Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the financial condition and results of operations of Park Hotels & Resorts Inc. (“we,” “us,” “our” or the “Company”) 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, 2021.
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, including expected dates that our hotels will break even or achieve positive Hotel Adjusted EBITDA, the impact to our business and financial condition and that of our hotel management companies, measures being taken in response to COVID-19, the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts), the effects of competition, the effects of future legislation or regulations, the expected completion of anticipated 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”, “hopes” or the negative version of these words or other comparable words. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events. Currently, one of the most significant factors is the adverse effect of COVID-19, including actions taken to contain the pandemic or mitigate its effects, the emergences of virus variants and resurgences, on our financial condition, results of operations, cash flows and performance, our hotel management companies and our hotels’ tenants, and the global economy and financial markets. Investors are cautioned to interpret many of the risks identified in the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2021 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.
All such forward-looking statements are based on current expectations of management and therefore involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results expressed in the statements. You should not put undue reliance on any forward-looking statements and we urge investors to carefully review the disclosures we make concerning risks and uncertainties in Item 1A: “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov, 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 currently hold investments in entities that have ownership or leasehold interests in 49 hotels, consisting of premium-branded hotels and resorts with over 30,000 rooms, of which over 87% are luxury and upper upscale (as defined by Smith Travel Research) and are located in prime U.S. markets and its territories. Our high-quality portfolio includes hotels in major urban and convention areas, such as New York City, Washington, D.C., Chicago, San Francisco, Boston, New Orleans and Denver; premier resorts in key leisure destinations, including Hawaii, Orlando, Key West and Miami Beach; and hotels adjacent to major gateway airports, such as Los Angeles International, Boston Logan International and Miami International, as well as hotels in 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 operating segment is our only reportable segment. Refer to Note 10: “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.
14
Recent Events
During the second quarter of 2022, we sold three consolidated hotels, the Hampton Inn & Suites Memphis - Shady Grove, the Hilton Chicago/Oak Brook Suites and the Homewood Suites by Hilton Seattle Convention Center Pike Street for gross proceeds of approximately $102 million. We also sold our ownership interests in the joint ventures that own and operate the Hilton San Diego Bayfront for gross proceeds of $157 million, which includes $55 million of our interest in the debt in the joint venture. Additionally, we sold the Hilton Garden Inn Chicago/Oakbrook Terrace in July 2022 for gross proceeds of approximately $9 million.
Outlook
The novel strain of coronavirus and the disease it causes (“COVID-19”) have continued to affect the hospitality industry and our business. Beginning in March 2020, travel restrictions and mandated closings of non-essential businesses were imposed, which resulted in temporary suspensions of operations at a majority of our hotels. As vaccination rates across the country increased and COVID-19 related restrictions were eased or removed, we saw an increase in travel and hospitality spending beginning in the second quarter of 2021. During the second quarter of 2022, we continued to witness robust leisure demand and an acceleration in group and business transient demand, despite inflationary pressures in the market, and have now reopened all our previously suspended hotels following the reopening of Parc 55 San Francisco – a Hilton Hotel on May 19, 2022. However, the potential for an economic slowdown or a recession during the second half of 2022 may disrupt the positive momentum across our portfolio and our industry.
We believe the distribution of the COVID-19 vaccine during 2021 drove the improvement in traveler sentiment we experienced and resulted in an improvement in occupancy, Average Daily Rate (“ADR”) and Revenue per Available Room (“RevPAR”) during the second quarter of 2021. Changes in our 2022 pro-forma metrics, which exclude results from properties disposed of and include results from properties acquired as of August 4, 2022, as compared to the same periods in 2021 and 2019, and 2022 occupancy are as follows:
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Change in Pro-forma ADR |
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|
Change in Pro-forma Occupancy |
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|
Change in Pro-forma RevPAR |
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|
2022 Pro-forma |
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2022 vs. 2021 |
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2022 vs. 2019 |
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|
2022 vs. 2021 |
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2022 vs. 2019 |
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|
2022 vs. 2021 |
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|
2022 vs. 2019 |
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|
Occupancy |
|
Q1 2022 |
|
44.0 |
% |
|
|
0.6 |
% |
|
|
25.4 |
% |
pts |
|
(25.9 |
)% |
pts |
|
183.2 |
% |
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|
(33.0 |
)% |
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|
51.6 |
% |
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Apr 2022 |
|
36.1 |
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|
8.5 |
|
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|
33.7 |
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|
(14.3 |
) |
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|
161.8 |
|
|
|
(9.9 |
) |
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|
|
70.2 |
|
May 2022 |
|
28.1 |
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|
4.5 |
|
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|
27.8 |
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|
(16.9 |
) |
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|
117.2 |
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|
(16.4 |
) |
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|
67.6 |
|
Jun 2022 |
|
26.3 |
|
|
|
11.7 |
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|
26.4 |
|
|
|
(12.5 |
) |
|
|
94.4 |
|
|
|
(4.2 |
) |
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|
|
75.4 |
|
Q2 2022 |
|
29.2 |
|
|
|
8.3 |
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|
29.3 |
|
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|
(14.6 |
) |
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119.7 |
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(10.2 |
) |
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|
71.0 |
|
If additional virus variants emerge causing re-imposed widespread travel restrictions, we may be required to suspend operations at some or all of our hotels. While there can be no assurances that we will not experience further fluctuations in hotel revenues or earnings at our hotels due to the uncertainty of COVID-19 and other macroeconomic factors, such as inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts, we expect to continue to recover through the remainder of 2022 based on current demand trends.
Key Business Metrics Used by Management
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. Room nights available to guests have not been adjusted for suspended or reduced operations at certain of our hotels as a result of COVID-19. Occupancy measures the utilization of our hotels’ available capacity. We use occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable ADR levels as demand for rooms increases or decreases.
Average Daily Rate
ADR (which we also refer to as rate) 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.
15
Revenue per Available Room
RevPAR represents rooms revenue divided by the total number of room nights available to guests for a given period. Room nights available to guests have not been adjusted for suspended or reduced operations at certain of our hotels as a result of COVID-19. 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.
Comparable Hotels Data
Historically, we have presented certain data for our hotels on a comparable hotel basis as supplemental information for investors. We defined 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 or business interruption, have not undergone large-scale capital projects or for which comparable results are not available. We presented comparable hotel results to help us and our investors evaluate the ongoing operating performance of our comparable hotels. However, given the significant effect of COVID-19 on most of our hotels and the lack of comparability to prior periods, we do not believe this supplemental information is useful to us or our investors at this time. Under “Results of Operations” below, we have provided information on the effects from dispositions and other factors to our results of operations for the three and six months ended June 30, 2022 as compared to the same periods in 2021. Change from other factors primarily relates to the effects of COVID-19 and subsequent ongoing recovery.
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.
EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA
EBITDA, presented herein, reflects net income (loss) excluding depreciation and amortization, interest income, interest expense, income taxes and also interest expense, income tax and depreciation and amortization included in equity in earnings (losses) 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;
•Costs associated with hotel acquisitions or dispositions expensed during the period;
•Share-based compensation expense;
•Impairment losses and casualty gains or 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, which excludes 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.
16
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;
•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 a reconciliation of Net income (loss) to Hotel Adjusted EBITDA:
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|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in millions) |
|
Net income (loss) |
|
$ |
154 |
|
|
$ |
(114 |
) |
|
$ |
98 |
|
|
$ |
(305 |
) |
Depreciation and amortization expense |
|
|
68 |
|
|
|
71 |
|
|
|
137 |
|
|
|
145 |
|
Interest income |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
Interest expense |
|
|
62 |
|
|
|
66 |
|
|
|
124 |
|
|
|
129 |
|
Income tax expense |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
Interest expense, income tax and depreciation and amortization included in equity in earnings from investments in affiliates |
|
|
4 |
|
|
|
4 |
|
|
|
5 |
|
|
|
5 |
|
EBITDA |
|
|
288 |
|
|
|
27 |
|
|
|
364 |
|
|
|
(25 |
) |
Loss (gain) on sales of assets, net |
|
|
1 |
|
|
|
(6 |
) |
|
|
1 |
|
|
|
(6 |
) |
Gain on sale of investments in affiliates(1) |
|
|
(92 |
) |
|
|
— |
|
|
|
(92 |
) |
|
|
— |
|
Share-based compensation expense |
|
|
5 |
|
|
|
4 |
|
|
|
9 |
|
|
|
10 |
|
Casualty and impairment loss, net |
|
|
1 |
|
|
|
5 |
|
|
|
1 |
|
|
|
5 |
|
Other items |
|
|
4 |
|
|
|
3 |
|
|
|
6 |
|
|
|
— |
|
Adjusted EBITDA |
|
|
207 |
|
|
|
33 |
|
|
|
289 |
|
|
|
(16 |
) |
Less: Adjusted EBITDA from investments in affiliates |
|
|
(11 |
) |
|
|
(2 |
) |
|
|
(16 |
) |
|
|
— |
|
Add: All other(2) |
|
|
12 |
|
|
|
11 |
|
|
|
24 |
|
|
|
22 |
|
Hotel Adjusted EBITDA |
|
$ |
208 |
|
|
$ |
42 |
|
|
$ |
297 |
|
|
$ |
6 |
|
(1) Included in other gain (loss), net.
(2) Includes other revenues and other expenses, non-income taxes on TRS leases included in other property-level expenses and corporate general and administrative expenses.
17
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 (used in) 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 (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 those entities on the same basis. As noted by Nareit in its December 2018 “Nareit Funds from Operations White Paper – 2018 Restatement,” 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:
•Costs associated with hotel acquisitions or dispositions expensed during the period;
•Share-based compensation expense; 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 (loss) attributable to stockholders to Nareit FFO attributable to stockholders and Adjusted FFO attributable to stockholders:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in millions, except per share amounts) |
|
Net income (loss) attributable to stockholders |
|
$ |
150 |
|
|
$ |
(116 |
) |
|
$ |
93 |
|
|
$ |
(306 |
) |
Depreciation and amortization expense |
|
|
68 |
|
|
|
71 |
|
|
|
137 |
|
|
|
145 |
|
Depreciation and amortization expense attributable to noncontrolling interests |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
Loss (gain) on sales of assets, net |
|
|
1 |
|
|
|
(6 |
) |
|
|
1 |
|
|
|
(6 |
) |
Gain on sale of investments in affiliates(1) |
|
|
(92 |
) |
|
|
— |
|
|
|
(92 |
) |
|
|
— |
|
Impairment loss |
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
5 |
|
Equity investment adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (earnings) losses from investments in affiliates |
|
|
(5 |
) |
|
|
2 |
|
|
|
(5 |
) |
|
|
6 |
|
Pro rata FFO of investments in affiliates |
|
|
8 |
|
|
|
— |
|
|
|
10 |
|
|
|
(2 |
) |
Nareit FFO attributable to stockholders |
|
|
129 |
|
|
|
(45 |
) |
|
|
142 |
|
|
|
(160 |
) |
Share-based compensation expense |
|
|
5 |
|
|
|
4 |
|
|
|
9 |
|
|
|
10 |
|
Other items |
|
|
5 |
|
|
|
3 |
|
|
|
6 |
|
|
|
(1 |
) |
Adjusted FFO attributable to stockholders |
|
$ |
139 |
|
|
$ |
(38 |
) |
|
$ |
157 |
|
|
$ |
(151 |
) |
Nareit FFO per share – Diluted(2) |
|
$ |
0.57 |
|
|
$ |
(0.19 |
) |
|
$ |
0.61 |
|
|
$ |
(0.68 |
) |
Adjusted FFO per share – Diluted(2) |
|
$ |
0.61 |
|
|
$ |
(0.16 |
) |
|
$ |
0.68 |
|
|
$ |
(0.64 |
) |
(1) Included in other gain (loss), net.
(2) Per share amounts are calculated based on unrounded numbers.
18
Results of Operations
The following items have had a significant effect on the year-over-year comparability of our operations and are illustrated further in the table of Hotel Revenues and Operating Expenses below:
•Property Dispositions: Since January 1, 2021, we disposed of eight consolidated hotels. As a result of these dispositions, our revenues and operating expenses decreased for the three and six months ended June 30, 2022 as compared to the same periods in 2021. The results of operations during our period of ownership of these hotels are included in our consolidated results.
•Ongoing COVID-19 Recovery: Travel and hospitality spending began to improve beginning in the second quarter of 2021 as vaccination rates increased, which resulted in improved occupancy, and we reopened additional previously suspended hotels throughout 2021 and into the second quarter of 2022. Consequently, the results of our portfolio during the three and six months ended June 30, 2022 will not be comparable to the same periods in 2021.
Hotel Revenues and Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change from Property Dispositions |
|
|
Change from Other Factors(1) |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Rooms revenue |
|
$ |
433 |
|
|
$ |
207 |
|
|
$ |
226 |
|
|
$ |
(7 |
) |
|
$ |
233 |
|
Food and beverage revenue |
|
|
173 |
|
|
|
54 |
|
|
|
119 |
|
|
|
— |
|
|
|
119 |
|
Ancillary hotel revenue |
|
|
70 |
|
|
|
50 |
|
|
|
20 |
|
|
|
(1 |
) |
|
|
21 |
|
Rooms expense |
|
|
98 |
|
|
|
59 |
|
|
|
39 |
|
|
|
(2 |
) |
|
|
41 |
|
Food and beverage expense |
|
|
119 |
|
|
|
42 |
|
|
|
77 |
|
|
|
— |
|
|
|
77 |
|
Other departmental and support expense |
|
|
158 |
|
|
|
101 |
|
|
|
57 |
|
|
|
(3 |
) |
|
|
60 |
|
Other property-level expense |
|
|
65 |
|
|
|
52 |
|
|
|
13 |
|
|
|
(3 |
) |
|
|
16 |
|
Management fees expense |
|
|
32 |
|
|
|
14 |
|
|
|
18 |
|
|
|
— |
|
|
|
18 |
|
(1) Change from other factors primarily relates to the effects of our ongoing COVID-19 recovery.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change from Property Dispositions |
|
|
Change from Other Factors(1) |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Rooms revenue |
|
$ |
725 |
|
|
$ |
313 |
|
|
$ |
412 |
|
|
$ |
(7 |
) |
|
$ |
419 |
|
Food and beverage revenue |
|
|
283 |
|
|
|
76 |
|
|
|
207 |
|
|
|
— |
|
|
|
207 |
|
Ancillary hotel revenue |
|
|
131 |
|
|
|
79 |
|
|
|
52 |
|
|
|
(1 |
) |
|
|
53 |
|
Rooms expense |
|
|
183 |
|
|
|
94 |
|
|
|
89 |
|
|
|
(3 |
) |
|
|
92 |
|
Food and beverage expense |
|
|
206 |
|
|
|
63 |
|
|
|
143 |
|
|
|
(1 |
) |
|
|
144 |
|
Other departmental and support expense |
|
|
291 |
|
|
|
179 |
|
|
|
112 |
|
|
|
(5 |
) |
|
|
117 |
|
Other property-level expense |
|
|
115 |
|
|
|
100 |
|
|
|
15 |
|
|
|
(5 |
) |
|
|
20 |
|
Management fees expense |
|
|
54 |
|
|
|
21 |
|
|
|
33 |
|
|
|
— |
|
|
|
33 |
|
(1) Change from other factors primarily relates to the effects of our ongoing COVID-19 recovery.
19
Group, transient, contract and other rooms revenue for the three and six months ended June 30, 2022, as well as the change for each segment compared to the same periods in 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change from Property Dispositions |
|
|
Change from Other Factors(1) |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Group rooms revenue |
|
$ |
123 |
|
|
$ |
16 |
|
|
$ |
107 |
|
|
$ |
1 |
|
|
$ |
106 |
|
Transient rooms revenue |
|
|
283 |
|
|
|
176 |
|
|
|
107 |
|
|
|
(7 |
) |
|
|
114 |
|
Contract rooms revenue |
|
|
18 |
|
|
|
12 |
|
|
|
6 |
|
|
|
(1 |
) |
|
|
7 |
|
Other rooms revenue |
|
|
9 |
|
|
|
3 |
|
|
|
6 |
|
|
|
— |
|
|
|
6 |
|
Rooms revenue |
|
$ |
433 |
|
|
$ |
207 |
|
|
$ |
226 |
|
|
$ |
(7 |
) |
|
$ |
233 |
|
(1) Change from other factors primarily relates to the effects of our ongoing COVID-19 recovery.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change from Property Dispositions |
|
|
Change from Other Factors(1) |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
Group rooms revenue |
|
$ |
196 |
|
|
$ |
23 |
|
|
$ |
173 |
|
|
$ |
1 |
|
|
$ |
172 |
|
Transient rooms revenue |
|
|
481 |
|
|
|
263 |
|
|
|
218 |
|
|
|
(8 |
) |
|
|
226 |
|
Contract rooms revenue |
|
|
32 |
|
|
|
22 |
|
|
|
10 |
|
|
|
(1 |
) |
|
|
11 |
|
Other rooms revenue |
|
|
16 |
|
|
|
5 |
|
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
Rooms revenue |
|
$ |
725 |
|
|
$ |
313 |
|
|
$ |
412 |
|
|
$ |
(8 |
) |
|
$ |
420 |
|
(1) Change from other factors primarily relates to the effects of our ongoing COVID-19 recovery.
Other revenue and Other operating expense
During the three and six months ended June 30, 2022, other revenue increased by $7 million and $15 million, respectively, and other operating expense increased by $5 million and $14 million, respectively, primarily due to increases in support services revenue and expense from the reopening of our hotels that have service arrangements with Hilton Grand Vacations to full capacity following their suspension of operations during 2020.
Corporate general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
Percent Change |
|
|
2022 |
|
|
2021 |
|
|
Percent Change |
|
|
|
(in millions) |
|
|
|
|
|
(in millions) |
|
|
|
|
General and administrative expenses |
|
$ |
10 |
|
|
$ |
11 |
|
|
|
(9.1 |
)% |
|
$ |
20 |
|
|
$ |
22 |
|
|
|
(9.1 |
)% |
Share-based compensation expense |
|
|
5 |
|
|
|
4 |
|
|
|
25.0 |
|
|
|
9 |
|
|
|
10 |
|
|
|
(10.0 |
) |
Other items(1) |
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
3 |
|
|
|
2 |
|
|
|
50.0 |
|
Total corporate general and administrative |
|
$ |
16 |
|
|
$ |
16 |
|
|
|
— |
% |
|
$ |
32 |
|
|
$ |
34 |
|
|
|
(5.9 |
)% |
(1) Consists of expenses not included in Adjusted EBITDA.
Casualty and impairment loss, net
During the six months ended June 30, 2021, we recognized an impairment loss of $5 million related to one of our hotels classified as held for sale as of June 30, 2021, primarily as a result of selling costs of $5 million.
(Loss) gain on sales of assets, net
During each of the three and six months ended June 30, 2022, we recognized a loss of $1 million as a result of the sale of three of our consolidated hotels during the second quarter.
During each of the three and six months ended June 30, 2021, we recognized a gain of $6 million as a result of the sale of three of our consolidated hotels during the second quarter.
20
Non-operating Income and Expenses
Interest expense
Interest expense decreased during the three and six months ended June 30, 2022 compared to the same periods in 2021 as a result of the partial repayment of our unsecured delayed draw term loan facility ("2019 Term Facility") during the second and third quarters of 2021 and the full repayment of our revolving credit facility ("Revolver") during 2021, partially offset by the issuance of $750 million of 4.875% senior secured notes due 2029 ("2029 Senior Secured Notes") in May 2021. Interest expense associated with our debt for the three and six months ended June 30, 2022 and 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2022 |
|
|
2021 |
|
|
Percent Change |
|
|
2022 |
|
|
2021 |
|
|
Percent Change |
|
|
|
(in millions) |
|
|
|
|
|
(in millions) |
|
|
|
|
SF and HHV Mortgage Loans(1) |
|
$ |
21 |
|
|
$ |
21 |
|
|
|
— |
% |
|
$ |
42 |
|
|
$ |
42 |
|
|
|
— |
% |
Other mortgage loans |
|
|
6 |
|
|
|
7 |
|
|
|
(14.3 |
) |
|
|
11 |
|
|
|
12 |
|
|
|
(8.3 |
) |
Revolver |
|
|
— |
|
|
|
3 |
|
|
|
(100.0 |
) |
|
|
1 |
|
|
|
8 |
|
|
|
(87.5 |
) |
2019 Term Facility |
|
|
— |
|
|
|
4 |
|
|
|
(100.0 |
) |
|
|
1 |
|
|
|
9 |
|
|
|
(88.9 |
) |
2025 Senior Secured Notes(2) |
|
|
12 |
|
|
|
12 |
|
|
|
— |
|
|
|
24 |
|
|
|
24 |
|
|
|
— |
|
2028 Senior Secured Notes(2) |
|
|
10 |
|
|
|
10 |
|
|
|
— |
|
|
|
21 |
|
|
|
21 |
|
|
|
— |
|
2029 Senior Secured Notes(2) |
|
|
9 |
|
|
|
5 |
|
|
|
80.0 |
|
|
|
18 |
|
|
|
5 |
|
|
|
260.0 |
|
Other |
|
|
4 |
|
|
|
4 |
|
|
|
— |
|
|
|
6 |
|
|
|
8 |
|
|
|
(25.0 |
) |
Total interest expense |
|
$ |
62 |
|
|
$ |
66 |
|
|
|
(6.1 |
)% |
|
$ |
124 |
|
|
$ |
129 |
|
|
|
(3.9 |
)% |
(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 Mortgage Loan”) and a $1.275 billion CMBS loan secured by the Hilton Hawaiian Village Waikiki Beach Resort (“HHV Mortgage Loan”).
(2) In May and September 2020, Park Intermediate Holdings LLC (our “Operating Company”), PK Domestic Property LLC, an indirect subsidiary of the Company (“PK Domestic”), and PK Finance Co-Issuer Inc. (“PK Finance”) issued an aggregate of $650 million of senior secured notes due 2025 (“2025 Senior Secured Notes”) and an aggregate of $725 million of senior secured notes due 2028 (“2028 Senior Secured Notes”), respectively (collectively with the 2029 Senior Secured Notes, the "Senior Secured Notes").
Other gain (loss), net
During the three and six months ended June 30, 2022, we recognized a gain of $92 million, which is primarily due to the sale of our ownership interests in the joint ventures that own and operate the Hilton San Diego Bayfront. Refer to Note 3: "Dispositions and Assets Held for Sale" for additional information.
Income tax expense
Income tax expense is primarily related to taxable income generated by our taxable REIT subsidiaries, offset by the utilization of net operating losses.
Liquidity and Capital Resources
Overview
We seek to maintain sufficient amounts of liquidity with an appropriate balance of cash, debt and equity to provide financial flexibility. As of June 30, 2022, we had total cash and cash equivalents of $758 million and $109 million of restricted cash. Restricted cash primarily consists of cash restricted as to use by our debt agreements and reserves for capital expenditures in accordance with certain of our management agreements. We currently have higher than historical balances in restricted cash due to certain of our mortgage loans that require deposits of excess cash with the lender when certain financial ratios are not met, which occurred as a result of the effect from COVID-19 on operating results at the associated hotels. We expect $83 million currently held by the lenders of the HHV Mortgage Loan and the mortgage loan secured by the Hilton Denver City Center will be released to us during the third quarter upon submission of the certificates reflecting compliance with financial ratios of these loans.
As discussed above under “Outlook,” we continued to witness increases in demand across our portfolio during the second quarter of 2022, and we expect our cash flows to continue to improve throughout 2022 if these positive trends continue. However, the potential for an economic slowdown or a recession during the second half of 2022 may disrupt the positive momentum across our portfolio and our industry.
With $901 million of availability under our Revolver and existing cash and cash equivalents, we have sufficient liquidity to pay our debt maturities and to fund other liquidity obligations over the next year and beyond. Only 1% of our total outstanding debt is
21
maturing in 2022. We may also take actions to improve our liquidity, such as the issuance of additional debt, equity or equity-linked securities, if we determine that doing so would be beneficial to us. However, there can no assurance as to the timing of any such issuance, which may be in the near term, or that any such additional financing will be completed on favorable terms, or at all. In 2020, we amended our credit facilities, which in addition to providing enhanced liquidity, extended the maturity of the Revolver and placed certain restrictions on the Company, including limitations on our ability to make dividends and distributions (except to the extent required to maintain REIT status, the ability to pay a $0.01 per share per fiscal quarter dividend and certain other agreed exceptions). In February 2022, we further amended our credit facilities, including extending the waiver period for the testing of the financial covenants, obtaining the ability to repurchase up to $250 million of shares as long as there is no outstanding balance on the Revolver (with the amount of any such repurchases increasing the minimum liquidity covenant, dollar for dollar, resulting in a minimum liquidity covenant amount as of June 30, 2022 of $418 million), and removing or decreasing certain restrictions on the Company related to capital expenditures, acquisitions and asset sales. Upon delivery of the second quarter 2022 compliance certificate in July 2022, which reflected compliance with all required covenants, we exited the waiver period under our credit facilities (one quarter earlier than the scheduled end of the waiver period). Upon exit of the waiver period, certain restrictions related to investments and the incurrence, repayment of debt and dividends and distributions ceased to apply.
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, 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, corporate general and administrative expenses and dividends to our stockholders. Many of the other expenses associated with our hotels are relatively fixed, including portions of rent expense, property taxes and insurance. Since we generally are unable to decrease these costs significantly or rapidly when demand for our hotels decreases, the resulting decline in our revenues can have a greater adverse effect on our net cash flow, margins and profits. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements at our hotels (to the extent not cancelled or deferred), 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 construction contract commitments of approximately $125 million for capital expenditures at our properties, of which $62 million relates to the expansion project at the Bonnet Creek complex. The Bonnet Creek expansion project includes additional meeting space for the Signia by Hilton Orlando Bonnet Creek and the Waldorf Astoria Orlando. Our contracts contain clauses that allow us to cancel all or some portion of the work. Additionally, 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 an FF&E reserve, unless such amounts have been incurred.
Our cash management objectives continue to be 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.
Stock Repurchase Program
In February 2022, our Board of Directors authorized and approved a stock repurchase program allowing us to repurchase up to $300 million of our common stock over a 24-month period, ending in February 2024. Stock repurchases would be made through open market purchases, including through Rule 10b5-1 trading programs, in privately negotiated transactions, or in such other manner that would comply with applicable securities laws and subject to compliance with existing debt agreements (which currently limits the repurchase of common stock to $250 million). The timing of any future stock repurchases and the number of shares to be repurchased will depend upon prevailing market conditions and other factors. During the three and six months ended June 30, 2022, we repurchased approximately 8.5 million and 12.0 million shares of our common stock, respectively, for a total purchase price of $157 million and $218 million, respectively, and as of June 30, 2022, $82 million remained available for stock repurchases.
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, |
|
|
|
2022 |
|
|
2021 |
|
|
Percent Change |
|
|
|
(in millions) |
|
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
191 |
|
|
$ |
(161 |
) |
|
|
218.6 |
% |
Net cash provided by investing activities |
|
|
147 |
|
|
|
154 |
|
|
|
(4.5 |
)% |
Net cash used in financing activities |
|
|
(234 |
) |
|
|
(30 |
) |
|
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.
22
The $352 million increase in net cash provided by operating activities for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was primarily due to an increase in cash from operations as a result of the increase in occupancy as our hotels continue to recover from the effects of COVID-19.
Investing Activities
The $147 million in net cash provided by investing activities for the six months ended June 30, 2022 was primarily attributable to $199 million of net proceeds from the sale of three of our hotels and our ownership interests in the joint ventures that own and operate one hotel, partially offset by $52 million in capital expenditures.
The $154 million in net cash provided by investing activities for the six months ended June 30, 2021 was primarily attributable to $168 million of net proceeds from the sale of three of our consolidated hotels, partially offset by $13 million in capital expenditures.
Financing Activities
The $234 million in net cash used in financing activities for the six months ended June 30, 2022 was primarily attributable to the repurchase of approximately 12.0 million shares of our common stock for $218 million.
The $30 million in net cash used in financing activities for the six months ended June 30, 2021 was primarily attributable to $775 million of debt repayments and $15 million of debt issuance costs, partially offset by the issuance of $750 million of 2029 Senior Secured Notes and the $14 million mortgage loan secured by the Doubletree Spokane.
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, and after utilization of any NOL carryforward to our stockholders on an annual basis. To avoid paying tax on our income, we intend to make distributions of all, or substantially all, of our REIT taxable income (including net capital gains) to our stockholders. Therefore, as a general matter, before consideration of the use of any NOL carryforward, 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. After the payment of the first quarter dividend in 2020, we suspended our quarterly dividend as a precautionary measure in light of COVID-19; in March 2022, our Board of Directors approved and reinstated our quarterly cash dividend.
We declared the following dividends to holders of our common stock during 2022:
|
|
|
|
|
|
|
Record Date |
|
Payment Date |
|
Dividend per Share |
|
March 31, 2022 |
|
April 15, 2022 |
|
$ |
0.01 |
|
June 30, 2022 |
|
July 15, 2022 |
|
$ |
0.01 |
|
Debt
As of June 30, 2022, our total indebtedness was approximately $4.7 billion, including approximately $2.1 billion of our Senior Secured Notes, as disclosed above, and excluding approximately $170 million of our share of debt from 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. 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.
Critical Accounting 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 unaudited condensed consolidated financial statements and accompanying footnotes. We have discussed those 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, 2021, filed with the Securities and Exchange Commission on February 18, 2022. There have been no material changes to our critical accounting policies or the methods or assumptions we apply.