PARK HOTELS & RESORTS INC. The following discussion and analysis of the financial condition and results of operations ofPark 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 endedDecember 31, 2020 .
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 the expected reopening dates for our hotels and 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 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 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. COVID-19 has
significantly affected our business, and the extent to which COVID-19 impacts
us, our hotel managers, tenants and guests at our hotels will depend on future
developments, which are highly uncertain and cannot be predicted with
confidence, including the scope, severity and duration of the pandemic, the
actions taken to contain the pandemic or mitigate its effect, the emergence of
virus variants, the efficacy, availability and deployment of vaccinations and
other treatments to combat COVID-19, including public adoption rates of COVID-19
vaccines, additional closures that may be mandated or advisable even after the
reopening of certain of our hotels on a limited basis, whether due to an
increased number of COVID-19 cases or otherwise, and the direct and indirect
economic effects of the pandemic and containment measures, among others.
Moreover, 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, 2020 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, 2020 , 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 54 hotels, consisting of premium-branded hotels and resorts with approximately 32,000 rooms, of which over 86% are luxury and upper upscale (as defined bySmith Travel Research ) and are located in primeU.S. markets and its territories. Our high-quality portfolio includes hotels in major urban and convention areas, such asNew York City ,Washington, D.C. ,Chicago ,San Francisco ,Boston ,New Orleans andDenver ; premier resorts in key leisure destinations, includingHawaii ,Orlando ,Key West andMiami Beach ; and hotels adjacent to major gateway airports, such asLos Angeles International ,Boston Logan International andMiami 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. 16
-------------------------------------------------------------------------------- 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 12: "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. Recent Events During the third quarter of 2021, we sold two consolidated hotels, theHotel Adagio , Autograph Collection, and the Le Meridien San Francisco. Net proceeds from those sales, along with the sale of two hotels onJune 30, 2021 were used to repay$419 million of our term loan facility due in 2024 ("2019 Term Facility") and to repay$13 million under our revolving credit facility ("Revolver"), which currently has no remaining balance outstanding.
COVID-19 Operational Update
The global outbreak of a novel strain of coronavirus and the disease it causes
("COVID-19") have had and continue to have a significant effect on the lodging
industry and our business. We cannot presently determine the extent or duration
of the overall operational and financial effects that COVID-19 will have on our
business. In March and April 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, all except two of which have now
reopened. Temporary closings of restaurants and hotels as well as travel
restrictions across entire regions also contributed to severely reduced overall
lodging demand. The effects of COVID-19 continue to have a significant adverse
effect on the hospitality industry, including our business; however, the
increase in vaccination rates across the country and the easing or removal of
restrictions, quarantining, and "social distancing" mandates have resulted in
increased travel and hospitality spending during the second and third quarters
of 2021 as compared to the same periods in 2020. Despite the near-term reduction
in demand due to the seasonal decline in leisure travel and the delay in return
of business travel, coupled with concerns over the spread of the Delta variant,
we expect a broader based recovery to resume during the latter half of the
fourth quarter of 2021 and into 2022 as leisure demand trends and group booking
activity continue to improve.
Beginning in March 2020 , we experienced a significant decline in occupancy,
Average Daily Rate ("ADR") and Revenue per Available Room ("RevPAR") associated
with the COVID-19 pandemic throughout our consolidated portfolio, which has
resulted in a decline in our operating cash flow. As distribution of the
COVID-19 vaccine continues, we have seen improvement in traveler sentiment, and
as a result, an improvement in occupancy, ADR and RevPAR during 2021. Changes in
our 2021 pro-forma metrics, which exclude results from properties disposed of
and include results from properties acquired as of November 4, 2021 , as compared
to the same periods in 2019 and 2020, respectively, and pro-forma occupancy are
as follows:
Change in Pro-forma ADR Change in Pro-forma Occupancy Change in Pro-forma RevPAR
2021
2021 vs. 2020 2021 vs. 2019 2021 vs. 2020 2021 vs. 2019 2021 vs. 2020 2021 vs. 2019 Pro-forma
OccupancyQ1 2021 (28.9 )% (30.6 )% (35.0 )% pts (50.7 )% pts (69.3 )% (76.2 )% 26.6 % Q2 2021 44.8 (16.7 ) 36.1 (43.4 ) 897.0 (58.9 ) 42.2 July 2021 45.3 - 42.1 (29.0 ) 462.2 (33.7 ) 56.8 August 2021 52.0 (5.7 ) 29.3 (35.8 ) 269.4 (45.1 ) 49.7 September 2021 45.6 (16.6 ) 24.8 (34.4 ) 206.6 (51.8 ) 47.2 Q3 2021 50.0 (7.0 ) 32.2 (33.0 ) 301.6 (43.4 ) 51.3 We believe demand will remain significantly reduced as long as mandatory travel restrictions, "social distancing" and cost-saving measures, such as the postponing or cancelling of non-essential business travel, remain in place or if these restrictions tighten due to virus variants. Although we were able to recommence operations at most of our previously suspended hotels, there remains considerable uncertainty as to both the time it will take to see travel and demand for lodging and travel-related experiences to fully recover. Further, uncertainty as to the timing of when remaining restrictions will be removed generally will make it more difficult to execute on our external growth strategy. The uncertainties surrounding the COVID-19 pandemic recovery, including the Delta variant, make it difficult to predict operating results for our hotels for the remainder of 2021, thus there can be no assurances that we will not experience further declines in hotel revenues or earnings at our hotels. We and our hotel managers have taken various actions to mitigate the effects of the COVID-19 pandemic, including temporarily suspending operations at a majority of our hotels beginning inMarch 2020 , limiting capacity at our open hotels, deferring approximately$150 million of capital expenditures planned for 2020, reducing forecasted capital expenditures for maintenance projects to approximately$56 million for 2021 and suspending our dividend after the first quarter of 2020. Additionally, as a precautionary measure to increase liquidity and preserve financial flexibility, we fully drew on our Revolver in 2020 and completed three corporate bond offerings totaling$2.1 billion in 2020 and 2021 and five asset sales in 2021, the proceeds of which were used to fully repay the Revolver and our term loan dueDecember 2021 ("2016 Term Loan"), as well as a majority of the 2019 Term Facility. 17 -------------------------------------------------------------------------------- Since originally suspending operations, we have commenced the phased reopening of all except two of our hotels and the timing of reopening our remaining suspended hotels will depend primarily on government restrictions imposed or re-imposed, recommendations of health officials and recovery in demand. The status of our hotels as ofNovember 4, 2021 is as follows: Status Number of Hotels Total Rooms Consolidated Open 46 26,551 Consolidated Suspended 2 1,338 Total Consolidated 48 27,889 Unconsolidated Open(1) 6 4,036Total Hotels 54 31,925
(1) The ground lease for the Embassy Suites Secaucus Meadowlands expired on
In addition, the operating environment for us and our hotel managers has improved as government restrictions are lifted and demand for travel returns. Economic indicators such as GDP growth, corporate earnings, consumer confidence and employment are highly correlated with lodging demand and have generally returned to pre-pandemic levels. We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other things, its duration, the success of efforts to contain it, the emergence of virus variants, efficacy, availability and deployment of vaccinations and other treatments to combat COVID-19, including public adoption rates of COVID-19 vaccines, and the effect of actions taken in response (such as travel advisories and restrictions and social distancing), including the extent and duration of such actions. The extent and duration of the effects of COVID-19 are not yet clear. Despite cost reduction initiatives, we do not expect to be able to fully, or even materially, offset revenue losses from the COVID-19 pandemic. In addition, as states and cities have begun to lift quarantines and other similar restrictions, the timing and approach differs in different locations and we cannot predict whether our reopened hotels will be forced to suspend operations again in the future or be subjected to operating restrictions following further outbreaks or variants of COVID-19.
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. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable ADR levels as demand for rooms increases or decreases.
Average Daily Rate
ADR represents rooms revenue divided by total number of room nights sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. ADR is a commonly used performance measure in the hotel industry, and we use ADR to assess pricing levels that we are able to generate by type of customer, as changes in rates have a more pronounced effect on overall revenues and incremental profitability than changes in occupancy, as described above.
Revenue per
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.
Non-GAAP Financial Measures
We also evaluate the performance of our business through certain other financial measures that are not recognized underU.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. 18 --------------------------------------------------------------------------------
EBITDA, Adjusted EBITDA and
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; ? Severance expense; ? 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 presentHotel Adjusted EBITDA to help us and our investors evaluate the ongoing operating performance of our consolidated hotels. EBITDA, Adjusted EBITDA andHotel Adjusted EBITDA are not recognized terms underU.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance withU.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 andHotel 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 andHotel Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry. EBITDA, Adjusted EBITDA andHotel 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 underU.S. GAAP. Some of these limitations are: ? EBITDA, Adjusted EBITDA andHotel Adjusted EBITDA do not reflect our interest expense; ? EBITDA, Adjusted EBITDA andHotel Adjusted EBITDA do not reflect our income tax expense; ? EBITDA, Adjusted EBITDA andHotel 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
? EBITDA, Adjusted EBITDA andHotel Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; ? EBITDA, Adjusted EBITDA andHotel Adjusted EBITDA do not reflect the cash requirements necessary to service interest or principal payments, on our indebtedness; ? EBITDA, Adjusted EBITDA andHotel Adjusted EBITDA do not reflect the cash requirements to pay our taxes; ? EBITDA, Adjusted EBITDA andHotel Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; and 19 -------------------------------------------------------------------------------- ?
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
Because of these limitations, EBITDA, Adjusted EBITDA andHotel 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 loss toHotel Adjusted EBITDA : Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (in millions) Net loss $ (82 ) $ (276 ) $ (387 )$ (1,226 ) Depreciation and amortization expense 68 75 213 225 Interest income - - - (2 ) Interest expense 66 59 195 149 Income tax (benefit) expense (3 ) 1 (2 ) 14 Interest expense, income tax and depreciation and amortization included in equity in earnings from investments in affiliates 3 2 8 11 EBITDA 52 (139 ) 27 (829 ) Loss (gain) on sales of assets, net 11 1 5 (62 ) Acquisition costs - 9 - 10 Severance expense - 24 - 26 Share-based compensation expense 5 4 15 10 Impairment and casualty loss, net 2 2 7 696 Other items 7 10 7 20 Adjusted EBITDA 77 (89 ) 61 (129 ) Less: Adjusted EBITDA from investments in affiliates (4 ) 2 (4 ) 2 Add: All other(1) 11 11 33 34 Hotel Adjusted EBITDA $ 84 $ (76 ) $ 90$ (93 )
(1) Includes other revenues and other expenses, non-income taxes on TRS leases included in other property-level expenses and corporate general and administrative expenses.
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.
20
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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;
?
Severance expense;
?
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 loss attributable to stockholders to Nareit FFO attributable to stockholders and Adjusted FFO attributable to stockholders:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in millions, except per share amounts)
Net loss attributable to stockholders $ (86 ) $ (276 ) $ (392 ) $ (1,223 )
Depreciation and amortization expense 68 75 213 225
Depreciation and amortization expense
attributable to noncontrolling interests (1 ) (1 ) (3 ) (3 ) Loss (gain) on sales of assets, net 11 1 5 (62 ) Gain on sale of investments in affiliates(1) - - - (1 ) Impairment loss - 2 5 697 Equity investment adjustments: Equity in losses from investments in affiliates - 7 6 16 Pro rata FFO of investments in affiliates 3 (3 ) 1 (6 ) Nareit FFO attributable to stockholders (5 ) (195 ) (165 ) (357 ) Casualty loss (gain), net 2 - 2 (1 ) Severance expense - 24 - 26 Acquisition costs - 9 - 10 Share-based compensation expense 5 4 15 10 Other items(2) 3 11 2 48 Adjusted FFO attributable to stockholders $ 5 $ (147 ) $ (146 )$ (264 ) Nareit FFO per share - Diluted(3) $ (0.02 ) $ (0.83 ) $ (0.70 )$ (1.52 ) Adjusted FFO per share - Diluted(3) $ 0.02 $ (0.62 ) $ (0.62 )$ (1.12 )
(1) Included in other loss, net.
(2) For the nine months ended
(3) Per share amounts are calculated based on unrounded numbers.
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
? Property Dispositions: BetweenJanuary 1, 2020 andSeptember 30, 2021 , we disposed of seven consolidated hotels. As a result of these dispositions, our revenues and operating expenses decreased for the three and nine months endedSeptember 30, 2021 as compared to the same periods in 2020. The results of operations during our period of ownership of these hotels are included in our consolidated results. ? COVID-19: Beginning inMarch 2020 , we experienced a significant decline in ADR, occupancy and RevPAR due to COVID-19. The economic contraction resulting from the spread of COVID-19 has and is expected to continue to significantly affect our business. Consequently, the results of our portfolio during the three and nine months endedSeptember 30, 2021 will not be comparable to the same periods in 2020. 21
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Three Months Ended September 30,
Change from Change
Property from Other
2021 2020 Change Dispositions Factors(1)
(in millions)
Rooms revenue $ 274 $ 70 $ 204 $ 2 $ 202
Food and beverage revenue 76 10 66 - 66
Ancillary hotel revenue 58 15 43 - 43
Rooms expense 76 30 46 1 45
Food and beverage expense 63 18 45 - 45Other departmental and support
expense 119 64 55 (1 ) 56 Other property-level expense 51 84 (33 ) (2 ) (31 ) Management fees expense 19 2 17 - 17 (1) Change from other factors primarily relates to the effects of COVID-19. The increase in revenues and expenses for the three months endedSeptember 30, 2021 was primarily due to the reopening of most of our hotels that were suspended during the same period in 2020 and improved occupancy due to an increase in leisure travel as compared to the same period in 2020. Nine Months Ended September 30, Change from Change Property from Other 2021 2020 Change Dispositions Factors(1) (in millions) Rooms revenue$ 587 $ 453 $ 134 $ (10 )$ 144 Food and beverage revenue 152 174 (22 ) (3 ) (19 ) Ancillary hotel revenue 137 87 50 (1 ) 51 Rooms expense 170 162 8 (1 ) 9 Food and beverage expense 126 155 (29 ) (3 ) (26 ) Other departmental and support expense 298 296 2 (5 ) 7 Other property-level expense 151 200 (49 ) (2 ) (47 ) Management fees expense 40 27 13 (1 ) 14
(1) Change from other factors primarily relates to the effects of COVID-19.
Group, transient, contract and other rooms revenue for the three and nine months endedSeptember 30, 2021 , as well as the change for each segment compared to the same periods in 2020 are as follows: Three Months Ended September 30, Change from Change Property from Other 2021 2020 Change Dispositions Factors(1) (in millions) Group rooms revenue$ 36 $ 9 $ 27 $ - $ 27 Transient rooms revenue 219 49 170 1 169 Contract rooms revenue 14 10 4 - 4 Other rooms revenue 5 2 3 1 2 Rooms revenue$ 274 $ 70 $ 204 $ 2$ 202 (1) Change from other factors primarily relates to the effects of COVID-19. The increase in revenues for the three months endedSeptember 30, 2021 was primarily due to the reopening of most of our hotels that were suspended during the same period in 2020. 22
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Nine Months Ended September 30,
Change from Change
Property from Other
2021 2020 Change Dispositions Factors(1)
(in millions)
Group rooms revenue $ 59 $ 129 $ (70 ) $ (4 ) $ (66 )
Transient rooms revenue 482 275 207 (6 ) 213
Contract rooms revenue 36 38 (2 ) - (2 )
Other rooms revenue 10 11 (1 ) - (1 )
Rooms revenue $ 587 $ 453 $ 134 $ (10 ) $ 144 (1) Change from other factors primarily relates to the effects of COVID-19.
Other revenue and Other expense
During the second half of 2020, we permanently closed operations at all three of
our laundry facilities resulting in a decrease in both laundry revenue and
laundry expense. The increases in support services revenue and expense are due
to the reopening of our hotels that have service arrangements with Hilton Grand
Vacations ("HGV"), which were suspended for a majority of 2020.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Percent Change 2021 2020 Percent Change
(in millions) (in millions)Support service revenue$ 15 $ 3 400.0 % 35 23 52.2 % Laundry revenue - - - - 2 (100.0 ) Total other revenue$ 15 $ 3 400.0 %$ 35 $ 25 40.0 % Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 Percent Change 2021 2020 Percent Change (in millions) (in millions) Support services expense$ 14 $ 1 1300.0
%$ 34 $ 21 61.9 % Laundry expense - 5 (100.0 ) - 10 (100.0 ) Total other expense$ 14 $ 6 133.3 %$ 34 $ 31 9.7 %
Corporate general and administrative
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Percent Change 2021 2020 Percent Change
(in millions) (in millions)
General and
administrative expenses $ 9 $ 9 - % $ 33 $ 29 13.8 %
Share-based compensation
expense 5 4 25.0 15 10 50.0
Disposition costs - - - - 1 (100.0 )
Severance expense - - - - 2 (100.0 )
Total corporate general
and
administrative $ 14 $ 13 7.7 % $ 48 $ 42 14.3 %
Acquisition costs
During the nine months ended
Impairment and casualty loss, net
During the nine months endedSeptember 30, 2021 , we recognized an impairment loss of$5 million related to one of our hotels classified as held for sale as ofJune 30, 2021 . We also recognized$2 million of casualty losses as a result of damage caused by Hurricane Ida at one of our hotels. 23 -------------------------------------------------------------------------------- During the nine months endedSeptember 30, 2020 , we recognized a net loss of$696 million primarily as a result of$607 million of impairment losses related to our goodwill and$90 million of impairment losses primarily related to one of our hotels, and our inability to recover the carrying value of the asset because of COVID-19.
(Loss) gain on sales of assets, net
During the three and nine months endedSeptember 30, 2021 , we recognized a net loss of$11 million and$5 million , respectively, primarily as a result of the sales of our consolidated hotels during the respective periods.
During the nine months ended
Non-operating Income and Expenses
Interest expense
Interest expense increased during the three and nine months endedSeptember 30, 2021 compared to the same periods in 2020 as a result the issuances of$2.1 billion of Senior Secured Notes during the second and third quarters of 2020 andMay 2021 , partially offset by a decrease in interest expense as a result of the full repayment of the 2016 Term Loan inSeptember 2020 , partial repayment of the 2019 Term Facility during the second and third quarters of 2021 and the full repayment of the Revolver during 2021. Interest expense associated with our debt for the three and nine months endedSeptember 30, 2021 and 2020 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 Percent Change 2021 2020 Percent Change (in millions) (in millions) SF and HHV CMBS Loans(1)$ 21 $ 21 - %$ 63 $ 63 - % Mortgage Loans 7 5 40.0 19 16 18.8 2016 Term Loan - 4 NM(2) - 15 NM(2) 2019 Term Facility 2 5 (60.0 ) 11 15 (26.7 ) Revolver 1 6 (83.3 ) 9 14 (35.7 ) 2025 Senior Secured Notes(3) 13 13 - 37 17 117.6 2028 Senior Secured Notes(3) 11 2 450.0 32 2 1,500.0 2029 Senior Secured Notes(3) 9 - NM(2) 14 - NM(2) Other 2 3 (33.3 ) 10 7 42.9 Total interest expense$ 66 $ 59 11.9 %$ 195 $ 149 30.9 % (1) InOctober 2016 , we entered into a$725 million CMBS loan secured by theHilton San Francisco Union Square and the Parc 55Hotel San Francisco ("SF CMBS Loan") and a$1.275 billion CMBS loan secured by theHilton Hawaiian Village Waikiki Beach Resort ("HHV CMBS Loan").
(2) Percentage change is not meaningful.
(3) In May andSeptember 2020 ,Park Intermediate Holdings LLC (our "Operating Company"),PK Domestic Property LLC , an indirect subsidiary of the Company ("PK Domestic"), andPK 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. Additionally, inMay 2021 , ourOperating Company , PK Domestic and PK Finance issued an aggregate of$750 million of senior secured notes due 2029 ("2029 Senior Secured Notes," collectively with the 2025 Senior Secured Notes and 2028 Senior Secured Notes, the "Senior Secured Notes").
Income tax expense
Three Months Ended September 30 ,
Nine Months Ended
2021 2020 Percent Change 2021 2020 Percent Change
(in millions) (in millions)
Income tax (benefit)
expense $ (3 ) $ 1 (400.0 )% $ (2 ) $ 14 (114.3 )%
During the nine months ended September 30, 2021 , we recognized a $2 million
income tax benefit, comprising a $3 million state tax benefit from utilizing
state NOLs, a $1 million benefit from the derecognition of deferred tax
liabilities and $2 million of tax expense, primarily from adjustments to the
benefit recognized in 2020 from utilizing the NOL carryback provisions of the
CARES Act.
Income tax expense for the nine months ended
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--------------------------------------------------------------------------------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 ofSeptember 30, 2021 , we had total cash and cash equivalents of$772 million and$70 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. As a result of the economic uncertainty resulting from the effects of COVID-19, including decreased occupancy, ADR and RevPAR at our hotels, as described above under "Recent Events", we expect our cash flows for the remainder of 2021 to be significantly lower than prior to COVID-19. We have taken several steps to preserve capital and increase liquidity, including drawing$1 billion from our Revolver inMarch 2020 (which we subsequently fully repaid), issuing$650 million of 2025 Senior Secured Notes inMay 2020 (a portion of which was used to partially repay amounts outstanding under our Revolver and 2016 Term Loan), issuing$725 million of 2028 Senior Secured Notes inSeptember 2020 (a portion of which was used to repay the 2016 Term Loan in full as well as a portion of the Revolver), issuing$750 million of 2029 Senior Secured Notes inMay 2021 (a portion of which was used to partially repay the Revolver and the 2019 Term Facility), suspending our dividend following the payment of the first quarter 2020 dividend and implementing various cost saving initiatives at our hotels including temporary suspension of operations at certain hotels and selected restaurants and other businesses and outlets and reductions in forecasted capital expenditures for maintenance projects to approximately$56 million for 2021. We will continue to assess when the deferred capital expenditures will resume or if any of the deferred expenditures will be cancelled. In 2021, we sold five consolidated hotels, theW New Orleans -French Quarter , theHotel Indigo San Diego Gaslamp Quarter , the Courtyard Washington Capitol Hill Navy Yard, theHotel Adagio , Autograph Collection and the Le Meridien San Francisco. Net proceeds from the sales of these hotels were used to repay$37 million outstanding under the Revolver, which currently has no remaining balance outstanding, and to partially repay$419 million of the 2019 Term Facility. We generated positiveHotel Adjusted EBITDA for the quarter endedSeptember 30, 2021 . With the availability under our Revolver and existing cash and cash equivalents as a result of net proceeds from the offering of our Senior Secured Notes and the proceeds from the sales of two consolidated hotels in 2020 and the sale of five consolidated hotels in 2021, we have sufficient liquidity to pay our near-term debt maturities and to fund other short-term liquidity obligations. We are maintaining higher than historical cash levels due to the continued uncertainty surrounding COVID-19, and we intend to do so until markets stabilize and demand in the lodging industry significantly recovers. In addition, we also may take other 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, extending the maturity of the Revolver and extending the waiver period for the testing of the financial covenants, 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). 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, when resumed, 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. Despite the impact of COVID-19 on the global economy and our business, we were able to access the debt capital markets during the past year to complete three separate offerings of our Senior Secured Notes. Our commitments to fund capital expenditures for renovations and maintenance at our hotels will be funded by cash and cash equivalents, restricted cash to the extent permitted by our lending agreements and cash flow from operations. We have established reserves for capital expenditures ("FF&E reserve") in accordance with our management and certain debt agreements. Generally, these agreements require that we fund 4% of hotel revenues into an FF&E reserve, unless such amounts have been incurred. As a result of COVID-19, our hotel managers have temporarily delayed contributions to the FF&E reserve accounts and in addition, have allowed our hotels to utilize, as needed, their FF&E reserve for operating expenses at the respective hotels, as long as the hotels remain in compliance with debt agreements. 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. 25 --------------------------------------------------------------------------------
Stock Repurchase Program
InFebruary 2019 , our Board of Directors approved a stock repurchase program allowing us to repurchase up to$300 million of our common stock over a two-year period, which ended inFebruary 2021 . We have not renewed the stock repurchase program at this time. Stock repurchases were made through open market purchases, in privately negotiated transactions, or in such other manner that complied with applicable securities laws. The timing of stock repurchases and the number of shares repurchased were dependent upon prevailing market conditions and other factors. During the three months endedMarch 31, 2020 , we repurchased 4.6 million shares of our common stock for a total purchase price of$66 million . No additional common stock was repurchased during 2020 or the first two months of 2021.
Sources and Uses of Our Cash and Cash Equivalents
The following tables summarize our net cash flows and key metrics related to our
liquidity:
Nine Months Ended September 30,
2021 2020 Percent Change
(in millions)
Net cash used in operating activities $ (95 ) $ (274 ) 65.3 %
Net cash provided by investing activities 425 136 212.5 %
Net cash (used in) provided by financing
activities (469 ) 921 NM(1)
(1) Percentage change is not meaningful.
Operating Activities
Cash flow from operating activities are primarily generated from the operating income generated at our hotels.
The$179 million decrease in net cash used in operating activities for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 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, partially offset by an increase in cash paid for taxes of approximately$27 million , primarily associated with built-in gains from an asset sold in 2020, and an increase in cash paid for interest of$25 million .
Investing Activities
The$425 million in net cash provided by investing activities for the nine months endedSeptember 30, 2021 was primarily attributable to$454 million of net proceeds from the sale of five of our consolidated hotels, partially offset by$28 million in capital expenditures.
The
Financing Activities
The
The$921 million in net cash provided by financing activities for the nine months endedSeptember 30, 2020 was primarily attributable to borrowings of$1 billion from our Revolver as a result of COVID-19, the issuance of our$650 million 2025 Senior Secured Notes and$725 million of 2028 Senior Secured Notes, partially offset by$1.1 billion of debt repayments,$241 million in dividends paid and the repurchase of 4.5 million shares of our common stock for$66 million .
Dividends
As a REIT, we are required to distribute at least 90% of our REIT taxable
income, determined without regard to the deduction for dividends paid and
excluding net capital gain, and after utilization of any NOL carryforward to our
stockholders on an annual basis. Therefore, as a general matter, it is unlikely
that we will be able to retain substantial cash balances that could be used to
meet our liquidity needs from our annual taxable income. Instead, we will need
to meet these needs from external sources of capital and amounts, if any, by
which our cash flow generated from operations exceeds taxable income. However,
as a precautionary measure in light of COVID-19, after the payment of the first
quarter dividend in 2020, we suspended our quarterly dividend.
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--------------------------------------------------------------------------------Debt As ofSeptember 30, 2021 , our total indebtedness was approximately$4.7 billion , including approximately$2.1 billion of our Senior Secured Notes, as disclosed above, and excluding approximately$225 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 7: "Debt" in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as ofSeptember 30, 2021 included construction contract commitments of approximately$116 million for capital expenditures at our properties, of which$78 million relates to the expansion project at theBonnet Creek complex.The Bonnet Creek expansion project includes additional meeting space for the Signia byHilton Orlando Bonnet Creek and the Waldorf Astoria Orlando. Our contracts contain clauses that allow us to cancel all or some portion of the work. If cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in our condensed consolidated financial statements and accompanying footnotes. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission onFebruary 26, 2021 . There have been no material changes to our critical accounting policies or the methods or assumptions we apply.
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