61

)

Equity in earnings from investments in affiliates

 

 

8

 

 

 

8

 

 

 

12

 

 

 

12

 

Loss on foreign currency transactions

 

 

(4

)

 

 

(4

)

 

 

(3

)

 

 

(3

)

Income tax (expense) benefit

 

 

(13

)

 

 

19

 

 

 

(13

)

 

 

2,300

 

Other gain (loss), net

 

 

108

 

 

 

(1

)

 

 

108

 

 

 

(1

)

Other items

 

 

(1

)

 

 

(2

)

 

 

(4

)

 

 

(4

)

Net income

 

$

218

 

 

$

115

 

 

$

367

 

 

$

2,465

 

 

 

The following table presents total assets for our consolidated hotels, reconciled to condensed consolidated amounts:

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

(in millions)

 

Consolidated hotels

 

$

9,386

 

 

$

9,623

 

All other

 

 

65

 

 

 

91

 

 

 

$

9,451

 

 

$

9,714

 

 

Note 12: Commitments and Contingencies

We expect that insurance proceeds, excluding any applicable insurance deductibles, will be sufficient to cover a significant portion of the property damage to our two hotels in Key West Florida and the Caribe Hilton from Hurricanes Irma and Maria in September 2017 and the resulting loss of business. We have estimated the total amount of damages and insurance proceeds based on all information available to date. As a result, we have recognized a total loss of $16 million representing losses up to the amount of our deductibles; refer to Note 4: “Property and Equipment.” The amount of the loss for property damage and insurance proceeds could change as more information becomes available about the nature and extent of damage. Any gain resulting from insurance proceeds, including those for business interruption, will not be recognized until all contingencies have been resolved.

As of June 30, 2018, we had outstanding commitments under third-party contracts of approximately $33 million for capital expenditures at certain owned and leased hotels. Our contracts contain clauses that allow us to cancel all or some portion of the work. If cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract.

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. In addition, we are also involved in litigation that is not in the ordinary course of business, for which we are indemnified under the Distribution Agreement with Hilton. While the ultimate results of claims and litigation relating to assets retained by Hilton in connection with the spin-off cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of June 30, 2018 will not have a material effect on our condensed consolidated results of operations, financial position or cash flows.

 

Note 13: Subsequent Events

In July 2018, we received insurance proceeds of $45 million related to our claim for property damage and loss of business at the Caribe Hilton.

13


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements, related notes included elsewhere in this Quarterly Report on Form 10-Q, and with our Annual Report on Form 10-K for the year ended December 31, 2017.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, the effects of competition and the effects of future legislation or regulations, the expected completion of anticipated acquisitions and dispositions, the declaration and payment of future dividends and other non-historical statements. Forward-looking statements include all statements that are not historical facts, and in some cases, can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements and we urge investors to carefully review the disclosures we make concerning risk and uncertainties in Item 1A: “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We have a diverse portfolio of iconic and market-leading hotels and resorts with significant underlying real estate value. We hold investments in entities that have ownership or leasehold interests in 54 hotels, consisting of premium-branded hotels and resorts with over 32,000 rooms, of which over 87% are luxury and upper upscale and over 97% are located in the U.S. Luxury and upper upscale refers to luxury hotels and upper upscale hotels as defined by Smith Travel Research. Our high-quality portfolio includes hotels in major urban and convention areas, such as New York City, Washington, D.C., Chicago, San Francisco and New Orleans; premier resorts in key leisure destinations, including Hawaii, Orlando and Key West; and a number of hotels adjacent to major gateway airports, such as Los Angeles International, Boston Logan International and Miami International, and select suburban locations.

Our objective is to be the preeminent lodging real estate investment trust (“REIT”), focused on consistently delivering superior, risk-adjusted returns to stockholders through active asset management and a thoughtful external growth strategy while maintaining a strong and flexible balance sheet. As a pure-play real estate company with direct access to capital and independent financial resources, we believe our enhanced ability to implement compelling return on investment initiatives within our portfolio represents a significant embedded growth opportunity. Finally, given our scale and investment expertise, we believe we will be able to successfully execute single-asset and portfolio acquisitions and dispositions to further enhance the value and diversification of our assets throughout the lodging cycle, including potentially taking advantage of the economies of scale that could come from consolidation in the lodging REIT industry.

We operate our business through two operating segments, our consolidated hotels and unconsolidated hotels. Our consolidated hotels are our only reportable segment. Refer to Note 11: “Business Segment Information” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information regarding our operating segments.   

Outlook

The U.S. lodging industry benefited in the second quarter of 2018 from a positive macro-economic landscape overall, with continued improvements in Non-Residential Fixed Business Investment, a key indicator of RevPAR performance. Our ability to experience continued RevPAR growth in the remainder of 2018 depends on various factors, including the strength of group and transient demand and the timing of completion of renovation projects at several of our hotels.  In addition, RevPAR growth and profitability will depend on macroeconomic factors, including consumer confidence, unemployment rates and gross domestic product growth, supply growth and increased popularity of online booking services and short-term lodging websites.

14


Recent Events

In May 2018, we and the other owners of our unconsolidated affiliates that owned the Hilton Berlin hotel sold our interests for gross proceeds of approximately $375 million, before customary closing adjustments, of which our pro rata share was approximately $150 million. Refer to Note 3: “Dispositions” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information. Following the sale, we declared a special cash dividend of $0.45 per share, or approximately $90 million, paid on July 16, 2018 to stockholders of record as of June 29, 2018.

Key Business Metrics Used by Management

Comparable Hotels Data

We present certain data for our hotels on a comparable hotel basis as supplemental information for investors. We define our comparable hotels as those that: (i) were active and operating in our portfolio since January 1st of the previous year; and (ii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results are not available. We present comparable hotel results to help us and our investors evaluate the ongoing operating performance of our comparable hotels.

Of our 46 hotels that we consolidated as of June 30, 2018, 44 hotels have been classified as comparable hotels. Due to the conversion, or planned conversions, of a significant number of rooms at the Hilton Waikoloa Village in 2017 to Hilton Grand Vacations (“HGV”) timeshare units, and due to the effects of business interruption from Hurricane Maria at the Caribe Hilton in Puerto Rico, the results from these properties were excluded from our comparable hotels. Our comparable hotels as of June 30, 2017 also exclude the 12 consolidated hotels that were sold in January and February 2018. Refer to Note 3: “Dispositions” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information.

Occupancy

Occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels. Occupancy measures the utilization of our hotels’ available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable Average Daily Rate (“ADR”) levels as demand for rooms increases or decreases.

Average Daily Rate

ADR represents rooms revenue divided by total number of room nights sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. ADR is a commonly used performance measure in the hotel industry, and we use ADR to assess pricing levels that we are able to generate by type of customer, as changes in rates have a more pronounced effect on overall revenues and incremental profitability than changes in occupancy, as described above.

Revenue per Available Room

Revenue per Available Room (“RevPAR”) represents rooms revenue divided by the total number of room nights available to guests for a given period. We consider RevPAR to be a meaningful indicator of our performance as it provides a metric correlated to two primary and key factors of operations at a hotel or group of hotels: occupancy and ADR. RevPAR is also a useful indicator in measuring performance over comparable periods for comparable hotels.

References to RevPAR, ADR and occupancy are presented on a comparable basis and references to RevPAR and ADR are presented on a currency neutral basis (prior periods are reflected using current period exchange rates), unless otherwise noted.

Non-GAAP Financial Measures

We also evaluate the performance of our business through certain other financial measures that are not recognized under U.S. GAAP. Each of these non-GAAP financial measures should be considered by investors as supplemental measures to GAAP performance measures such as total revenues, operating profit and net income.

15


EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA

EBITDA, presented herein, reflects net income excluding depreciation and amortization, interest income, interest expense, income taxes and interest expense, income tax and depreciation and amortization included in equity in earnings from investments in affiliates.

Adjusted EBITDA, presented herein, is calculated as EBITDA further adjusted to exclude:

 

Gains or losses on sales of assets for both consolidated and unconsolidated investments;

 

Gains or losses on foreign currency transactions;

 

Transition expense related to our establishment as an independent, publicly traded company;

 

Transaction expense associated with the potential disposition of hotels or acquisition of a business;

 

Severance expense;

 

Share-based compensation expense;

 

Casualty and impairment losses; and

 

Other items that we believe are not representative of our current or future operating performance.

Hotel Adjusted EBITDA measures hotel-level results before debt service, depreciation and corporate expenses for our consolidated hotels, including both comparable and non-comparable hotels but excluding hotels owned by unconsolidated affiliates, and is a key measure of our profitability. We present Hotel Adjusted EBITDA to help us and our investors evaluate the ongoing operating performance of our consolidated hotels.

EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

We believe that EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA are among the measures used by our management team to make day-to-day operating decisions and evaluate our operating performance between periods and between REITs by removing the effect of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results; and (ii) EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss) or other methods of analyzing our operating performance and results as reported under U.S. GAAP. Some of these limitations are:

 

EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect our interest expense;

 

EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect our income tax expense;

 

EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations; and

 

other companies in our industry may calculate EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA differently, limiting their usefulness as comparative measures.

We do not use or present EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA as measures of our liquidity or cash flow. These measures have limitations as analytical tools and should not be considered either in isolation or as a substitute for cash flow or other methods of analyzing our cash flows and liquidity as reported under U.S. GAAP. Some of these limitations are:

 

EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect the cash requirements to pay our taxes;

16


 

EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; and

 

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect any cash requirements for such replacements.

Because of these limitations, EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

The following table provides the components of Hotel Adjusted EBITDA:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018(1)

 

 

2017(1)

 

 

2018(1)

 

 

2017(1)

 

 

 

(in millions)

 

Comparable Hotel Adjusted EBITDA

 

$

215

 

 

$

193

 

 

$

374

 

 

$

352

 

Non-comparable Hotel Adjusted EBITDA

 

 

13

 

 

 

20

 

 

 

28

 

 

 

41

 

Hotel Adjusted EBITDA

 

$

228

 

 

$

213

 

 

$

402

 

 

$

393

 

 

(1)

Based on our 2018 comparable hotels as of June 30, 2018.

The following table provides a reconciliation of Net income to Hotel Adjusted EBITDA:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in millions)

 

Net income

 

$

218

 

 

$

115

 

 

$

367

 

 

$

2,465

 

Depreciation and amortization expense

 

 

69

 

 

 

73

 

 

 

139

 

 

 

143

 

Interest income

 

 

(1

)

 

 

(1

)

 

 

(2

)

 

 

(1

)

Interest expense

 

 

31

 

 

 

31

 

 

 

62

 

 

 

61

 

Income tax expense (benefit)

 

 

13

 

 

 

(19

)

 

 

13

 

 

 

(2,300

)

Interest expense, income tax and depreciation and

   amortization included in equity in earnings from

   investments in affiliates

 

 

5

 

 

 

7

 

 

 

12

 

 

 

12

 

EBITDA

 

 

335

 

 

 

206

 

 

 

591

 

 

 

380

 

Gain on sales of assets, net

 

 

(7

)

 

 

 

 

 

(96

)

 

 

 

Gain on sale of investments in affiliates(1)

 

 

(108

)

 

 

 

 

 

(108

)

 

 

 

Loss on foreign currency transactions

 

 

4

 

 

 

4

 

 

 

3

 

 

 

3

 

Transition expense

 

 

 

 

 

1

 

 

 

2

 

 

 

2

 

Severance expense

 

 

1

 

 

 

 

 

 

1

 

 

 

 

Share-based compensation expense

 

 

4

 

 

 

4

 

 

 

8

 

 

 

7

 

Other items

 

 

(1

)

 

 

2

 

 

 

1

 

 

 

2

 

Adjusted EBITDA

 

 

228

 

 

 

217

 

 

 

402

 

 

 

394

 

Less: Adjusted EBITDA from investments in affiliates

 

 

14

 

 

 

15

 

 

 

26

 

 

 

24

 

Less: All other(2)

 

 

(14

)

 

 

(11

)

 

 

(26

)

 

 

(23

)

Hotel Adjusted EBITDA

 

$

228

 

 

$

213

 

 

$

402

 

 

$

393

 

 

(1)

Included in other gain (loss), net.

(2)

Includes other revenue and other expense, non-income taxes on REIT leases included in other property-level expense and corporate general and administrative expense.

NAREIT FFO attributable to stockholders and Adjusted FFO attributable to stockholders

We present NAREIT FFO attributable to stockholders and NAREIT FFO per diluted share (defined as set forth below) as non-GAAP measures of our performance. We calculate funds from operations (“FFO”) attributable to stockholders for a given operating period in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), as net income or loss attributable to stockholders (calculated in accordance with U.S. GAAP), excluding depreciation and amortization, gains or losses on sales of assets, impairment, and the cumulative effect of changes in accounting principles, plus adjustments for unconsolidated joint ventures. Adjustments for unconsolidated joint ventures are calculated to reflect our pro rata share of the FFO of

17


those entities on the same basis. As noted by NAREIT in its April 2002 “White Paper on Funds From Operations,” since real estate values historically have risen or fallen with market conditions, many industry investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. For these reasons, NAREIT adopted the FFO metric in order to promote an industry-wide measure of REIT operating performance. We believe NAREIT FFO provides useful information to investors regarding our operating performance and can facilitate comparisons of operating performance between periods and between REITs. Our presentation may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do. We calculate NAREIT FFO per diluted share as our NAREIT FFO divided by the number of fully diluted shares outstanding during a given operating period.

We also present Adjusted FFO attributable to stockholders and Adjusted FFO per diluted share when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance. Management historically has made the adjustments detailed below in evaluating our performance and in our annual budget process. We believe that the presentation of Adjusted FFO provides useful supplemental information that is beneficial to an investor’s complete understanding of our operating performance. We adjust NAREIT FFO attributable to stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to stockholders:

 

Gains or losses on foreign currency transactions;

 

Transition expense related to our establishment as an independent, publicly traded company;

 

Transaction expense associated with the potential disposition of hotels or acquisition of a business;

 

Severance expense;

 

Share-based compensation expense;

 

Casualty losses;

 

Litigation gains and losses outside the ordinary course of business; and

 

Other items that we believe are not representative of our current or future operating performance.

The following table provides a reconciliation of net income attributable to stockholders to NAREIT FFO attributable to stockholders and Adjusted FFO attributable to stockholders:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in millions)

 

Net income attributable to stockholders

 

$

216

 

 

$

112

 

 

$

366

 

 

$

2,462

 

Depreciation and amortization expense

 

 

69

 

 

 

73

 

 

 

139

 

 

 

143

 

Depreciation and amortization expense attributable to

     noncontrolling interests

 

 

(1

)

 

 

(1

)

 

 

(2

)

 

 

(2

)

Gain on sales of assets, net

 

 

(7

)

 

 

 

 

 

(96

)

 

 

 

Gain on sale of investments in affiliates(1)

 

 

(108

)

 

 

 

 

 

(108

)

 

 

 

Equity investment adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings from investments in affiliates

 

 

(8

)

 

 

(8

)

 

 

(12

)

 

 

(12

)

Pro rata FFO of investments in affiliates

 

 

10

 

 

 

10

 

 

 

20

 

 

 

18

 

NAREIT FFO attributable to stockholders

 

 

171

 

 

 

186

 

 

 

307

 

 

 

2,609

 

Loss on foreign currency transactions

 

 

4

 

 

 

4

 

 

 

3

 

 

 

3

 

Transition expense

 

 

 

 

 

1

 

 

 

2

 

 

 

2

 

Severance expense

 

 

1

 

 

 

 

 

 

1

 

 

 

 

Share-based compensation expense

 

 

4

 

 

 

4

 

 

 

8

 

 

 

7

 

Other items(2)

 

 

7

 

 

 

(22

)

 

 

3

 

 

 

(2,310

)

Adjusted FFO attributable to stockholders

 

$

187

 

 

$

173

 

 

$

324

 

 

$

311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NAREIT FFO per share - Diluted(3)

 

$

0.85

 

 

$

0.87

 

 

$

1.49

 

 

$

12.19

 

Adjusted FFO per share - Diluted(3)

 

$

0.93

 

 

$

0.81

 

 

$

1.57

 

 

$

1.45

 

 

(1)

Included in other gain (loss), net.

(2)

The three and six months ended June 30, 2017 includes the income tax benefits from the derecognition of deferred tax liabilities of $24 million and $2,312 million, respectively, associated with our intent to elect REIT status.

(3)

Per share amounts are calculated based on unrounded numbers.

18


Comparable Hotel Data

The following tables set forth data for our 2018 comparable hotels by geographic market as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017:

 

 

 

As of

June 30, 2018

 

 

Three Months Ended June 30, 2018

 

 

Three Months Ended June 30, 2017

 

 

Percent

Change in

 

Market

 

No. of Hotels

 

 

No. of Rooms

 

 

ADR

 

 

Occupancy

 

 

RevPAR

 

 

ADR

 

 

Occupancy

 

 

RevPAR

 

 

RevPAR

 

Hawaii

 

 

1

 

 

 

2,860

 

 

$

254.09

 

 

 

94.8

%

 

$

240.93

 

 

$

250.44

 

 

 

93.1

%

 

$

233.22

 

 

 

3.3

%

Northern California

 

 

6

 

 

 

4,279

 

 

 

245.96

 

 

 

90.3

 

 

 

222.07

 

 

 

226.73

 

 

 

87.2

 

 

 

197.67

 

 

 

12.3

 

Florida

 

 

6

 

 

 

3,294

 

 

 

209.78

 

 

 

82.2

 

 

 

172.52

 

 

 

201.57

 

 

 

85.9

 

 

 

173.18

 

 

 

(0.4

)

Other

 

 

14

 

 

 

5,373

 

 

 

173.24

 

 

 

81.8

 

 

 

141.63

 

 

 

172.04

 

 

 

81.5

 

 

 

140.27

 

 

 

1.0

 

New Orleans

 

 

2

 

 

 

1,939

 

 

 

186.63

 

 

 

82.0

 

 

 

153.05

 

 

 

187.60

 

 

 

79.2

 

 

 

148.60

 

 

 

3.0

 

Chicago

 

 

4

 

 

 

2,743

 

 

 

204.25

 

 

 

84.3

 

 

 

172.10

 

 

 

195.41

 

 

 

80.8

 

 

 

157.82

 

 

 

9.0

 

New York

 

 

1

 

 

 

1,878

 

 

 

302.19

 

 

 

92.3

 

 

 

278.99

 

 

 

297.66

 

 

 

89.3

 

 

 

265.72

 

 

 

5.0

 

Southern California

 

 

4

 

 

 

1,304

 

 

 

170.81

 

 

 

85.0

 

 

 

145.13

 

 

 

173.52

 

 

 

88.9

 

 

 

154.25

 

 

 

(5.9

)

Washington, D.C.

 

 

3

 

 

 

1,282

 

 

 

202.24

 

 

 

89.4

 

 

 

180.78

 

 

 

201.45

 

 

 

89.9

 

 

 

181.19

 

 

 

(0.2

)

Total Domestic

 

 

41

 

 

 

24,952

 

 

$

217.13

 

 

 

86.4

%

 

$

187.67

 

 

$

210.58

 

 

 

85.6

%

 

$

180.15

 

 

 

4.2

%

Total International

 

 

3

 

 

 

783

 

 

$

158.74

 

 

 

75.1

%

 

$

119.19

 

 

$

150.15

 

 

 

69.8

%

 

$

104.83

 

 

 

13.7

%

All Markets

 

 

44

 

 

 

25,735

 

 

$

215.58

 

 

 

86.1

%

 

$

185.58

 

 

$

209.07

 

 

 

85.1

%

 

$

177.86

 

 

 

4.3

%

 

 

 

As of

June 30, 2018

 

 

Six Months Ended June 30, 2018

 

 

Six Months Ended June 30, 2017

 

 

Percent

Change in

 

Market

 

No. of Hotels

 

 

No. of Rooms

 

 

ADR

 

 

Occupancy

 

 

RevPAR

 

 

ADR

 

 

Occupancy

 

 

RevPAR

 

 

RevPAR

 

Hawaii

 

 

1

 

 

 

2,860

 

 

$

255.43

 

 

 

94.3

%

 

$

240.84

 

 

$

252.06

 

 

 

93.6

%

 

$

235.88

 

 

 

2.1

%

Northern California

 

 

6

 

 

 

4,279

 

 

 

247.89

 

 

 

85.8

 

 

 

212.73

 

 

 

239.07

 

 

 

83.1

 

 

 

198.57

 

 

 

7.1

 

Florida

 

 

6

 

 

 

3,294

 

 

 

235.66

 

 

 

84.3

 

 

 

198.70

 

 

 

224.24

 

 

 

85.9

 

 

 

192.65

 

 

 

3.1

 

Other

 

 

14

 

 

 

5,373

 

 

 

168.24

 

 

 

79.3

 

 

 

133.44

 

 

 

166.83

 

 

 

79.4

 

 

 

132.43

 

 

 

0.8

 

New Orleans

 

 

2

 

 

 

1,939

 

 

 

192.34

 

 

 

79.1

 

 

 

152.24

 

 

 

192.32

 

 

 

77.1

 

 

 

148.32

 

 

 

2.6

 

Chicago

 

 

4

 

 

 

2,743

 

 

 

176.07

 

 

 

75.1

 

 

 

132.22

 

 

 

172.54

 

 

 

72.4

 

 

 

124.97

 

 

 

5.8

 

New York

 

 

1

 

 

 

1,878

 

 

 

276.10

 

 

 

83.9

 

 

 

231.58

 

 

 

271.24

 

 

 

83.3

 

 

 

225.86

 

 

 

2.5

 

Southern California

 

 

4

 

 

 

1,304

 

 

 

164.76

 

 

 

81.1

 

 

 

133.57

 

 

 

167.14

 

 

 

85.2

 

 

 

142.47

 

 

 

(6.3

)

Washington, D.C.

 

 

3

 

 

 

1,282

 

 

 

190.63

 

 

 

77.9

 

 

 

148.53

 

 

 

192.79

 

 

 

81.6

 

 

 

157.38

 

 

 

(5.6

)

Total Domestic

 

 

41

 

 

 

24,952

 

 

$

214.62

 

 

 

82.7

%

 

$

177.47

 

 

$

210.20

 

 

 

82.3

%

 

$

172.95

 

 

 

2.6

%

Total International

 

 

3

 

 

 

783

 

 

$

165.28

 

 

 

70.7

%

 

$

116.89

 

 

$

156.63

 

 

 

67.1

%

 

$

105.10

 

 

 

11.2

%

All Markets

 

 

44

 

 

 

25,735

 

 

$

213.33

 

 

 

82.3

%

 

$

175.63

 

 

$

208.86

 

 

 

81.8

%

 

$

170.89

 

 

 

2.8

%

 

During the three and six months ended June 30, 2018, our comparable hotels experienced RevPAR growth of 4.3% and 2.8%, as compared to the three and six months ended June 30, 2017, respectively. The overall increase in RevPAR was a result of both increases in occupancy and ADR at our Northern California, Hawaii, Chicago, and New York hotels during those periods, primarily attributable to increases in group business at urban and resort hotels in these markets. The overall increase in RevPAR for our comparable hotels during both periods was partially offset by a decline in RevPAR for our Southern California hotels primarily from renovation displacement at the Hilton Santa Barbara Beachfront Resort; these renovations were completed in April 2018. Additionally, during the six months ended June 30, 2018, our Washington, D.C. hotels experienced a decline in RevPAR from weaker transient demand in 2018 due to the inauguration occurring in 2017, contributing to decreases in both ADR and occupancy.

The following tables set forth data for our 2018 comparable hotels by hotel type as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017:

 

 

 

As of

June 30, 2018

 

 

Three Months Ended June 30, 2018

 

 

Three Months Ended June 30, 2017

 

 

Percent

Change in

 

Hotel Type

 

No. of Hotels

 

 

No. of Rooms

 

 

ADR

 

 

Occupancy

 

 

RevPAR

 

 

ADR

 

 

Occupancy

 

 

RevPAR

 

 

RevPAR

 

Resort

 

 

9

 

 

 

6,728

 

 

$

234.34

 

 

 

85.6

%

 

$

200.66

 

 

$

229.77

 

 

 

87.5

%

 

$

201.11

 

 

 

(0.2

)%

Urban

 

 

12

 

 

 

10,216

 

 

$

237.39

 

 

 

86.2

 

 

$

204.59

 

 

 

227.24

 

 

 

83.6

 

 

 

189.91

 

 

 

7.7

 

Airport

 

 

13

 

 

 

6,355

 

 

$

174.40

 

 

 

87.3

 

 

$

152.24

 

 

 

170.31

 

 

 

86.1

 

 

 

146.57

 

 

 

3.9

 

Suburban

 

 

10

 

 

 

2,436

 

 

$

180.35

 

 

 

83.8

 

 

$

151.11

 

 

 

176.01

 

 

 

82.0

 

 

 

144.38

 

 

 

4.7

 

All Types

 

 

44

 

 

 

25,735

 

 

$

215.58

 

 

 

86.1

%

 

$

185.58

 

 

$

209.07

 

 

 

85.1

%

 

$

177.86

 

 

 

4.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19


 

 

 

As of

June 30, 2018

 

 

Six Months Ended June 30, 2018

 

 

Six Months Ended June 30, 2017

 

 

Percent

Change in

 

Hotel Type

 

No. of Hotels

 

 

No. of Rooms

 

 

ADR

 

 

Occupancy

 

 

RevPAR

 

 

ADR

 

 

Occupancy

 

 

RevPAR

 

 

RevPAR

 

Resort

 

 

9

 

 

 

6,728

 

 

$

246.04

 

 

 

85.8

%

 

$

211.08

 

 

$

239.52

 

 

 

87.4

%

 

$

209.34

 

 

 

0.8

%

Urban

 

 

12

 

 

 

10,216

 

 

 

228.99

 

 

 

79.7

 

 

 

182.58

 

 

 

224.48

 

 

 

78.3

 

 

 

175.80

 

 

 

3.9

 

Airport

 

 

13

 

 

 

6,355

 

 

 

167.40

 

 

 

84.3

 

 

 

141.18

 

 

 

163.67

 

 

 

83.6

 

 

 

136.75

 

 

 

3.2

 

Suburban

 

 

10

 

 

 

2,436

 

 

 

176.39

 

 

 

78.4

 

 

 

138.31

 

 

 

173.55

 

 

 

76.6

 

 

 

132.97

 

 

 

4.0

 

All Types

 

 

44

 

 

 

25,735

 

 

$

213.33

 

 

 

82.3

%

 

$

175.63

 

 

$

208.86

 

 

 

81.8

%

 

$

170.89

 

 

 

2.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the three and six months ended June 30, 2018, our urban hotels experienced RevPAR growth primarily related to an increase in group business at our hotels in San Francisco. Our airport and suburban hotels experienced RevPAR growth for both the three and six months ended June 30, 2018, attributable to increases in both ADR and occupancy.  Our resort hotels experienced a RevPAR decline for the three months ended June 30, 2018, primarily due to the renovation displacement at the Hilton Santa Barbara Beachfront Resort. Our resort hotels had an increase in RevPAR for the six months ended June 30, 2018 due to an increase in ADR, offset by the renovation displacement.

 

Results of Operations

The following items have had a significant effect on the year-over-year comparability of our operations and are further discussed in the sections below:

 

Property Dispositions. During the six months ended June 30, 2018, we sold 12 consolidated hotels and one hotel owned by unconsolidated affiliates. Refer to Note 3: “Dispositions” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information. Additionally, the results of operations during our period of ownership of the sold consolidated hotels are included within non-comparable revenues and operating expenses.

 

Hurricane Maria: As a result of Hurricane Maria in September 2017, the Caribe Hilton sustained significant damage and is expected to be closed for most of 2018. While the results of operations are included within non-comparable revenues and operating expenses, the closure has resulted in a reduction in hotel revenues and expenses for the three and six months ended June 30, 2018 compared to the same period in 2017.

 

Revenue

Rooms 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Comparable rooms revenue

 

$

435

 

 

$

418

 

 

 

4.1

%

 

$

818

 

 

$

797

 

 

 

2.6

%

Non-comparable rooms revenue

 

 

16

 

 

 

51

 

 

 

(68.6

)

 

 

51

 

 

 

104

 

 

 

(51.0

)

Total rooms revenue

 

$

451

 

 

$

469

 

 

 

(3.8

)%

 

$

869

 

 

$

901

 

 

 

(3.6

)%

 

(1)

Based on our 2018 comparable hotels as of June 30, 2018.

For a discussion of comparable hotel RevPAR see “—Comparable Hotel Data.” For the three and six months ended June 30, 2018 and 2017, non-comparable rooms revenue decreased $35 million and $53 million, respectively, compared to the same period in 2017 primarily as a result of our asset sales in 2018 and lost business at the Caribe Hilton.

Food and beverage

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Comparable food and beverage revenue

 

$

196

 

 

$

178

 

 

 

10.1

%

 

$

362

 

 

$

350

 

 

 

3.4

%

Non-comparable food and beverage revenue

 

 

9

 

 

 

22

 

 

 

(59.1

)

 

 

26

 

 

 

42

 

 

 

(38.1

)

Total food and beverage revenue

 

$

205

 

 

$

200

 

 

 

2.5

%

 

$

388

 

 

$

392

 

 

 

(1.0

)%

 

(1)

Based on our 2018 comparable hotels as of June 30, 2018.

20


During the three and six months ended June 30, 2018 comparable food and beverage revenue increased $18 million and $12 million, respectively, compared to the same period in 2017 primarily due to increases in banquet and catering revenues as a result of increased group business. For the three and six months ended June 30, 2018, food and beverage revenues at our non-comparable hotels decreased $13 million and $16 million, respectively, primarily as a result of our asset sales in 2018 and lost business at the Caribe Hilton.

Ancillary hotel

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Comparable ancillary hotel revenue

 

$

42

 

 

$

38

 

 

 

10.5

%

 

$

85

 

 

$

75

 

 

 

13.3

%

Non-comparable ancillary hotel revenue

 

 

16

 

 

 

10

 

 

 

60.0

 

 

 

23

 

 

 

20

 

 

 

15.0

 

Total ancillary hotel revenue

 

$

58

 

 

$

48

 

 

 

20.8

%

 

$

108

 

 

$

95

 

 

 

13.7

%

 

(1)

Based on our 2018 comparable hotels as of June 30, 2018.

 

During the three and six months ended June 30, 2018, comparable ancillary hotel revenues increased $4 million and $10 million, respectively, compared to the same period in 2017 primarily due to increases in resort and parking fees. During the three and six months ended June 30, 2018, ancillary hotel revenue at our non-comparable hotels increased as a result of the receipt of $7 million in business interruption insurance proceeds at the Caribe Hilton offset by a decrease in ancillary hotel revenue from assets sold in 2018.

Other

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

Percent Change

 

 

2018

 

 

2017

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Laundry revenue

 

$

3

 

 

$

3

 

 

 

%

 

$

6

 

 

$

6

 

 

 

%

Support service revenue

 

 

14

 

 

 

13

 

 

 

7.7

 

 

 

28

 

 

 

23

 

 

 

21.7

 

Total other revenue

 

$

17

 

 

$

16

 

 

 

6.3

%

 

$

34

 

 

$

29

 

 

 

17.2

%

During the six months ended June 30, 2018, support service revenue increased $5 million, compared to the same period in 2017, primarily due to an increase in the number of timeshare units for which we provide services.

Operating Expenses

Rooms 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Comparable rooms expense

 

$

108

 

 

$

104

 

 

 

3.8

%

 

$

210

 

 

$

203

 

 

 

3.4

%

Non-comparable rooms expense

 

 

4

 

 

 

14

 

 

 

(71.4

)

 

 

14

 

 

 

28

 

 

 

(50.0

)

Total rooms expense

 

$

112

 

 

$

118

 

 

 

(5.1

)%

 

$

224

 

 

$

231

 

 

 

(3.0

)%

 

(1)

Based on our 2018 comparable hotels as of June 30, 2018.

During the three and six months ended June 30, 2018, non-comparable rooms expense decreased $10 million and $14 million, respectively, as a result of our asset sales in 2018 and the closure of the Caribe Hilton.

21


Food and beverage 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Comparable food and beverage expense

 

$

124

 

 

$

116

 

 

 

6.9

%

 

$

238

 

 

$

231

 

 

 

3.0

%

Non-comparable food and beverage expense

 

 

7

 

 

 

16

 

 

 

(56.3

)

 

 

19

 

 

 

32

 

 

 

(40.6

)

Total food and beverage expense

 

$

131

 

 

$

132

 

 

 

(0.8

)%

 

$

257

 

 

$

263

 

 

 

(2.3

)%

 

(1)

Based on our 2018 comparable hotels as of June 30, 2018.

During the three and six months ended June 30, 2018, comparable food and beverage expense increased $8 million and $7 million, respectively, compared to the same period in 2017 primarily due to increases in banquet and catering expenses as a result of the increased group food and beverage business. Food and beverage at our non-comparable hotels for the three and six months ended June 30, 2018 decreased $9 million and $13 million, respectively, primarily as a result of our asset sales in 2018 and the closure of the Caribe Hilton.

Other departmental and support  

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Comparable other departmental and support expense

 

$

145

 

 

$

141

 

 

 

2.8

%

 

$

284

 

 

$

281

 

 

 

1.1

%

Non-comparable other departmental and support

    expense

 

 

10

 

 

 

25

 

 

 

(60.0

)

 

 

27

 

 

 

49

 

 

 

(44.9

)

Total other departmental and support expense

 

$

155

 

 

$

166

 

 

 

(6.6

)%

 

$

311

 

 

$

330

 

 

 

(5.8

)%

 

(1)

Based on our 2018 comparable hotels as of June 30, 2018.

During the three and six months ended June 30, 2018, our non-comparable hotel other departmental and support expense decreased $15 million and $22 million, respectively, primarily from our asset sales and the closure of the Caribe Hilton.

Other property-level 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Comparable other property-level expense

 

$

48

 

 

$

47

 

 

 

2.1

%

 

$

97

 

 

$

93

 

 

 

4.3

%

Non-comparable other property-level expense

 

 

2

 

 

 

4

 

 

 

(50.0

)

 

 

6

 

 

 

9

 

 

 

(33.3

)

Total other property-level expense

 

$

50

 

 

$

51

 

 

 

(2.0

)%

 

$

103

 

 

$

102

 

 

 

1.0

%

 

(1)

Based on our 2018 comparable hotels as of June 30, 2018.

Management and franchise fees 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

2018(1)

 

 

2017(1)

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Comparable management and franchise fees expense

 

$

37

 

 

$

35

 

 

 

5.7

%

 

$

67

 

 

$

64

 

 

 

4.7

%

Non-comparable management and franchise fees

    expense

 

 

2

 

 

 

4

 

 

 

(50.0

)

 

 

5

 

 

 

9

 

 

 

(44.4

)

Total management and franchise fees expense

 

$

39

 

 

$

39

 

 

 

 

 

$

72

 

 

$

73

 

 

 

(1.4

)%

 

(1)

Based on our 2018 comparable hotels as of June 30, 2018.

22


Corporate general and administrative

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

Percent Change

 

 

2018

 

 

2017

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

General and administrative expenses

 

$

10

 

 

$

11

 

 

 

(9.1

)%

 

$

20

 

 

$

21

 

 

 

(4.8

)%

Share-based compensation expense

 

 

4

 

 

 

4

 

 

 

 

 

 

8

 

 

 

7

 

 

 

14.3

 

Transition expense

 

 

 

 

 

1

 

 

 

(100.0

)

 

 

2

 

 

 

2

 

 

 

 

Severance expense

 

1

 

 

0

 

 

NM (1)

 

 

1

 

 

0

 

 

NM (1)

 

Total corporate general and administrative

 

$

15

 

 

$

16

 

 

 

(6.3

)%

 

$

31

 

 

$

30

 

 

 

3.3

%

 

(1)

Percentage change is not meaningful.

Other

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

Percent Change

 

 

2018

 

 

2017

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Laundry expense

 

$

5

 

 

$

3

 

 

 

66.7

%

 

$

9

 

 

$

7

 

 

 

28.6

%

Support services expense

 

 

13

 

 

 

12

 

 

 

8.3

 

 

 

26

 

 

 

21

 

 

 

23.8

 

Total other

 

$

18

 

 

$

15

 

 

 

20.0

%

 

$

35

 

 

$

28

 

 

 

25.0

%

 

During the six months ended June 30, 2018, support services expense increased $5 million primarily due to increased costs resulting from an increase in the number of timeshare units for which we provide services.

Gain on sales of assets, net

 

During the six months ended June 30, 2018, we recognized a gain of $96 million, including the reclassification of a currency translation adjustment of $31 million from accumulated other comprehensive loss to earnings, as a result of the sale of 12 of our consolidated hotels. Refer to Note 3: “Dispositions” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information.

Non-operating Income and Expenses 

 

Interest expense 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

Percent Change

 

 

2018

 

 

2017

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

SF and HHV CMBS Loans(1)

 

$

21

 

 

$

21

 

 

 

%

 

$

42

 

 

$

42

 

 

 

%

Mortgage Loans

 

 

2

 

 

 

2

 

 

 

 

 

 

4

 

 

 

4

 

 

 

 

Term Loan

 

 

6

 

 

 

5

 

 

 

20.0

 

 

 

12

 

 

 

9

 

 

 

33.3

 

Other

 

 

2

 

 

 

3

 

 

 

(33.3

)

 

 

4

 

 

 

6

 

 

 

(33.3

)

Total interest expense

 

$

31

 

 

$

31

 

 

 

%

 

$

62

 

 

$

61

 

 

 

1.6

%

 

(1)

In October 2016, we entered into a $725 million CMBS loan secured by the Hilton San Francisco Union Square and the Parc 55 Hotel San Francisco (“SF CMBS Loan”) and a $1.275 billion CMBS loan secured by the Hilton Hawaiian Village (“HHV CMBS Loan”).

 

Other gain, net

During the six months ended June 30, 2018, we recognized a net gain of $108 million, which is net of the reclassification of an $8 million currency translation adjustment from accumulated other comprehensive loss into earnings, concurrent with the sale of our interests in the unconsolidated affiliates that owned the Hilton Berlin. Refer to Note 3: “Dispositions” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information.

 

23


Income tax (expense) benefit

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

Percent Change

 

 

2018

 

 

2017

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

 

(in millions)

 

 

 

 

 

Income tax (expense) benefit

 

 

(13

)

 

 

19

 

 

 

(168.4

)%

 

 

(13

)

 

 

2,300

 

 

 

(100.6

)%

 

Income tax expense for the three and six months ended June 30, 2018, includes the recognition of $4 million of built-in gain tax recognized on the hotels disposed of during 2018, beyond that of our previously recognized deferred tax liabilities, and income tax liabilities associated with our taxable operations. Our income tax benefit during the three and six months ended June 30, 2017 was primarily a result of the derecognition of approximately $24 million and $2,312 million, respectively, of deferred tax liabilities associated with our intention to be taxed as a REIT.

Liquidity and Capital Resources

Overview

As of June 30, 2018, we had total cash and cash equivalents of $438 million, including $17 million of restricted cash. Restricted cash consists of cash restricted as to use by our debt agreements. Approximately $175 million of this cash was used to pay dividends in July 2018, including the special dividend resulting from the sale of the Hilton Berlin, see “— Recent Events.”

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including reimbursements to our hotel manager for payroll and related benefits, legal costs, costs associated with the operation of our hotels, interest and scheduled principal payments on our outstanding indebtedness, capital expenditures for renovations and maintenance at our hotels, and dividends to our stockholders. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements at our hotels, and costs associated with potential acquisitions.

Our commitments to fund capital expenditures for renovations and maintenance at our hotels will be funded by cash and cash equivalents, restricted cash to the extent permitted by our lending agreements and cash flow from operations. We have established reserves for capital expenditures (“FF&E reserve”) in accordance with our management and certain debt agreements. Generally, these agreements require that we fund 4% of hotel revenues into a FF&E reserve, unless such amounts have been incurred.

We finance our business activities primarily with existing cash and cash generated from our operations. We believe that this cash will be adequate to meet anticipated requirements for operating expenses and capital expenditures for the foreseeable future. Our cash management objectives are to maintain the availability of liquidity, minimize operational costs, make debt payments and fund our capital expenditure programs and future acquisitions. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments.

Sources and Uses of Our Cash and Cash Equivalents

The following tables summarize our net cash flows and key metrics related to our liquidity:

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

Percent Change

 

 

 

(in millions)

 

 

 

 

 

Net cash provided by operating activities

 

$

148

 

 

$

274

 

 

 

(46.0

)%

Net cash provided by (used in) investing activities

 

 

467

 

 

 

(86

)

 

NM(1)

 

Net cash used in financing activities

 

 

(555

)

 

 

(215

)

 

NM(1)

 

 

(1)

Percentage change is not meaningful.

Operating Activities

Cash flow from operating activities are primarily generated from the operating income generated at our hotels.

The $126 million decrease in net cash provided by operating activities for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily due to decreases in working capital resulting from the timing of payments to our hotel manager and other vendors as well as receipts from our customers.

24


Investing Activities

The $553 million increase in net cash provided by investing activities for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was a result of the $518 million in net proceeds from the sale of 13 hotels and $35 million of insurance proceeds received for property damage claims; see Note 3: “Dispositions” and Note 4: “Property and Equipment” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information.

Financing Activities

The $340 million increase in net cash used in financing activities for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily attributable to the repurchase of 14,000,000 shares of our common stock for $348 million.

Dividends

As a REIT, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders on an annual basis. Therefore, as a general matter, it is unlikely that we will be able to retain substantial cash balances that could be used to meet our liquidity needs from our annual taxable income. Instead, we will need to meet these needs from external sources of capital and amounts, if any, by which our cash flow generated from operations exceeds taxable income.

We declared or paid the following dividends to holders of our common stock during 2018:

 

Record Date

 

Payment Date

 

Dividend per Share

 

March 30, 2018

 

April 16, 2018

 

$

0.43

 

June 29, 2018

 

July 16, 2018

 

$

0.43

 

June 29, 2018

 

July 16, 2018 (1)

 

$

0.45

 

September 28, 2018

 

October 15, 2018

 

$

0.43

 

 

(1)

We utilized a portion of the net proceeds from the sale of the Hilton Berlin to declare a special cash dividend of $0.45 per share, or approximately $90 million.

Debt

As of June 30, 2018, our total indebtedness was approximately $3 billion, excluding approximately $234 million of our share of debt of investments in affiliates. Substantially all the debt of such unconsolidated affiliates is secured solely by the affiliates’ assets or is guaranteed by other partners without recourse to us. For further information on our total indebtedness, refer to Note 6: “Debt” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of June 30, 2018 included construction contract commitments of approximately $33 million for capital expenditures at our properties. Our contracts contain clauses that allow us to cancel all or some portion of the work. If cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract.

Critical Accounting Policies and Estimates

The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in our condensed consolidated financial statements and accompanying footnotes. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018. There have been no material changes to our critical accounting policies or the methods or assumptions we apply.

25


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk primarily from changes in interest rates and foreign currency exchange rates, which may affect our future income, cash flows and fair value, depending on changes to interest rates and/or foreign exchange rates. In certain situations, we may seek to reduce cash flow volatility associated with changes in interest rates or foreign exchange rates by entering into financial arrangements intended to provide a hedge against a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged. Our largest net foreign currency exposures as of December 31, 2017 were to the euro and British pound. Subsequent to the sale of seven of our eight hotels located in the United Kingdom and two of our hotels located in the Netherlands and Germany during 2018, our foreign currency exposure to the British pound and euro was significantly reduced. As June 30, 2018, our largest net foreign currency exposures was to the Brazilian real.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as required by paragraph (b) of Rules 13a-15 and 15d-15 of the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2018, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports filed or submitted with the SEC (i) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

26


PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are involved in various claims and lawsuits arising in the ordinary course of business, some of which include claims for substantial sums, including proceedings involving tort and other general liability claims, employee claims and consumer protection claims. Most occurrences involving liability, claims of negligence and employees are covered by insurance with solvent insurance carriers. For those matters not covered by insurance, which include commercial matters, we recognize a liability when we believe the loss is probable and can be reasonably estimated. The ultimate results of claims and litigation cannot be predicted with certainty. We believe we have adequate reserves against such matters. We currently believe that the ultimate outcome of such lawsuits and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or liquidity. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect our future results of operations in a particular period.

On February 5, 2018, we, along with Hilton and related individuals, were named in a claim in the High Court of Justice in England and Wales filed by Top Zinc Limited, the alleged ultimate parent company for landlord entities of ten Hilton hotels retained by Hilton as part of the spin-off. We are the guarantor on the applicable leases for these hotels. The claim alleged damages in excess of £90 million from breach of lease obligations, collusion by Hilton and other parties to destroy the claimant’s equity in assets and unlawful interference in a sale process. The claim was formally served in May 2018 and was being defended. On July 24, 2018, Top Zinc Limited filed a notice of discontinuance, voluntarily dismissing without prejudice all claims as to the defendants, and Top Zinc Limited will be discussing with defendants the settlement of the fees and costs related to this claim. Further related to this claim, Park is the subject of an application in the Southern District of New York for discovery/depositions; however, in light of the discontinuance of the related claim in the High Court of Justice in England and Wales, Park expects that this application will also be discontinued in the Southern District of New York. In a related matter, on May 12, 2016, we, along with certain tenant entities, were named as defendant in a suit filed by the landlord entities of these hotels in the High Court of Justice in England and Wales seeking either an order for specific performance for work to be performed on the hotels or to collect £113 million in damages plus litigation costs related to alleged failure to keep the assets in the condition required by the applicable leases. On July 30, 2018, the claim was discontinued by the relevant claimants for the Hilton London Kensington, resulting in the ongoing claim in respect to the nine other hotels that is still being defended being worth some amount less than the original alleged damages of £113 million.

Because the assets were retained by Hilton as part of the spin-off, any associated liabilities with respect to these matters are expected to be fully indemnified by Hilton pursuant to the Distribution Agreement. See “Spin-off Related Agreements—Distribution Agreement” in our Annual Report on Form 10-K for the year ended December 31, 2017. To date, we have not incurred any costs or losses related to either of these matters and do not anticipate incurring any losses.

Item 1A. Risk Factors.

As of June 30, 2018, there have been no material changes from the risk factors previously disclosed in response to “Part I – Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 2. Unregistered Sales of Equity Securities.

2(a): Unregistered Sales of Equity Securities and Use of Proceeds

None.

2(b): Use of Proceeds from Registered Securities

None.

2(c): Purchases of Equity Securities

None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

27


Item 6. Exhibits.

 

Exhibit

Number

 

Description

 

 

 

  2.1

 

Distribution Agreement by and among Hilton Worldwide Holdings Inc., Park Hotels & Resorts Inc., Hilton Grand Vacations Inc. and Hilton Domestic Operating Company Inc., dated as of January 2, 2017 (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8­K, filed on January 4, 2017).

 

 

 

  3.1

 

Amended and Restated Certificate of Incorporation of Park Hotels & Resorts Inc. (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8­K, filed on March 17, 2017).

 

 

 

  3.2

 

Amended and Restated By­laws of Park Hotels & Resorts Inc. (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8­K, filed on March 17, 2017).

 

 

 

11.1

 

Computation of Per Share Earnings from Operations (included in the notes to the unaudited financial statements contained in this Report).

 

 

31.1*

 

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2*

 

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

 

 

32.2

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

 

 

 

101.INS

 

XBRL Instance Document.

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

*

Filed herewith

 

 

28


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Park Hotels & Resorts Inc.

 

 

 

 

Date: August 2, 2018

By:

 

/s/ Thomas J. Baltimore Jr.

 

 

 

Thomas J. Baltimore, Jr.

 

 

 

Chairman of the Board,

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

Date: August 2, 2018

By:

 

/s/ Sean M. Dell’Orto

 

 

 

Sean M. Dell’Orto

 

 

 

Executive Vice President,

Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

 

 

 

Date: August 2, 2018

By:

 

/s/ Darren W. Robb

 

 

 

Darren W. Robb

 

 

 

Senior Vice President and

Chief Accounting Officer

(Principal Accounting Officer)

 

 

29