The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization and Business
CorePoint Lodging Inc., a Maryland corporation (“we,” “us,” “our,” “CorePoint,” “CorePoint Lodging” or the “Company”) is a nationwide lodging real estate company, primarily serving the upper mid-scale and mid-scale segments, with a portfolio of select service hotels located in the United States (“U.S.”). We have operated as an independent, self-administered, publicly traded company since May 30, 2018. See discussion below regarding our spin-off on May 30, 2018 and our continuing and discontinued operations.
The following table sets forth the number of owned and joint venture hotels as of September 30, 2018 and December 31, 2017 respectively:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
# of hotels
|
|
|
# of rooms
|
|
|
# of hotels
|
|
|
# of rooms
|
|
Owned
(1)
|
|
|
314
|
|
|
|
40,200
|
|
|
|
316
|
|
|
|
40,400
|
|
Joint Venture
|
|
|
1
|
|
|
|
200
|
|
|
|
1
|
|
|
|
200
|
|
Totals
|
|
|
315
|
|
|
|
40,400
|
|
|
|
317
|
|
|
|
40,600
|
|
(1)
|
As of September 30, 2018 and December 31, 2017, one and three of the owned hotels, respectively, were classified as assets held for sale.
|
For U.S. federal income tax purposes, we intend to make an election to be taxed as a real estate investment trust (“REIT”), effective May 31, 2018, with the filing of our U.S. federal income tax return for the year ending December 31, 2018. We believe that we are organized and operate in a REIT-qualified manner and we intend to continue to operate as such. As a REIT, the Company is generally not subject to federal corporate income tax on the portion of its net income that is currently distributed to its stockholders. To maintain our REIT status, we are required to meet several requirements as provided by the Internal Revenue Code of 1986, as amended (the “Code”). These include that the Company cannot operate or manage its hotels. Therefore, the REIT leases the hotel properties to CorePoint TRS L.L.C., the Company's wholly owned taxable REIT subsidiary ("TRS"), which engages third-party eligible independent contractors to manage the hotels. CorePoint TRS L.L.C. is subject to federal, state and local income taxes. Also, to maintain REIT status, we must distribute annually at least 90 percent of our “REIT taxable income”, as defined by the Code, to our stockholders. We intend to meet our distribution requirements effective for 2018 and thereafter as required by the Code.
Our Spin-Off from La Quinta Holdings Inc.
On May 30, 2018, La Quinta Holdings Inc., a Delaware corporation. (“LQH Parent,” and together with its consolidated subsidiaries, “LQH”) completed the separation of its real estate business from its franchise and management business, including the spin-off of its real estate ownership business into an independent, publicly traded company. The spin-off (“Spin-Off”) of CorePoint Lodging was made as part of a plan approved by LQH Parent’s board of directors to spin off LQH’s real estate business into a stand-alone, publicly traded company prior to the merger (“Merger”) of LQH Parent with a wholly owned subsidiary of Wyndham Worldwide Corporation, a Delaware corporation (“Wyndham Worldwide”). For additional discussion of the Spin-Off, the Merger and related transactions, see Note 3 “Discontinued Operations.”
Notwithstanding the legal form of the Spin-Off, for accounting and financial reporting purposes, LQH Parent is presented as being spun-off from CorePoint (a “reverse spin”). This presentation is in accordance with generally accepted accounting principles in the U.S. (“GAAP”) and is primarily a result of the relative significance of CorePoint’s business to LQH’s business, as measured in terms of revenues, profits, and assets. Therefore, CorePoint Lodging is considered the divesting entity and treated as the “accounting successor,” and LQH Parent is the “accounting spinnee” and “accounting predecessor” for consolidated financial reporting purposes.
In accordance with GAAP, effective with the closing of the Spin-Off on May 30, 2018, the results of operations related to LQH Parent’s hotel franchise and hotel management business are reported as discontinued operations for all periods presented. In addition, the assets and liabilities of LQH Parent’s hotel franchise and hotel management business have been segregated from the assets and liabilities related to the Company’s continuing operations and presented separately on the Company’s consolidated balance sheet as of December 31, 2017 and the consolidated statement of equity for the nine months ended September 30, 2017 has been omitted. Unless
9
otherwise noted, all disclosures in the notes accompanying the unaudited consolidated financial statements reflect only continu
ing operations.
Interim Unaudited Financial Information
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. Accordingly, they do not include all information or footnotes required by GAAP for complete annual financial statements. Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with LQH’s consolidated financial statements and notes thereto for the years ended December 31, 2017, 2016 and 2015.
Subsequent to May 30, 2018, the accompanying unaudited condensed consolidated financial statements include the accounts of the Company. The historical unaudited condensed consolidated financial statements through May 30, 2018 represent the financial position and results of operations of entities that have historically been under common control of the accounting predecessor, LQH Parent.
The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated balance sheet as of September 30, 2018 and condensed consolidated statements of operations, comprehensive income, cash flows and equity for the periods ended September 30, 2018 and 2017 have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, including normal recurring items, necessary to present fairly our consolidated financial position as of September 30, 2018 and December 31, 2017, and our consolidated results of operations and cash flows for the periods ended September 30, 2018 and 2017.
The accompanying condensed consolidated financial statements include the accounts of the Company, as well as its wholly-owned subsidiaries and any consolidated variable interest entities (“VIEs”). We recognize noncontrolling interests for the proportionate share of operations for ownership interests not held by our stockholders. All intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. These estimates include such items as: Spin-Off related adjustments; income taxes; impairment of long-lived assets; casualty losses; fair value evaluations; depreciation and amortization; and equity-based compensation measurements. Actual results could differ from those estimates.
Reclassifications
Certain line items on the condensed consolidated balance sheet as of December 31, 2017 and the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 have been reclassified to conform to the current period presentation. These reclassifications had no impact on our net income (loss) or financial position and were made in order to conform to presentations consistent with other REIT lodging companies and reflect the results of discontinued operations. See Note 3 “Discontinued Operations” for additional information.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING STANDARDS
Investment in Real Estate
Property and equipment are stated at cost less accumulated depreciation computed using a straight-line method over the estimated useful life of each asset. Property and equipment consists of the following, along with associated estimated useful lives:
Buildings and improvements
|
|
5 to 40 years
|
Furniture, fixtures and other equipment
|
|
2 to 10 years
|
We capitalize expenditures that increase the overall value of an asset or extend an asset’s life, typically associated with hotel refurbishment, renovation, and major repairs. Such costs primarily include third party contract labor, materials, professional design and other direct costs, and during the redevelopment and renovation period interest, real estate taxes and insurance costs. The interest capitalization period begins when the activities related to the improvement have begun and ceases when the project is substantially complete and the assets are held available for use or occupancy. Once such a project is substantially complete and the associated assets are ready for intended use, interest costs are no longer capitalized. Normal maintenance and repair costs are expensed as incurred.
10
Impairment of Real Estate Related Assets
If events or circumstances indicate that the carrying amount of a property may not be recoverable, we make an assessment of the property’s recoverability by comparing the carrying amount of the asset to our estimate of the aggregate undiscounted future operating cash flows expected to be generated over the holding period of the asset including its eventual disposition. If the carrying amount exceeds the aggregate undiscounted future operating cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.
We recorded impairment expense of $1 million for the three and nine months ended September 30, 2017. We did not record any impairment loss for the three and nine months ended September 30, 2018.
Assets
Held for Sale
For sales of real estate or assets classified as held for sale, we evaluate whether the disposition will have a major effect on our operations and financial results and will therefore qualify as a strategic shift. If the disposition represents a strategic shift, it will be classified as discontinued operations in our financial statements for all periods presented. If the disposition does not represent a strategic shift, it will be presented in continuing operations in our financial statements.
We classify hotels as held for sale when criteria are met in accordance with GAAP. At that time, we present the assets and obligations associated with the real estate held for sale separately in our consolidated balance sheet, and we cease recording depreciation and amortization expense related to that asset. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell.
Cash and Cash Equivalents
We classify all cash on hand, demand deposits with financial institutions, and short-term highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair market value.
Accounts Receivable
Accounts receivable primarily consists of receivables due from hotel guests, credit card companies and insurance settlements and are carried at estimated collectable amounts. We periodically evaluate our receivables for collectability based on historical experience, the length of time receivables are past due, the financial condition of the debtor, and the general economy. Accounts receivable are written off when determined to be uncollectable and collection efforts have generally ceased. Our insurance settlement receivables included in accounts receivable are recorded based upon the terms of our insurance policies and our estimates of insurance losses. We recognize business interruption claims as revenue when collected and accordingly our accounts receivable do not include any amounts related to estimated business interruption claim recoveries. As of September 30, 2018, and December 31, 2017, the Company had $17 million and $23 million of insurance settlement receivables, respectively.
Debt and Deferred Debt Issuance Costs
Deferred debt issuance costs include costs incurred in connection with issuance of debt, including costs associated with the issuance of our credit facilities, and are presented as a direct reduction from the carrying amount of debt. These debt issuance costs are deferred and amortized to expense on a straight-line basis over the term of the debt, which approximates the effective interest amortization method. This amortization expense is included as a component of interest expense. When debt is paid prior to its scheduled maturity date or the underlying terms are materially modified, the remaining carrying value of deferred debt issuance costs, along with certain other payments to lenders, is included in loss on extinguishment of debt.
11
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or pay to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In evaluating the fair value of both financial and non-financial assets and liabilities, GAAP establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels, which are as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Valuations in this category are inherently less reliable than quoted market prices due to the degree of subjectivity involved in determining appropriate methodologies and the applicable underlying observable market assumptions.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. These inputs cannot be validated by readily determinable market data and generally involve considerable judgment by management.
We use the highest level of observable market data if such data is available without undue cost and effort.
Derivative Instruments
We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not enter into derivative financial instruments for trading or speculative purposes.
We record all derivatives at fair value. On the date the derivative contract is entered, we designate the derivative as one of the following: a hedge of a forecasted transaction or the variability of cash flows to be paid (“Cash Flow Hedge”), a hedge of the fair value of a recognized asset or liability (“Fair Value Hedge”), or an undesignated hedge instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a Cash Flow Hedge are recorded in the condensed consolidated statements of comprehensive income (loss) until they are reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a Fair Value Hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged in the condensed consolidated statements of cash flows. Changes in fair value of undesignated hedge instruments are recorded in current period earnings.
On a quarterly basis, we assess the effectiveness of our designated hedges in offsetting the variability in the cash flows or fair values of the hedged assets or obligations via use of a statistical regression and hypothetical derivative approach. We discontinue hedge accounting prospectively when the derivative is not highly effective as a hedge, the underlying hedged transaction is no longer probable, or the hedging instrument expires, is sold, terminated or exercised.
Revenue Recognition
We adopted Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers,
effective January 1, 2018 using the modified retrospective transition method. The information in this section describes our current revenue recognition policies. See “
Newly Adopted Accounting Standards
” below for additional information related to the adoption.
Our revenues primarily consist of operating lease revenues from room rentals, and, to a lesser extent, restaurants, billboards and cell towers, which are accounted for under GAAP in accordance with lease accounting standards. Room revenue is recognized as earned on a daily basis, net of customer incentive discounts, cash rebates, and refunds. Revenue related to operating leases with a term in excess of one year are recognized on a straight-line basis over the life of the respective lease agreement.
Other revenues include revenues generated by the incidental support of hotel operations for hotels and are recognized under the revenue accounting standard as the service obligation is completed.
There was no material impact to continuing operations in our financial statements due to the change in accounting policies for the three and nine months ended September 30, 2018.
12
Equity-Based Compensation
We have a stock-based incentive award plan for our employees and directors. Stock-based compensation expense associated with these awards is recognized in general and administrative expenses in our consolidated statements of operations. We recognize the cost of services received in an equity-based payment transaction with an employee or director as services are received and record either a corresponding increase in equity or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria.
Measurement for these equity awards is the estimated fair value at the grant date of the equity instruments.
Dividends related to unvested awards are charged to retained earnings.
We recognize forfeitures as they occur.
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 beginning with our tax year ending December 31, 2018 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 purposes of determining federal and state income tax expense for the three and nine months ended September 30, 2018 related to our REIT activities.
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 May 30, 2018) during the five-year period following our election to be taxed as a REIT. In addition, our TRS is subject to U.S. federal, state and local income taxes and our REIT may be subject to state and local taxes and non-U.S. income tax on foreign held REIT activities.
Through May 30, 2018, LQH Parent will file a federal income tax return, as well as certain state tax returns where we filed on a combined basis, and foreign tax filings, as applicable.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Tax Act contains several key tax provisions that affected us, including a reduction of the corporate income tax rate to 21 percent effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing tax guidance is still outstanding, we consider the deferred tax re-measurements and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the one year measurement period permitted by SAB 118.
Concentrations of Credit Risk and Business Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents. We utilize financial institutions that we consider to be of high credit quality and consider the risk of default to be minimal. We also monitor the credit-worthiness of our customers and financial institutions before extending credit or making investments. Certain balances in cash and cash equivalents exceed the Federal Deposit Insurance Corporation limit of $250,000; however, we believe credit risk related to these deposits is minimal.
Lodging operations are particularly sensitive to adverse economic and competitive conditions and trends, which could adversely affect the Company’s business, financial condition, and results of operations. Geographic concentrations, which potentially subject us to concentrations of business risk, relate primarily to locations of hotels and the revenue recognized in various states within the U.S. We have a concentration of hotels operating in Texas, Florida and California.
13
The percentages of our total revenues, excluding revenue from discontinued operations, from these states for the nine months ended September 30, 2018 and 2017 are as follows:
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
|
22
|
%
|
|
|
21
|
%
|
Florida
|
|
|
14
|
%
|
|
|
17
|
%
|
California
|
|
|
11
|
%
|
|
|
10
|
%
|
Total
|
|
|
47
|
%
|
|
|
48
|
%
|
Segment Reporting
Our hotel investments have similar economic characteristics and our service offerings and delivery of services are provided in a similar manner, using the same types of facilities and similar technologies. Our chief operating decision maker, the Company's Chief Executive Officer, reviews our financial information on an aggregated basis. As a result, we have concluded that we have
one
reportable business segment
.
Principal Components of Expenses
Rooms
— These expenses include hotel operating expenses of housekeeping, reservation systems, room and breakfast supplies and front desk costs.
Other departmental and support
—
These expenses include labor and other expenses that constitute non-room operating expenses, including parking, telecommunications, on-site administrative departments, sales and marketing, recurring repairs and maintenance and utility expenses.
Property tax, insurance and other
—
These expenses consist primarily of real and personal property taxes, other local taxes, ground rent, equipment rent and insurance.
Other, net
— These expenses include losses incurred resulting from property damage or destruction caused by any sudden, unexpected or unusual event such as a hurricane or significant casualty. Impairment losses are non-cash expenses that are recognized when circumstances indicate that the carrying value of a long-lived asset is not recoverable. An impairment loss is recognized for the excess of the carrying value over the fair value of the asset.
Newly Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), regarding the accounting for leases for both lessees and lessors. In July 2018, ASU 2016-02 was amended, providing another transition method by allowing companies to initially apply the new lease standard in the year of adoption and not the earliest comparative period. The lease standard amendment also provided a practical expedient for an accounting policy election for lessors, by class of underlying asset, to not separate nonlease components from the associated lease components, similar to the practical expedient provided for lessees. The lessor practical expedient is only available if the timing and pattern of transfer are the same for the nonlease and lease components and the lease components, if accounted for separately, would be classified as an operating lease.
Lessees will need to recognize on their balance sheet a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, adjusted for any initial direct costs of the lease, lease incentives or early lease payments, where applicable. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line rent expense (similar to current operating leases) while finance leases will result in interest and amortization expense (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. The new standard may be adopted using a modified retrospective transition and provides for certain practical expedients. We are evaluating the impact of ASU 2016-02 on our consolidated financial statements, where we believe the primary impact as a lessee will relate to leases where we are the ground lessee.
14
For lessor accounting, our primary activity relates to daily hotel leases, where we intend to adopt the short-term lease exception and record lease revenue as its earned. However, for longer term leases, such as restaurant, cell towers and billboards, under current lessor accounting, a real estate lease could only be a sales-type lease if ownership of the real estate was transferred to the lessee. With the adoption of ASU 2016-02, there will no longer be an exclusion for real estate leases, where the same classification guidance applies as with all other leases. We are currently evaluating how this guidance would apply to lessor classification. If, as lessor, our real estate leases would be classified as sales-type leases, the real estate asset would be eliminated, a net investment asset would be recognized generally equal to the present value of the minimum lease payments plus the unguaranteed residual value and a selling profit or loss recorded. Additionally, only incremental direct leasing costs may be capitalized under this new guidance, which is primarily consistent with the Company’s existing policies.
In light of the recently issued lease standard amendment and the new practical expedients, we continue to evaluate the impact of the new leasing standard. We plan to adopt the new standard effective January 1, 2019.
In June
2018, the FASB issued ASU 2018-07, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under this ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The Company accounts for its share-based payments to members of its board of directors in the same manner as share-based payments to its employees. Other than to members of our board of directors, the Company does not award share-based payments to any nonemployees. The guidance is effective for periods beginning after December 15, 2018. Early adoption is
allowed.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded.
The guidance affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The guidance will apply to our trade receivables, notes receivable, net investments in leases and any other future financial assets that have the contractual right to receive cash that we may acquire in the future.
The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. Historically, credit losses have not been material to the Company. We are currently evaluating the impact of this guidance on our financial position, results of operations and related disclosures but do not expect the implementation of this guidance to have a material impact on our condensed consolidated financial position and results of operations.
Newly Adopted Accounting Standards
Effective January 1, 2018, we adopted FASB Topic 606. The revised guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded prior revenue recognition guidance, including industry-specific revenue guidance. The revised guidance replaced most existing revenue and real estate sale recognition guidance in GAAP. The standard specifically excludes lease contracts, which is our primary recurring revenue source; however, our revenue accounting for incidental hotel revenue will follow the revised guidance. We adopted the new standard using the modified retrospective transition method, where financial statement presentations prior to the date of adoption are not adjusted. Transactions that were not closed as of the adoption date were adjusted to reflect the new standard where we recorded a net reduction to opening retained earnings of approximately $15 million, net of tax, as of January 1, 2018 due to the cumulative impact of adopting ASC 606
, which relates primarily to our discontinued operations
. The adoption of this statement did not have a material impact on our continuing operations.
Effective January 1, 2018, we adopted FASB ASU 2017-05, Other Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 310-20), which requires the derecognition of a business in accordance with ASC 810, Consolidations, including instances in which the business is considered in substance real estate. In cases where a controlling interest in real estate was sold but a noncontrolling interest is retained, we may record a gain or loss related to both the sold and retained interests. The adoption of this standard did not have an impact on our condensed consolidated financial statements, but depending on future transactions, may in the future.
Effective January 1, 2018, we adopted FASB ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which provides guidance from the SEC allowing for the recognition of provisional amounts in the financial statements as a result of the Tax Act that was signed into law in December 2017. The guidance allows for a measurement period of up to one year from the enactment date to finalize the accounting related to the Tax Act. The Company has applied and continues to apply the guidance in this update within its financial statements.
15
Effective January 1, 2018, we adopted
FASB
ASU 2018-02, Inc
ome Statement – Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Act from accumulated other comprehensive income into retained earnings.
The adoption
of this statement
did not have a material effect on our financial statements.
Effective January 1, 2018, we adopted FASB ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This update clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. The adoption of this statement did not have a material effect on our financial statements.
Effective January 1, 2018 we adopted FASB ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides guidance for evaluating whether certain transactions are to be accounted for as an acquisition (or disposal) of either a business or an asset. This standard is applied on a prospective basis. The adoption of this statement did not have a material effect on our financial statements.
From time to time, new accounting standards are issued by FASB or other standards setting bodies, which we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently adopted or recently issued standards that are not yet effective have not or will not have a material impact on our consolidated financial statements upon adoption.
NOTE 3. DISCONTINUED OPERATIONS
As discussed in Note 1 “Organization and Basis of Presentation,” LQH Parent completed the Spin-Off on May 30, 2018. As part of the Spin-Off closing, LQH Parent distributed to its stockholders all the outstanding shares of CorePoint common stock. Each holder of LQH Parent common stock received one share of CorePoint common stock for each share of LQH Parent common stock held by such holder on the record date, after giving effect to a reverse stock split, whereby each share of the common stock of LQH Parent (par value $0.01) was reclassified and combined into one half of a share of the common stock of LQH Parent (par value $0.02) (the “Reverse Stock Split”). Immediately following the Spin-Off, pursuant to the terms of the merger agreement, LQH Parent became a wholly-owned subsidiary of Wyndham Worldwide and each share of LQH Parent common stock (after giving effect to the Reverse Stock Split) was converted into the right to receive $16.80 per share in cash (after giving effect to the Reverse Stock Split), without interest. Wyndham Worldwide repaid $715 million of LQH Parent’s debt net of cash and set aside a reserve of $240 million for estimated taxes expected to be incurred in connection with the Spin-Off. Immediately
following the Spin-Off, LQH Parent did not own any shares of any class of CorePoint outstanding common stock.
In connection with the Spin-Off, CorePoint entered into a Separation and Distribution Agreement (the “Separation and Distribution Agreement”) in January 2018 and entered into several other agreements with LQH Parent prior to consummation of the
Spin-Off
. These agreements set forth the principal transactions required to effect CorePoint’s separation from LQH and provide for the allocation between CorePoint and LQH Parent of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities) and govern the relationship between CorePoint and LQH after completion of the Spin-Off.
Notwithstanding the legal form of the Spin-Off, for accounting and financial reporting purposes, LQH Parent is presented as being spun-off from CorePoint as a reverse spin. This presentation is in accordance with GAAP and is primarily a result of the relative significance of CorePoint’s business to LQH’s business, as measured in terms of revenues, profits, and assets. Therefore, CorePoint Lodging is considered the divesting entity and treated as the accounting successor, and LQH Parent is the accounting spinnee and accounting predecessor for consolidated financial reporting purposes.
In accordance with GAAP, the results of operations related to LQH Parent’s hotel franchise and hotel management business are reported as discontinued operations for all periods presented. In addition, the assets and liabilities of LQH Parent’s hotel franchise and hotel management business have been segregated from the assets and liabilities related to the Company’s continuing operations and presented separately on the Company’s consolidated balance sheet as of December 31, 2017. Additionally, the financial statement presentation was modified to be more consistent with other REIT lodging companies and reflects the results of discontinued operations.
Because the separation was a spin-off among stockholders, for financial statement presentation, there is no gain or loss on the separation of the disposed net assets and liabilities. Rather, the carrying amounts of the net assets and liabilities of the Company’s former hotel franchise and hotel management accounts are removed at their historical cost with an offsetting amount to stockholders’ equity. In connection with the Spin-Off, the Company recorded a $740 million adjustment in stockholders’ equity. The amount recognized will be adjusted in future reporting periods as the amount recorded is preliminary pending the finalization of various items including the final determination of the tax liabilities associated with the transaction and the settlement of other remaining considerations with Wyndham Worldwide. As these matters are finalized pursuant to the transaction agreements, the Company will
16
record an adjustment to its cash balance or other working capital accounts with an offsetting amount to stockholders’ equity. Additionally, as the Spin-Off was
a taxable spin, Wyndham Worldwide reserved $240 million to cover the tax payment for the spin transaction. Any residual amount of the reserve in excess of the tax payment will be remitted to the Company.
Any related tax payment in excess of such reserve
is the responsibility of Wyndham Worldwide with the Company responsible for delivering to Wyndham Worldwide either cash equal to the excess or issuing shares of common stock to Wyndham Worldwide in lieu of cash. Any such shares issued to Wyndham Worldwide
would be subject to a registration rights agreement.
As these tax valuations are completed and the estimates are refined and finalized, the impact of the reorganization and separation from LQH on stockholders’ equity will be adjusted
.
Results of Discontinued Operations
The following table summarizes the results of the hotel franchise and hotel management business which are presented as discontinued operations (in millions).
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
FRANCHISE AND OTHER FEE BASED REVENUES
|
|
$
|
—
|
|
|
$
|
42
|
|
|
$
|
58
|
|
|
$
|
111
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate, general, administrative and marketing
|
|
|
—
|
|
|
|
28
|
|
|
|
64
|
|
|
|
86
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
2
|
|
|
|
4
|
|
|
|
6
|
|
Total Operating Expenses
|
|
|
—
|
|
|
|
30
|
|
|
|
68
|
|
|
|
92
|
|
Operating Income (Loss)
|
|
|
—
|
|
|
|
12
|
|
|
|
(10
|
)
|
|
|
19
|
|
OTHER EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(15
|
)
|
|
|
(25
|
)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
Total Other Expenses
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(22
|
)
|
|
|
(25
|
)
|
Income (loss) Before Income Taxes
|
|
|
—
|
|
|
|
4
|
|
|
|
(32
|
)
|
|
|
(6
|
)
|
Income tax benefit (expense), primarily current
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
3
|
|
Income (loss) from Discontinued Operations, net of tax
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
(25
|
)
|
|
$
|
(3
|
)
|
The following table presents the carrying amounts of the major classes of assets and liabilities of LQH Parent that were included in assets and liabilities from discontinued operations as of December 31, 2017 (in millions):
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS FROM DISCONTINUED OPERATIONS
|
|
|
|
|
Total real estate, net
|
|
$
|
49
|
|
Intangible assets, net of accumulated amortization
|
|
|
171
|
|
Accounts receivable, net
|
|
|
24
|
|
Other assets
|
|
|
36
|
|
Total Assets From Discontinued Operations
|
|
$
|
280
|
|
|
|
|
|
|
LIABILITIES FROM DISCONTINUED OPERATIONS
|
|
|
|
|
Debt, net
|
|
$
|
696
|
|
Accounts payable and accrued expenses
|
|
|
109
|
|
Other liabilities
|
|
|
21
|
|
Deferred tax liabilities
|
|
|
20
|
|
Total Liabilities From Discontinued Operations
|
|
$
|
846
|
|
In connection with the Spin-Off, CorePoint made a cash payment to LQH Parent of approximately $1 billion (the “Cash Payment”), immediately prior to and as a condition of the Spin-Off. The Cash Payment was to facilitate the repayment of part of LQH Parent’s existing debt. Accordingly, concurrently with the closing of the Merger, Wyndham Worldwide repaid, or caused to be repaid, on behalf of LQH Parent, LQH Parent’s existing debt.
17
As permitted under GAAP, the Company has elected not to adjust the condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and September 3
0, 2017 to exclude cash flows attributable to discontinued operations.
As such, t
he following table presents selected financial information of LQH Parent included in the condensed consolidated statements of cash flows (in millions):
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Non-cash items included in net income (loss):
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
4
|
|
|
$
|
6
|
|
Amortization of deferred costs
|
|
|
1
|
|
|
|
2
|
|
Loss on extinguishment of debt
|
|
|
7
|
|
|
|
—
|
|
Equity based compensation expense
|
|
|
4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
11
|
|
|
$
|
18
|
|
NOTE 4. INVESTMENTS IN REAL ESTATE
During the third quarter of 2018, one
hotel was sold for net proceeds of $2 million resulting in a loss on sale of $0.4 million. During the nine months ended September 30, 2018, two hotels were sold for net proceeds of $6 million resulting in a gain on sale of $0.1 million. During the third quarter of 2017, one hotel was sold for net proceeds of $6 million resulting in a gain on sale of $1 million. During the nine months ended September 30, 2017, four hotels were sold for net proceeds of $28 million resulting in a gain on sale of $1 million.
Depreciation expense related to buildings and improvements, furniture, fixtures and other equipment was
$39 million and $36 million for the three months ended September 30, 2018 and 2017, respectively. Depreciation expense related to buildings and improvements, furniture, fixtures and other equipment was $115 million and $104 million for the nine months ended September 30, 2018 and 2017, respectively.
Construction in progress includes capitalized costs for ongoing projects that have not yet been put into service.
We have pledged substantially all of our hotels as collateral for the CMBS Loan Agreement (as defined in Note 6 “Debt”).
NOTE 5. OTHER ASSETS
The following table presents other assets as of September 30, 2018 and December 31, 2017 (in millions):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
Lenders escrow
|
|
$
|
15
|
|
|
$
|
—
|
|
|
Prepaid expenses
|
|
|
9
|
|
|
|
12
|
|
|
Intangible assets
|
|
|
5
|
|
|
|
5
|
|
|
Assets held for sale
|
|
|
3
|
|
|
|
9
|
|
|
Other assets, primarily hotel supplies
|
|
|
19
|
|
|
|
6
|
|
|
Total other assets
|
|
$
|
51
|
|
|
$
|
32
|
|
|
Assets held for sale as of September 30, 2018 represent one hotel and approximately 150 rooms. Assets held for sale as of December 31, 2017 represent three hotels and approximately 400 rooms.
As required by the CMBS Loan Agreement, we entered into an interest rate cap agreement on May 30, 2018 with a notional amount of $1.035 billion and a one-month London Interbank Offering Rate (“LIBOR”) interest rate cap of 3.25 percent that expires on July 15, 2020 (the “Interest Rate Cap Agreement”). The Interest Rate Cap Agreement is for a period equal to the existing term of the CMBS
18
Facility and has a notional amount equal to or greater than the then outstanding principal balance of the CMBS Facility. The C
ompany did not designate the interest rate cap as a hedge.
NOTE 6. DEBT
The following table presents the carrying amount of our debt as of September 30, 2018 and December 31, 2017 (in millions):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
Interest Rate as of September 30, 2018
(1)
|
|
Maturity Date
|
|
|
|
|
CMBS Facility
|
|
$
|
1,035
|
|
|
$
|
—
|
|
|
One-month LIBOR + 2.75%
|
|
2020
|
(2)
|
Revolving Facility
|
|
|
—
|
|
|
|
—
|
|
|
One-month LIBOR + 4.50%
|
|
2020
|
(3)
|
Term Facility
|
|
|
—
|
|
|
|
1,003
|
|
|
N/A
|
|
N/A
|
|
|
|
|
1,035
|
|
|
|
1,003
|
|
|
|
|
|
|
Less deferred debt issuance costs and original issue discount
|
|
|
(25
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
Total debt, net
|
|
$
|
1,010
|
|
|
$
|
992
|
|
|
|
|
|
|
|
(1)
|
One-month LIBOR at September 30, 2018 was 2.26 percent.
|
|
(2)
|
After maturity in 2020, includes five extension options of twelve months each at CorePoint’s option subject to certain conditions.
|
|
(3)
|
After maturity in 2020, includes one-year extension subject to certain conditions.
|
Term Facility and Extinguishment of Debt
In connection with the Spin-Off and Merger, on May 30, 2018, we entered into the CMBS Loan Agreement and used the proceeds to repay and discharge existing loans (“Term Facility”).
During the nine months ended September 30, 2018, we recorded a $10 million loss related to the extinguishment of the Term Facility. The loss primarily included the write-off of unamortized debt issuance costs and original issuance discount.
The interest rate for the Term Facility from January 1, 2018 to March 6, 2018, was LIBOR plus 2.75 percent and for the period from March 7, 2018 to May 30, 2018 was LIBOR plus 3.00 percent.
CMBS Facility
On May 30, 2018, certain indirect wholly-owned subsidiaries of CorePoint (collectively, the “CorePoint CMBS Borrower”). CorePoint TRS L.L.C. and CorePoint Operating Partnership L.P. (“CorePoint OP”) entered into a Loan Agreement (the “CMBS Loan Agreement”), pursuant to which the CorePoint CMBS Borrower borrowed an aggregate principal amount of $1.035 billion under a secured mortgage loan secured primarily by mortgages for 307 owned and ground leased hotels, an excess cash flow pledge for seven owned and ground leased hotels and other collateral customary for mortgage loans of this type (the “CMBS Facility”).
The proceeds from the CMBS Facility were used to facilitate the repayment of part of LQH Parent’s existing debt. In addition, simultaneously with the closing of the Merger, Wyndham repaid, or caused to be repaid, the Term Facility.
The CMBS Facility bears interest at a rate equal to the sum of (i) one-month LIBOR and (ii) 2.75 percent per annum for the first five years of the term, 2.90 percent for the sixth year of the term and 3.00 percent for the seventh year of the term. Interest is generally payable monthly. In addition, in connection with the Spin-Off, we incurred additional interest expense of $2 million prior to the securitization of the debt.
The CMBS Facility has an initial term of two years, with five extension options of twelve months each exercisable at the CorePoint CMBS Borrower’s election, provided there is no event of default existing as of the commencement of the applicable extension period and the CorePoint CMBS Borrower either extends the current interest rate cap or purchases a new interest rate cap covering the extension period at a strike price as set forth in the CMBS Loan Agreement. No regular principal payments are due prior to the scheduled or extended maturity date. The CMBS Facility is pre-payable in whole or in part subject to payment of (i) all accrued interest through the end of the applicable accrual period and (ii) prior to the payment date in December 2019 a spread maintenance premium and in certain cases third party LIBOR breakage costs. Notwithstanding the above, the CorePoint CMBS Borrowers are
19
permitted to
prepay the CMBS Facility by an amount not to exceed 20 percent of the original principal balance of the CMBS Facility, in the aggregate without payment of any spread maintenance premium and the spread maintenance premium for prepayments after the payment d
ate in November 2019 will be zero.
The CMBS Facility includes customary non-recourse carve-out guarantees, affirmative and negative covenants and events of default, including, among other things, guarantees for certain losses arising out of customary “bad-boy” acts of CorePoint OP and its affiliates and environmental matters (which will be recourse for environmental matters only to the CorePoint Borrower provided that the required environmental insurance is delivered to the lender), a full recourse guaranty with respect to certain bankruptcy events, restrictions on the ability of the CorePoint CMBS Borrower to incur additional debt and transfer, pledge or assign certain equity interests or its assets, and covenants requiring the CorePoint CMBS Borrower to exist as “special purpose entities,” maintain certain ongoing reserve funds and comply with other customary obligations for commercial mortgage-backed securities loan financings. As of September 30, 2018, the Company was in compliance with these covenants.
At the closing of the CMBS Facility, the CorePoint CMBS Borrower deposited in the loan servicer’s account approximately $15 million in upfront reserves for property improvement and environmental remediation, which funds may be periodically disbursed to the CorePoint CMBS Borrower throughout the term of the loan to cover such costs. In addition, the CMBS Facility lender has the right to control the disbursement of hotel operating cash receipts during the continuation of an event of default under the loan or if and while the debt yield for the CMBS Facility (generally defined as hotel property operating income before depreciation and corporate general and administrative expenses divided by the outstanding principal balance of the CMBS Facility) falls below 1
2.33 percent through May 30, 2023 and 12.83 percent thereafter in each case for two consecutive quarters. During such an event, the lender will use the funds to pay all monthly amounts due under the CMBS Facility loan documents including, but not limited to, required ongoing reserves, debt service and fees for the CMBS Facility and Revolving Facility and property operating expenses. Any remaining funds after the payment of such expenses will be held under the control of the Lender in an excess cash flow account and such amounts will not be available to the CorePoint CMBS Borrower until such events are cured, except that, if no event of default is continuing and there is no bankruptcy event with respect to the CorePoint CMBS Borrower, the Lender will make such funds available to the CorePoint CMBS Borrower for the payment of certain expenses, including, among other things, various operating expenses and dividends, and distributions and redemptions sufficient to maintain certain tax-preferential treatment for the CorePoint CMBS Borrower. As of September 30, 2018, the Company was in compliance with these covenants.
Revolving Facility
Also on May 30, 2018,
CorePoint Borrower L.L.C. (
the “CorePoint Revolver Borrower”), our indirect wholly owned subsidiary and the direct wholly owned subsidiary of CorePoint OP, and CorePoint OP entered into the Revolver Credit Agreement providing for the $150 million Revolving Facility (“Revolving Facility”). The Revolving Facility will mature on May 30, 2020, with an election to extend the maturity for one additional year subject to certain conditions, including that the maturity of the CMBS Facility be extended to a date no earlier than the maturity of the Revolving Facility. Upon consummation of the Spin-Off, $25 million was drawn on the Revolving Facility and repaid on August 3, 2018. As of September 30, 2018, no amounts were outstanding under the Revolving Facility and the entire $150 million was available to be drawn by us.
Interest under the Revolving Facility will be, at the option of the CorePoint Revolver Borrower, either at a base rate plus a margin of 3.50 percent or a LIBOR rate plus a margin of 4.50 percent. With respect to base rate loans, interest will be payable at the end of each quarter. With respect to LIBOR loans, interest will be payable at the end of the selected interest period but no less frequently than quarterly. Additionally, there is a commitment fee payable at the end of each quarter equal to 0.50 percent of unused commitments under the Revolving Facility and customary letter of credit fees.
The Revolving Facility contains customary representations and warranties, affirmative and negative covenants and defaults. The Revolving Facility also contains a maximum total net leverage ratio financial covenant and minimum interest coverage ratio financial covenant, in each case, as defined, and tested as of the last day of any fiscal quarter in which borrowings under the Revolving Facility and outstanding letters of credit exceed 10 percent of the aggregate commitments of the Revolving Facility. As of September 30, 2018, the Company was in compliance with these covenants.
The obligations under the Revolving Facility are unconditionally and irrevocably guaranteed by CorePoint OP, and, subject to certain exceptions, each of the CorePoint Revolver Borrower and its existing and future domestic subsidiaries that own equity interests in any CorePoint CMBS Borrower (collectively, the “Revolver Subsidiary Guarantors”). The CorePoint Revolver Borrower’s obligations under the Revolving Facility and any hedging or cash management obligations are secured by (i) a perfected first-lien pledge of all equity interests in the CorePoint Revolver Borrower, all equity interests in any Revolver Subsidiary Guarantor and, subject to certain exceptions, all equity interests in certain CorePoint CMBS Borrowers and (ii) a perfected first-priority security interest in the CorePoint Revolver Borrower’s conditional controlled deposit account.
20
NOTE 7. PREFERRED STOCK
In connection with LQH’s internal reorganization prior to the Spin-Off, the Company issued 15,000 shares of Cumulative Redeemable Series A Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), to a wholly owned subsidiary of LQH Parent for cash of $15 million. LQH, through its subsidiary, privately sold all of the Series A Preferred Stock to an unrelated third-party investor immediately prior to the completion of the Spin-Off.
On May 30, 2018, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary (as amended and supplemented, the “Articles Supplementary”) regarding certain rights of the shares of the Series A Preferred Stock. The Series A Preferred Stock has an aggregate liquidation preference of $15 million, plus any accrued and unpaid dividends thereon. As of September 30, 2018, we pay a cash dividend on the Series A Preferred Stock equal to 13 percent per annum, payable quarterly. If either our leverage ratio, as defined, exceeds 7.5 to 1.0 as of the last day of any fiscal quarter, or if an event of default occurs (or has occurred and has not been cured) with respect to the Series A Preferred Stock, we will be required to pay a cash dividend on the Series A Preferred Stock equal to 15 percent per annum. Our dividend rate on the Series A Preferred Stock will increase to 16.5 percent per annum if, at any time, we are both in breach of the leverage ratio covenant and an event of default occurs (or has occurred and has not been cured) with respect to the Series A Preferred Stock. The Series A Preferred Stock are senior to our common stock with respect to dividends and with respect to dissolution, liquidation or winding up of the Company.
The Series A Preferred Stock is mandatorily redeemable by us upon the tenth anniversary of the date of issuance. Beginning on the seventh anniversary of the issuance of the Series A Preferred Stock, we may redeem the outstanding Series A Preferred Stock for an amount equal to its aggregate liquidation preference, plus any accrued but unpaid dividends. The holders of the Series A Preferred Stock may also require us to redeem the Series A Preferred Stock upon a change of control of the Company for an amount equal to its aggregate liquidation preference plus any accrued and unpaid dividends thereon (and a premium if the change of control occurs prior to the seventh anniversary of the issuance of the Series A Preferred Stock).
Due to the fact that the
Preferred Stock
is mandatorily redeemable by us, the preferred shares are classified as a liability on the accompanying condensed consolidated balance sheet as of September 30, 2018. Dividends on these preferred shares are classified as interest expense in the accompanying condensed consolidated statements of operations.
Holders of Series A Preferred Stock generally have no voting rights. However, the Articles Supplementary provide that, without the prior consent of the holders of a majority of the outstanding shares of Series A Preferred Stock, we are prohibited from (i) authorizing or issuing any additional shares of Series A Preferred Stock, or (ii) amending our charter or entering into, amending or altering any other agreement in any manner that would adversely affect the Series A Preferred Stock. Holders of shares of the Series A Preferred Stock have certain preemptive rights over issuances by us of any class or series of our stock ranking on parity with the Series A Preferred Stock. If we are either (a) in arrears on the payment of dividends that were due on the Series A Preferred Stock on six or more quarterly dividend payment dates, whether or not such dates are consecutive, or (b) in default of our obligations to redeem the Preferred Stock on the tenth anniversary of its issuance or following a change of control, the preferred stockholders may designate a representative to attend meetings of our board of directors as a non-voting observer until all unpaid Preferred Stock dividends have either been paid or declared with an amount sufficient for payment set aside for payment, or the shares required to be redeemed have been redeemed, as applicable.
NOTE 8. FAIR VALUE MEASUREMENTS
We had no significant fair value adjustments on a recurring or nonrecurring basis as of September 30, 2018 and December 31, 2017.
The carrying amount and estimated fair values of our financial assets and liabilities were as follows (in millions):
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
|
|
|
Debt - CMBS Facility
(1)(2)
|
|
$
|
1,010
|
|
|
$
|
1,010
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt - Revolving Facility
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Debt - Term Facility
(1)(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
992
|
|
|
|
1,007
|
|
Mandatorily redeemable preferred shares
(1)
|
|
|
15
|
|
|
|
15
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Classified as Level 3 under the fair value hierarchy.
|
|
(2)
|
Carrying amount includes deferred debt issuance costs of $25 million as of September 30, 2018.
|
|
(3)
|
Carrying amount includes deferred debt issuance costs and original issue discount of $11 million as of December 31, 2017.
|
21
We believe the carrying amounts of our cash and cash equivalents and lenders escrow approximated fair value as of September 30, 2018 and December 31, 2017, as applicable. Our estimates of the fair values were determined using available market information and valuation methods appropriate in the circumstances.
We estimate the fair value of our debt and mandatorily redeemable preferred stock by using discounted cash flow analysis based on current market inputs for similar types of arrangements. The primary sensitivity in these calculations is based on the selection of appropriate discount rates. Fluctuations in these assumptions will result in different estimates of fair value.
NOTE 9. INCOME TAXES
To qualify as a REIT, the Company must meet a number of organizational, operational, and distribution requirements. As a REIT, the Company is generally not subject to federal corporate income taxes on the portion of its net income that is currently distributed to its stockholders. To the extent the Company does not distribute 100 percent of its taxable income for any year in which it has elected REIT status, the Company will be subject to income tax on the undistributed taxable income. It is the Company’s current intention to adhere to these and all other applicable requirements and maintain the Company’s qualification for taxation as a REIT, including the requirement to distribute its taxable income. If the Company fails to qualify for taxation as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates and may not be able to qualify as a REIT for the four taxable years subsequent to the year of an uncured REIT qualification failure. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through the Company's TRS is subject to federal, state and local income taxes at normal corporate rates.
The Company recorded a provision for federal, state and foreign income tax expense of approximately $5 million and $9 million for the three months ended September 30, 2018 and 2017, respectively. The Company recorded a provision for federal, state and foreign income tax expense of approximately $6 million and $28 million for the nine months ended September 30, 2018 and 2017, respectively. The provision for the three and nine month periods ended September 30, 2018 and 2017 differs from the statutory federal tax rates of 21 percent and 35 percent, respectively, primarily due to our election to be taxed as a REIT which effectively eliminates the federal and state income tax on that portion of our operations, federal and state income taxes relating to the separation of our franchise and management business that are classified in discontinued operations, and the impact of state income taxes.
NOTE 10. EQUITY-BASED COMPENSATION
Our 2018 Omnibus Incentive Plan (the “Plan”) authorizes the grant of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), non-qualified and incentive stock options, dividends and dividend equivalents, and other stock-based awards. A total of 8 million shares of common stock has been authorized for issuance under the Plan and 7 million shares of common stock are available for issuance as of September 30, 2018. As of September 30, 2018, we have outstanding time-based RSUs and RSAs, where the award vests over time and is not subject to future performance targets and, accordingly, are initially recorded at the current market price at the time of grant. These time-based awards vest according to each agreement, either in equal increments over the vesting period or at the end of the vesting period (generally three to four years with acceleration in the event of certain defined events), as long as the employee remains employed with the Company.
In connection with the Spin-Off, the Company entered into an agreement with LQH Parent to modify all outstanding awards granted to the employees of LQH Parent. The agreement generally provides that, as of the separation, holders of such awards were entitled to receive CorePoint equity-based, time-vesting, compensation awards. Generally, all such CorePoint equity-based compensation awards (except for the LQH Performance Share Units (“PSUs”), as described below) retain the same terms and vesting conditions as the original LQH Parent equity-based compensation awards to which such awards relate. Under the agreement, holders of LQH
RSAs and LQH RSUs received restricted shares of CorePoint common stock and CorePoint RSUs. Holders of LQH PSUs received CorePoint RSAs.
The number of shares subject to such converted awards were calculated based on adjustments to LQH Parent’s equity-based awards using the distribution ratio and assumed a majority of the performance-vesting awards vest at target performance levels.
P
erformance-based vesting with respect to the converted LQH PSUs were removed, and instead the CorePoint equity-based awards will vest, subject to the holder’s continued employment with LQH or CorePoint, as applicable, through the last date of the original performance period (as defined in the applicable LQH PSU grant notice) to which such awards relate, effectively transforming the PSU awards into time-vesting equity awards.
Following the Spin-Off,
the compensation expense related to these replacement equity-based compensation awards for the employees of LQH after the Spin-Off date is incurred by LQH. The compensation expense related to these replacement equity-based compensation awards for the employees of CorePoint is incurred by
22
CorePoint. Dividends related to all of these replacement awards are charged
to CorePoint retained earnings on the dividend payment date.
For the three and nine months ended September 30,
2018, we recognized $3 million and $5 million, respectively
, of equity-based compensation expense in continuing operations. For the three and nine months ended September 30, 2017, we recognize
d $2 million and $6 million, respectively
, of equity-based compensation expense in continuing operations.
For the nine months ended September 30, 2018, we recognized $4 million of equity-based compensation expense in discontinued operations. For the three and nine months ended September 30, 2017, we recognized $2 million and $6 million, respectively, of equity-based compensation expense in discontinued operations.
The following table summarizes the activity of our RSAs and RSUs during the nine months ended September 30, 2018:
|
|
Number of
Shares
|
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Unvested at January 1, 2018
|
|
|
560,015
|
|
|
$
|
26.29
|
|
Granted
|
|
|
708,923
|
|
|
|
27.52
|
|
Conversion of the performance units upon completion of the spin-off
|
|
|
423,510
|
|
|
|
27.92
|
|
Vested
|
|
|
(478,104
|
)
|
|
|
27.16
|
|
Forfeited
|
|
|
(28,200
|
)
|
|
|
26.99
|
|
Unvested at September 30, 2018
|
|
|
1,186,144
|
|
|
$
|
27.26
|
|
The amount of unvested RSA and RSU shares as of September 30, 2018 were 1,170,573 and 15,571, respectively. RSAs are included in amounts for issued and outstanding common stock but are excluded in the computation of basic earnings per share.
NOTE 11. RELATED PARTY TRANSACTIONS
LQH Parent
As discussed in Note 3 “Discontinued Operations,” CorePoint entered into the Separation and Distribution Agreement in January 2018 and entered into several other agreements with LQH Parent prior to consummation of the
Spin-Off
. These agreements set forth the principal transactions required to effect CorePoint Lodging’s separation from LQH and provide for the allocation between CorePoint and LQH Parent of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities) and govern the relationship between CorePoint Lodging and La Quinta after completion of the
Spin-Off
. These agreements also include arrangements with respect to transitional services to be provided by LQH Parent to CorePoint Lodging. In addition, prior to the
Spin-Off
, CorePoint Lodging entered into agreements, including long-term hotel management and franchise agreements for each of its hotels, with LQH that have either not existed historically, or that may be on different terms than the terms of the arrangement or agreements that existed prior to the
Spin-Off
.
In connection with the
Spin-Off
, CorePoint made the Cash Payment to LQH Parent of approximately $1 billion, immediately prior to and as a condition of the
Spin-Off
. The Cash Payment was to facilitate the repayment of part of LQH Parent’s existing debt. In addition, concurrently with the closing of the Merger, Wyndham Worldwide repaid, or caused to be repaid, on behalf of LQH Parent, LQH Parent’s existing Term Facility.
Prior to the Spin-Off and in connection with LQH’s internal reorganization, the Company issued 15,000 shares of Series A Preferred Stock to a wholly owned subsidiary of LQH Parent for cash of $15 million. Immediately prior to the completion of the Spin-Off, LQH sold the Series A Preferred Stock to an unrelated third-party investor. The Company did not participate in the sale and no dividends were paid to LQH Parent prior to their sale.
Other Related Parties
Prior to April 14, 2014, LQH and predecessor entities were owned and controlled by The Blackstone Group L.P. and its affiliates (collectivity, “Blackstone”). As of September 30, 2018, Blackstone beneficially owned approximately 29 percent of our shares of common stock outstanding.
23
In connection with the Spin-Off and prior to securitization of the CMBS Facility, approximately $518 million of the aggregate principal amount of our debt was held by Blackstone. During the third quarter of 2018, Blacksto
ne contributed the $518 million loan to a single asset securitization vehicle and invested in a $99 million subordinate risk retention interest issued by such securitization vehicle. Blackstone was paid all of its share of interest through the securitizat
ion date and the additional $2 million in interest. As of December 31, 2017, approximately $82 million of the aggregate principal amount of LQH’s Term Facility was held by Blackstone. In connection with the consummation of the Merger on May 30, 2018, all o
utstanding amounts under LQH’s Term Facility were repaid in full.
We also purchase products and services from entities affiliated with or owned by Blackstone in the ordinary course of operating our business. The fees paid for these products and services were approximately $1 million and $3 million during the three months and nine months ended September 30, 2017, respectively. The fees paid for these products and services were approximately $1 million during the nine months ended September 30, 2018.
In September 2018, the Company entered into a consulting agreement with Mr. Glenn Alba, a member of the Company’s Board of Directors, pursuant to which Mr. Alba provides consulting services in connection with developing, reviewing and advising on the Company’s real estate and capital deployment policies, strategies and programs. Mr. Alba will receive approximately $8 thousand monthly and reimbursement of all reasonable business expenses incurred on behalf of the Company.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Hotel Management and Franchising Agreements
Management Fees
On May 30, 2018, the Company entered into separate hotel management agreements with LQ Management L.L.C. (“LQM”), whereby we pay a fee equal to five percent of total gross revenues, as defined
.
LQM generally has sole responsibility for all activities necessary for the operation of the hotels, including establishing room rates, processing reservations and promoting and publicizing the hotels. LQM also provides all employees for the hotels, prepares reports, budgets and projections, and provides other administrative and accounting support services to the hotels. We have consultative and limited approval rights with respect to certain actions of LQM, including entering into long-term or high value contracts, engaging in certain actions relating to legal proceedings, approving the operating budget, making certain capital expenditures and the hiring of certain management personnel. We are also responsible for reimbursing LQM for certain costs incurred by LQM during the fulfillment of their duties, such as payroll costs for certain employees and other costs that the manager incurs to operate the hotels. The term of the management agreements is 20 years, subject to two renewals of five years each, at LQM’s option. There are penalties for early termination.
Royalty Fees
On May 30, 2018, we entered into separate hotel franchise agreements with La Quinta Franchising LLC (“LQ Franchising”). Pursuant to the franchise agreements, we were granted a limited, non-exclusive license to use our franchisor’s brand names, marks and system in the operation of our hotels. The franchisor also may provide us with a variety of services and benefits, including centralized reservation systems, participation in customer loyalty programs, national advertising, marketing programs and publicity designed to increase brand awareness, as well as training of personnel. In return, we are required to operate franchised hotels consistent with the applicable brand standards. As of September 30, 2018, 314 of our franchise agreements were with LQ Franchising.
Our franchise agreements require that we pay a five percent royalty fee on gross room revenue. The term of the franchise agreements is through 2038, subject to one renewal of ten years, at the franchisor’s option. There are penalties for early termination.
In addition to the royalty fee, the LQ Franchising agreement includes a reservation fee of 2 percent of gross room revenues, a marketing fee of 2.5 percent of gross room revenues, a loyalty program fee of 5 percent of eligible room night revenue, and other miscellaneous ancillary fees. Reservation fees are included within room expense
in the accompanying condensed consolidated statements of operations. The marketing fee and loyalty program fees are included within other departmental and support in the accompanying condensed consolidated statements of operations.
Litigation
24
We are a party to a number of pending claims and lawsuits arising in the normal course of business. We do not consider our ultimate liability with respect to any such claims or lawsuits, or the aggregate of such claims and lawsuits, to be material in relat
ion to our condensed consolidated financial condition, results of operations or our cash flows taken as a whole.
We and our hotel manager maintain general and other liability insurance; however, certain costs of defending lawsuits, such as those within the retention or insurance deductible amount, are not covered by or are only partially covered by insurance policies. We regularly evaluate our ultimate liability costs with respect to such claims and lawsuits. We accrue costs from litigation as they become probable and estimable.
Tax Contingencies
Under the terms of the Spin-Off and Merger agreements, we retained any liabilities arising from LQH federal, state or local income tax obligations through tax years ended December 31, 2014. Wyndham Worldwide assumed LQH federal, state or local income tax obligations for LQH tax periods thereafter through and including the Spin-Off date of May 30, 2018.
Additionally, as the Spin-Off was a taxable spin, Wyndham Worldwide reserved $240 million to cover their potential tax payments related to the Spin-Off. Any amount of the reserve related to the spin tax payment will be remitted to the Company with an increase to stockholders’ equity. Any related tax payment in excess of the reserve is the responsibility of Wyndham Worldwide with the Company delivering to Wyndham Worldwide either cash equal to the excess or issuing common stock based on the excess payment amount and the current fair value of the Company’s common stock. As the income tax returns for the year ended 2017 were recently filed in October 2018, which along with other supporting in-process schedules would serve as the basis for determining the final spin tax payment, the final determination of the reserve amount is not known. However, we believe the eventual resolution of the reserve amount will not be material to the Company’s consolidated financial condition. Any adjustment related to the settlement of the reserve, including the issuance of the Company’s common stock, would result in an adjustment to equity.
We are subject to regular audits by federal and state tax authorities. These audits may result in additional tax liabilities. The Internal Revenue Service (“IRS”) is currently auditing one of our former LQH REITs, and one of our former LQH TRSs, in each case for the tax years ended December 31, 2010 and 2011. As noted above, any obligations related to these tax years are the responsibility of the Company, with no reimbursement or offset from Wyndham Worldwide or any other parties. On July 7, 2014, we received an IRS 30-Day Letter proposing to impose a 100 percent tax on the REIT totaling $158 million for the periods under audit in which the IRS has asserted that the rent charged for these periods under the lease of hotel properties from the REIT to the taxable REIT subsidiary exceeded an arm’s length rent. After our appeal in November 2017, IRS Appeals returned the matter to IRS Examination for further factual development. There has been no substantive activity on these audits since that date.
We believe the IRS transfer pricing methodologies applied in the audits contain flaws and that the IRS proposed tax and adjustments are inconsistent with the U.S. federal tax laws related to REITs. We have concluded that the positions reported on our tax returns under audit by the IRS are, based on their technical merits, more-likely-than-not to be sustained upon examination. Accordingly, as of September 30, 2018, we have not established any reserves related to this proposed adjustment or any other issues reflected on the returns under examination. If, however, we are unsuccessful in challenging the IRS, an excise tax would be imposed on the REIT equal to 100 percent of the excess rent and we could owe additional income taxes, interest and penalties, which could adversely affect our financial condition, results of operations and cash flow and the trading price of our common stock. Such adjustments could also give rise to additional state income taxes.
On November 25, 2014, we were notified that the IRS intended to examine the tax returns of the same entities subject to the 2010 and 2011 audit in each case for the tax years ended December 31, 2012 and 2013. As noted above, any obligations related to these tax years are the responsibility of the Company, with no reimbursement or offset from Wyndham Worldwide or any other parties. On August 8, 2017, the IRS issued a 30-Day Letter, in which it is proposed to disallow net operating loss (“NOL”) carryovers originating in tax years 2006-2011 or, in the alternative, tax years 2006-2009, depending upon the outcome of the 2010-2011 examination discussed above. Based on our analysis of the NOL notice, we believe the IRS NOL disallowances applied in the 2012-2013 audit contain the same flaws present in the 2010-2011 audit and that the IRS proposed NOL adjustments are inconsistent with the U.S. federal tax laws related to REITs. We have concluded that the positions reported on our tax returns under audit by the IRS are, based on their technical merits, more-likely-than-not to be sustained upon examination. Accordingly, as of September 30, 2018, we have not established any reserves related to this proposed adjustment or any other issues reflected on the returns under examination.
Purchase Commitments
As of September 30, 2018, we had approximately $13 million of purchase commitments related to certain continuing redevelopment and renovation projects and other commitments.
NOTE 13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
25
The following table presents the s
upplemental cash flow informati
on for the nine months ended September 30, 2018 and 2017 (in millions):
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest paid during the period
|
|
$
|
63
|
|
|
$
|
57
|
|
|
Income taxes paid during the period, net of refunds
|
|
|
4
|
|
|
|
14
|
|
|
Supplemental non-cash disclosure:
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable
|
|
|
3
|
|
|
|
8
|
|
|
Cash flow hedge adjustment, net of tax
|
|
|
1
|
|
|
|
3
|
|
|
Casualty receivable related to real estate
|
|
|
5
|
|
|
|
6
|
|
|
Dividends payable on common stock
|
|
|
12
|
|
|
|
—
|
|
|
NOTE 14. EARNINGS PER SHARE
Basic (loss) earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding plus other potentially dilutive securities, except when the effect would be anti-dilutive. Dilutive securities include equity-based awards issued under long-term incentive plans, as discussed in Note 10 “Equity Based Compensation.”
The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings in periods when we have net income. None of our securities are considered participating securities for the periods presented.
As described in Note 1 “Organization and Basis of Presentation,” on May 30, 2018, LQH Parent stockholders of record as of May 18, 2018, received one share of CorePoint common stock for each share of LQH Parent common stock held after giving effect to the Reverse Stock Split. Basic and diluted net income (loss) per share for the three and nine months ended September 30, 2018 is calculated using the weighted average number of basic, dilutive and anti-dilutive common shares outstanding during the periods, as adjusted for the one-to-two distribution ratio.
26
The following table sets forth the computation of basic and diluted earnings (loss) per share (in millions, exce
pt per share data):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from Continuing Operations, net of tax
|
|
$
|
(13
|
)
|
|
$
|
10
|
|
|
$
|
(51
|
)
|
|
$
|
34
|
|
Loss on Discontinued Operations, net of tax
|
|
|
-
|
|
|
|
3
|
|
|
|
(25
|
)
|
|
|
(3
|
)
|
Net income (loss) attributable to CorePoint Lodging's
stockholders
|
|
$
|
(13
|
)
|
|
$
|
13
|
|
|
$
|
(76
|
)
|
|
$
|
31
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic
|
|
|
58.5
|
|
|
|
58.0
|
|
|
|
58.3
|
|
|
|
58.0
|
|
Weighted average number of shares outstanding, diluted
|
|
|
58.5
|
|
|
|
58.4
|
|
|
|
58.3
|
|
|
|
58.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share from continuing operations
|
|
$
|
(0.22
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.87
|
)
|
|
$
|
0.59
|
|
Basic earnings (loss) per share from discontinued operations
|
|
|
—
|
|
|
|
0.06
|
|
|
|
(0.43
|
)
|
|
|
(0.05
|
)
|
Basic earnings (loss) per share
|
|
$
|
(0.22
|
)
|
|
$
|
0.22
|
|
|
$
|
(1.30
|
)
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share from continuing operations
|
|
$
|
(0.22
|
)
|
|
$
|
0.16
|
|
|
$
|
(0.87
|
)
|
|
$
|
0.58
|
|
Diluted earnings (loss) per share from discontinued operations
|
|
|
—
|
|
|
|
0.06
|
|
|
|
(0.43
|
)
|
|
|
(0.06
|
)
|
Diluted earnings (loss) per share
|
|
$
|
(0.22
|
)
|
|
$
|
0.22
|
|
|
$
|
(1.30
|
)
|
|
$
|
0.52
|
|
The earnings per share amounts are calculated using unrounded amounts and shares which result in differences in rounding of the presented per share amounts.
For the three and nine months ended September 30, 2018, approximately 1.2 million shares and 0.8 million shares, respectively, were excluded from the computation of diluted shares, as their impact would have been anti-dilutive.
NOTE 15. SUBSEQUENT EVENTS
On September 19, 2018, our Board of Directors authorized and the Company declared a cash dividend of $0.20 per share of common stock with respect to the third quarter of 2018. The third quarter dividend was paid on October 15, 2018 to stockholders of record as of October 1, 2018.
On November 5, 2018, our Board of Directors authorized and the Company declared a cash dividend of $0.20 per share of common stock with respect to the fourth quarter of 2018. The fourth quarter dividend will be paid on January 15, 2019 to stockholders of record as of December 31, 2018.
27