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, 2019 .
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended
("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended ("Exchange Act"). Forward-looking statements include, but are not
limited to, statements related to our expectations regarding the performance of
our business, our financial results, our liquidity and capital resources, the
impact to our business and financial condition and that of our hotel management
companies, and measures (including through potential alternative sources of
revenue) being taken in response to, COVID-19, the effects of competition and
the effects of future legislation or regulations and other non-historical
statements. Forward-looking statements include all statements that are not
historical facts, and in some cases, can be identified by the use of
forward-looking terminology such as the words "outlook," "believes," "expects,"
"potential," "continues," "may," "will," "should," "could," "seeks," "projects,"
"predicts," "intends," "plans," "estimates," "anticipates" or the negative
version of these words or other comparable words. 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 potential adverse effect of COVID-19, including
possible 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. 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, 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 discussed in our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June
30, 2020 and our Annual Report on Form 10-K for the year ended December 31, 2019
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 this Quarterly Report on Form 10-Q, our Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 and
our Annual Report on Form 10-K for the year ended December 31, 2019 , 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 60 hotels, consisting of premium-branded hotels and resorts with over 33,000 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. 20
-------------------------------------------------------------------------------- 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
COVID-19 Effect on Our Business
The global outbreak of a novel strain of coronavirus and the disease it causes
("COVID-19") have had a significant effect on the lodging industry and our
company. We cannot presently determine the extent or duration of the overall
operational and financial effects that COVID-19 will have on our company. The
effects of COVID-19, including related government restrictions, border closings,
quarantining, "shelter-in-place" orders and "social distancing," have had and
continue to have a significant adverse effect on the hospitality industry,
including our business, and have contributed to a significant decrease in
business and consumer spending, with a particularly dramatic effect on travel
and hospitality spending. In March and April 2020 , travel restrictions and
mandated closings of non-essential businesses were imposed, which resulted in
temporary suspensions of operations at certain of our hotels, the majority of
which have now reopened, and significantly reduced capacity at the remainder of
our hotels. Temporary closings of other restaurants and hotels across entire
regions also contributed to severely reduced overall lodging demand. There
continues to be significant cancellations of existing reservations, including
the vast majority of group business and events throughout the remainder of 2020
and the first-half of 2021 and significant reductions in new reservations.
Since the beginning of March, we have 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 resulted in a decline in our operating cash flow. Changes in our monthly
pro-forma metrics, which exclude results from property dispositions and include
results from property acquisitions, for the first nine months of 2020 as
compared to the same period in 2019 and pro-forma occupancy are as follows:
Change in Change in Change in Pro-forma
Pro-forma ADR Pro-forma Occupancy Pro-formaRevPAR Occupancy January (1.0 )% 1.6 % pts 1.2 % 73.8 % February (0.7 ) 0.9 0.4 79.2 March (10.1 ) (49.4 ) (63.8 ) 33.3 Q1 (2.5 ) (16.0 ) (22.6 ) 61.7 April (47.0 ) (80.9 ) (97.6 ) 3.9 May (54.1 ) (79.9 ) (97.3 ) 4.9 June (36.5 ) (78.5 ) (93.0 ) 9.7 Q2 (43.2 ) (79.8 ) (95.9 ) 6.1 July (31.7 ) (71.3 ) (88.3 ) 14.7 August (38.1 ) (65.5 ) (85.4 ) 20.3 September (43.0 ) (59.7 ) (84.5 ) 22.3 Q3 (38.3 ) (65.6 ) (86.1 ) 19.1 We believe that imposed or re-imposed government restrictions and the economic recession associated with COVID-19 will continue to significantly affect our business. We believe demand will remain significantly reduced as a result of ongoing mandatory travel restrictions, "social distancing," and cost-saving measures, as companies continue to reduce non-essential travel and as conferences and events are cancelled and postponed. We do not expect to realize a material improvement in our results until medical advances (e.g., therapeutics, vaccines) are made available that will allow business traveler and general consumer confidence related to risks associated with the COVID-19 pandemic to improve and various government restrictions on travel, freedom of movement and the operations of our hotels are lifted. Although we were able to recommence operations at reduced capacity at most of our previously suspended hotels during the second and third quarters, there remains considerable uncertainty as to both the time it will take to see travel and demand for lodging and travel-related experiences increase and the long-term impacts on consumer attitudes to travel, and we cannot predict whether our reopened hotels will be forced to suspend operations again or decrease capacity in the future, including as a result of government regulation, an increase in the number of COVID-19 cases or changes in business and other consumer preferences for travel. The pandemic has had a prolonged effect on travel within and tothe United States , where all of our properties are located. In addition, due to the effects of COVID-19, during the nine months endedSeptember 30, 2020 , we recognized$607 million of impairment losses for goodwill and$90 million of impairment losses primarily related to one of our hotels resulting from a significant decline in market value. Further, economic uncertainty generally will make it more difficult to execute on our external growth strategy. These factors lead us to believe that our operating results will continue to be adversely affected by COVID-19 through the remainder of 2020 and at least the early part of 2021. 21 -------------------------------------------------------------------------------- We and our hotel managers have taken various actions to mitigate the effect on our business including cost saving initiatives to reduce costs at our hotels. During the first quarter of 2020, we temporarily suspended operations at 38 of our 60 hotels, deferred approximately$150 million of the$200 million in capital expenditures previously budgeted for 2020, reduced expected 2020 capital spending to approximately$50 million , suspended dividend payments following the payment of the first quarter 2020 dividend, which was paid onApril 15, 2020 , and drew on our$1 billion revolving credit facility (the "Revolver") as a precautionary measure to increase liquidity and preserve financial flexibility in light of the current uncertainty resulting from the COVID-19 pandemic. InMay 2020 , despite headwinds in the debt market,Park Intermediate Holdings LLC (our "Operating Company"),PK Domestic Property LLC ("PK Domestic") andPK Finance Co-Issuer Inc. ("PK Finance") issued an aggregate of$650 million 7.500% senior secured notes due 2025 ("2025 Senior Secured Notes"). We used$219 million of the net proceeds to partially repay the Revolver and$69 million of the net proceeds to partially repay the term loan dueDecember 2021 ("2016 Term Loan"). We also repaid an additional$100 million of the Revolver with existing cash. InSeptember 2020 , we issued an aggregate of$725 million of senior secured notes due 2028 ("2028 Senior Secured Notes"). Net proceeds from the 2028 Senior Secured Notes offering were used to repay the 2016 Term Loan in full and to repay$80 million of our outstanding balance under the Revolver, which may be redrawn. Since originally suspending operations, we have commenced the phased reopening of 26 of our hotels at limited capacity. The timing of fully reopening our hotels will depend primarily on government restrictions imposed or re-imposed, health official recommendations and market demand. The status of our hotels as ofNovember 6, 2020 is as follows: Status Number of Hotels Total Rooms Consolidated Open 41 16,831 Consolidated Suspended 12 12,100 Total Consolidated 53 28,931 Unconsolidated Open 7 4,297Total Hotels 60 33,228 We cannot predict whether we will be able to resume operations at any of our other suspended hotels or whether our reopened hotels will be forced to suspend operations again in the future. However, we currently expect to open an additional 2 hotels during the fourth quarter of 2020, which would bring the total open hotel count to 50 hotels and account for 74% of our total room count, with the remaining 10 suspended hotels expected to open by the first quarter of 2021. We continue to proactively pursue alternative sources of revenue from applicable government authorities and hospitals, such as providing temporary lodging for first responders, other medical personnel, military personnel, displaced guests and residents of communities where our hotels are located, colleges and universities, and professional sports associations. In addition, the operating environment for us and our hotel managers could remain challenging if the current economic recession extends beyond the lifting of government restrictions and reopening of our hotels. Historically, economic indicators such as GDP growth, corporate earnings, consumer confidence and employment are highly correlated with lodging demand, and although these factors have seen improvement, these metrics remain significantly below levels prior to the COVID-19 pandemic. The exact impact, magnitude and duration of the economic recession is unknown at this time. We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results and the economic recession, to be dictated by, among other things, its duration, the success of efforts to contain it 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. For instance, recent government action to provide substantial financial support to affected industries could provide helpful assistance to the travel and hospitality industry, including our operators. However, we cannot predict the manner in which such benefits or any of the other benefits described herein will be allocated or administered and we cannot assure you that we will be able to access such benefits in a timely manner or at all. 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, "shelter in place" orders 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. These uncertainties make it difficult to predict operating results for our hotels for the remainder of 2020. Therefore, there can be no assurances that we will not experience further declines in hotel revenues or earning at our hotels. For more information, see "Part II - Item 1.A. Risk Factors" included in this Quarterly Report on Form 10-Q. 22 --------------------------------------------------------------------------------
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 for comparable hotels.
References to RevPAR, ADR and occupancy are presented on a currency neutral basis (prior periods are reflected using current period exchange rates), unless otherwise noted.
Comparable Hotels Data Historically, we have presented certain data for our hotels on a comparable hotel basis as supplemental information for investors. We define our comparable hotels as those that: (i) were active and operating in our portfolio sinceJanuary 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 acquisitions, dispositions and other factors to our results of operations for the three and nine months endedSeptember 30, 2020 as compared to the three and nine months endedSeptember 30, 2019 . Change from other factors primarily relates to the effects of COVID-19. 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.
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;
23
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• Casualty gains or losses;
• Impairment losses; and
• Other items that we believe are not representative of our current or
future operating performance.
Hotel Adjusted EBITDA measures hotel-level results before debt service,
depreciation and corporate expenses for our consolidated hotels, including both
comparable and non-comparable hotels but excluding hotels owned by
unconsolidated affiliates, and is a key measure of our profitability. We present
Hotel Adjusted EBITDA to help us and our investors evaluate the ongoing
operating performance of our consolidated hotels.
EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA are not recognized terms under
U.S. GAAP and should not be considered as alternatives to net income (loss) or
other measures of financial performance or liquidity derived in accordance with
U.S. GAAP. In addition, our definitions of EBITDA, Adjusted EBITDA and Hotel
Adjusted EBITDA may not be comparable to similarly titled measures of other
companies.
We believe that EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA provide useful
information to investors about us and our financial condition and results of
operations for the following reasons: (i) EBITDA, Adjusted EBITDA and Hotel
Adjusted EBITDA are among the measures used by our management team to make
day-to-day operating decisions and evaluate our operating performance between
periods and between REITs by removing the effect of our capital structure
(primarily interest expense) and asset base (primarily depreciation and
amortization) from our operating results; and (ii) EBITDA, Adjusted EBITDA and
Hotel Adjusted EBITDA are frequently used by securities analysts, investors and
other interested parties as a common performance measure to compare results or
estimate valuations across companies in our industry.
EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA have limitations as analytical
tools and should not be considered either in isolation or as a substitute for
net income (loss) or other methods of analyzing our operating performance and
results as reported under U.S. GAAP. Some of these limitations are:
• EBITDA, Adjusted EBITDA and
interest expense;
• EBITDA, Adjusted EBITDA and
income tax expense;
• EBITDA, Adjusted EBITDA and
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
comparative measures.
We do not use or present EBITDA, Adjusted EBITDA and
• EBITDA, Adjusted EBITDA and
in, or cash requirements for, our working capital needs;
• EBITDA, Adjusted EBITDA and
requirements necessary to service interest or principal payments, on our
indebtedness;
• EBITDA, Adjusted EBITDA and
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.
24
-------------------------------------------------------------------------------- The following table provides a reconciliation of Net (loss) income toHotel Adjusted EBITDA : Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (in millions) Net (loss) income $ (276 ) $ 9 $ (1,226 )$ 190 Depreciation and amortization expense 75 61 225 184 Interest income - (2 ) (2 ) (5 ) Interest expense 59 33 149 98 Income tax expense 1 - 14 12 Interest expense, income tax and depreciation and amortization included in equity in earnings from investments in affiliates 2 7 11 19 EBITDA (139 ) 108 (829 ) 498 Loss (gain) on sales of assets, net 1 (1 ) (62 ) (20 ) Acquisition costs 9 59 10 65 Severance expense 24 - 26 2 Share-based compensation expense 4 4 10 12 Impairment and casualty loss, net 2 8 696 8 Other items 10 2 20 (2 ) Adjusted EBITDA (89 ) 180 (129 ) 563 Less: Adjusted EBITDA from investments in affiliates 2 (9 ) 2 (31 ) Add: All other(1) 11 12 34 41 Hotel Adjusted EBITDA $ (76 ) $ 183 $ (93 )$ 573
(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
or loss attributable to stockholders (calculated in accordance with U.S. GAAP),
excluding depreciation and amortization, gains or losses on sales of assets,
impairment, and the cumulative effect of changes in accounting principles, plus
adjustments for unconsolidated joint ventures. Adjustments for unconsolidated
joint ventures are calculated to reflect our pro rata share of the FFO of 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;
• Severance expense;
• Share-based compensation expense;
• Casualty gains or losses; and
• Other items that we believe are not representative of our current or
future operating performance.
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The following table provides a reconciliation of net (loss) income 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,
2020 2019 2020 2019
(in millions, except per share amounts)
Net (loss) income attributable to stockholders $ (276 ) $ 5 $ (1,223 ) $ 183
Depreciation and amortization expense 75 61 225 184
Depreciation and amortization expense
attributable to
noncontrolling interests (1 ) (1 ) (3 ) (3 )
Loss (gain) on sales of assets, net 1 (1 ) (62 ) (20 )
Gain on sale of investments in affiliates(1) - - (1 ) -
Impairment loss 2 - 697 -
Equity investment adjustments:
Equity in losses
(earnings) from investments in affiliates 7 (3 ) 16 (18 )
Pro rata FFO of investments in affiliates (5 ) 6 (9 ) 27
Nareit FFO attributable to stockholders (197 ) 67 (360 ) 353
Casualty loss (gain), net - 7 (1 ) 7
Acquisition costs 9 59 10 65
Severance expense 24 - 26 2
Share-based compensation expense 4 4 10 12
Other items(2) 11 3 48 1
Adjusted FFO attributable to stockholders $ (149 ) $ 140 $ (267 ) $ 440
Nareit FFO per share - Diluted(3) $ (0.84 ) $ 0.33 $ (1.53 ) $ 1.73
Adjusted FFO per share - Diluted(3) $ (0.63 ) $ 0.68 $ (1.13 ) $ 2.16 (1) Included in other loss, net.
(2) For the nine months ended
expense on hotels sold during the period.
(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 Acquisitions: On
entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement") with
2019, pursuant to the terms and subject to the conditions set forth in the
Merger Agreement, Chesapeake merged with and into Merger Sub (the
"Merger"). As a result of the Merger, we acquired 18 hotels, two of which
were disposed of in
hotels prior to acquisition for the three and nine months ended
September 30, 2019 are not included in our consolidated results.
• Property Dispositions: Since January 1, 2019 , we disposed of 8consolidated hotels excluding the 2 hotels acquired in the Merger that
were subsequently sold. As a result of these dispositions, our revenues
and operating expenses decreased for the three and nine months ended
operations during our period of ownership of these hotels are included in
our consolidated results.
• COVID-19: Beginning in
ADR, occupancy and RevPAR due to COVID-19. The economic recession
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 ended September 30, 2020 will
not be comparable to the same periods in 2019.
26
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Three Months Ended September 30,
Change from Change from Change
Property Property from Other
2020 2019 Change Acquisitions Dispositions Factors(1)
(in millions)
Rooms revenue $ 70 $ 430 $ (360 ) $ 1 $ (11 ) $ (350 )
Food and beverage revenue 10 156 (146 ) (2 ) (4 ) (140 )
Ancillary hotel revenue 15 64 (49 ) 3 (1 ) (51 )
Rooms expense 30 114 (84 ) 4 (2 ) (86 )
Food and beverage expense 18 117 (99 ) - (2 ) (97 )Other departmental and support
expense 64 153 (89 ) 9 (5 ) (93 ) Other property-level expense 84 54 30 12 (2 ) 20 Management fees expense 2 32 (30 ) - (1 ) (29 )
(1) Change from other factors primarily relates to the effects of COVID-19.
Nine Months Ended September 30,
Change from Change from Change
Property Property from Other
2020 2019 Change Acquisitions Dispositions Factors(1)
(in millions)
Rooms revenue $ 453 $ 1,267 $ (814 ) $ 72 $ (54 ) $ (832 )
Food and beverage revenue 174 534 (360 ) 16 (17 ) (359 )
Ancillary hotel revenue 87 174 (87 ) 12 (3 ) (96 )
Rooms expense 162 334 (172 ) 26 (10 ) (188 )
Food and beverage expense 155 371 (216 ) 17 (10 ) (223 )Other departmental and support
expense 296 453 (157 ) 49 (21 ) (185 ) Other property-level expense 200 152 48 32 (6 ) 22 Management fees expense 27 101 (74 ) 3 (3 ) (74 )
(1) Change from other factors primarily relates to the effects of COVID-19.
Other revenue and Other expense
During the three months endedSeptember 30, 2020 , we permanently suspended operations at two of our three laundry facilities and expect to permanently suspend operations at our third laundry facility in the fourth quarter of 2020. The decrease in support revenue is due to lower cost reimbursements as a result of these operations being suspended at most hotels that have a service arrangement with Hilton Grand Vacations ("HGV"). Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Percent Change 2020 2019 Percent Change (in millions) (in millions) Laundry revenue $ -$ 3 (100.0 )%$ 2 $ 9 (77.8 )% Support service revenue 3 19 (84.2 ) 23 50 (54.0 ) Total other revenue$ 3 $ 22 (86.4 )%$ 25 $ 59 (57.6 )% Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Percent Change 2020 2019 Percent Change (in millions) (in millions) Laundry expense$ 5 $ 4 25.0 %$ 10 $ 13 (23.1 )% Support services expense 1 19 (94.7 ) 21 48 (56.3 ) Total other expense$ 6 $ 23 (73.9 )%$ 31 $ 61 (49.2 )% 27
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Corporate general and administrative
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 Percent Change 2020 2019 Percent Change
(in millions) (in millions)
General and administrative
expenses $ 9 $ 10 (10.0 )% $ 29 $ 33 (12.1 )%
Share-based compensation
expense 4 4 - 10 12 (16.7 )
Disposition costs - - - 1 1 -
Severance expense - - - 2 1 100.0
Total corporate general and
administrative $ 13 $ 14 (7.1 )% $ 42 $ 47 (10.6 )%
Acquisition costs
During the nine months ended September 30, 2020 , we incurred $10 million of
acquisition costs, primarily as a result of $9 million of transfer tax in
connection with the Merger Agreement with Chesapeake based on new information
received during the period. Acquisition costs of $59 million and $65 million for
the three and nine months ended September 30, 2019 , respectively, primarily
related to costs incurred in connection with the entry into the Merger Agreement
with Chesapeake.
Impairment and casualty loss, net
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 because of COVID-19.
Gain on sales of assets, net
During the nine months endedSeptember 30, 2020 , we recognized a net gain of$62 million primarily as a result of the sale of two of our consolidated hotels. Refer to Note 3: "Acquisitions and Dispositions" in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information.
During the nine months ended
Non-operating Income and Expenses
Interest expense
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 Percent Change 2020 2019 Percent Change
(in millions) (in millions)
SF and HHV CMBS Loans(1) $ 21 $ 21 - % $ 63 $ 63 - %
Mortgage Loans 5 3 66.7 16 7 NM(2)
2016 Term Loan(3) 4 7 (42.9 ) 15 22 (31.8 )
2019 Term Facility(4) 5 1 NM(2) 15 1 NM(2)
Revolver 6 - NM(2) 14 - NM(2)
2025 Senior Secured Notes 13 - NM(2) 17 - NM(2)
2028 Senior Secured Notes 2 - NM(2) 2 - NM(2)
Other 3 1 NM(2) 7 5 40.0
Total interest expense $ 59 $ 33 78.8 % $ 149 $ 98 52.0 %
(1) In
CMBS Loan") and a
(2) Percentage change is not meaningful.
(3) The 2016 Term Loan was entered into in
repaid in
(4) In
entered into a credit agreement with
lenders, providing a
(the "2019 Term Facility"), with the
term loan tranche fully drawn on
commitments thereunder terminated on
2019, we repaid $180 million of the 2019 Term Facility.
28
-------------------------------------------------------------------------------- Interest expense increased during three and nine months endedSeptember 30, 2020 as compared to the same periods in 2019 as a result of$310 million in mortgage loans assumed in connection with the Merger, borrowings under the 2019 Term Facility to fund the Merger, the$1 billion drawn under the Revolver inMarch 2020 (of which$319 million and$80 million was repaid during the second and third quarters of 2020, respectively), and the issuances of our$650 million 2025 Senior Secured Notes and$725 million 2028 Senior Secured Notes, partially offset by a decrease in interest expense as a result of the full repayment of the 2016 Term Loan inSeptember 2020 . Income tax expense Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 Percent Change 2020 2019 Percent Change (in millions) (in millions) Income tax expense$ 1 $ - 100.0 %$ 14 $ 12 16.7 % Income tax expense for the nine months endedSeptember 30, 2020 includes$30 million of income tax expense from hotels sold during the period, partially offset by a TRS income tax benefit of$20 million from utilizing the NOL carryback provisions of the CARES Act. Refer to Note 9: "Income Taxes" in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information Income tax expense for the nine months endedSeptember 30, 2019 includes$7 million of income tax liabilities associated with our taxable operations and$2 million of built-in gain tax recognized on hotels disposed during 2019, beyond that of our previously recognized deferred tax liabilities.
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, 2020 , we had total cash and cash equivalents of approximately$1.1 billion and$35 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-COVID-19 Effect on Our Business", we expect our cash flow from operations through the remainder of 2020 and the first-half of 2021 to be significantly lower than in the past. We have taken several steps to preserve capital and increase liquidity, including drawing$1 billion from our Revolver inMarch 2020 , 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), 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 deferrals of approximately$150 million of the$200 million in capital expenditures budgeted for 2020. We will continue to assess when the deferred capital expenditures will resume or if any of the deferred expenditures will be cancelled. While operations have been significantly reduced, and in some cases remain suspended, at most of our hotels, the duration and extent of the effects of COVID-19 remain unknown, and we cannot predict whether our reopened hotels will be forced to suspend operations again in the future. Based on our average monthly burn rate of$50 million for the third quarter which takes into account current operations from both open and suspended hotels and uses an accrual-based methodology, and as a result of the above-mentioned cost-reduction efforts and the overall strength of our balance sheet, absent any debt required to be repaid, we currently expect to have over two and a half years of liquidity available to meet our financial obligations. This estimate does not take into account capital expenditures (which were reduced by 75% in 2020 to approximately$4 million per month) or any possible alternative sources of revenue that may arise or any hotel property dispositions for the remainder of the year or payment of future cash dividends, if any. The estimated burn rate amount has not been reduced by any amount available to us under existing or future debt facilities, or proceeds from issuance of any additional debt, equity or equity-linked securities. 29
-------------------------------------------------------------------------------- With the net proceeds from our Revolver borrowings during 2020, net proceeds from the offering of our 2025 Senior Secured Notes and 2028 Senior Secured Notes and the proceeds from the sales of two consolidated hotels during the first quarter of 2020, we have sufficient liquidity to pay our 2021 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 begins to recover. 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 May andSeptember 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. 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. 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 (including the 2025 Senior Secured Notes and 2028 Senior Secured Notes), capital expenditures for renovations and maintenance at our hotels (to the extent not deferred for 2020), 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, including a sustained decline in our performance, we were able to access the debt capital markets during the second and third quarters of 2020 and complete our inaugural notes offering for our 2025 Senior Secured Notes as well as the offering of our 2028 Senior Secured Notes. However, it may be difficult or costly for us to raise additional debt or equity capital in the future to fund long-term liquidity requirements. 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 their lenders. 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
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, ending inFebruary 2021 . Stock repurchases, if any, 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. The timing of future stock repurchases and the number of shares to be repurchased will depend 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 common stock was repurchased during the three months endedJune 30, 2020 or three months endedSeptember 30, 2020 . As ofSeptember 30, 2020 , approximately$234 million remained available for stock repurchases. The timing of stock repurchases and the number of shares to be repurchased will depend upon prevailing market conditions and other factors, and we may suspend the repurchase program at any time. In addition, our credit facility and term loan amendments impose restrictions surrounding our ability to repurchase stock until certain financial ratio metrics are achieved. 30 --------------------------------------------------------------------------------
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,
2020 2019 Percent Change
(in millions)
Net cash (used in) provided by operating
activities $ (274) $ 349 NM(1)
Net cash provided by (used in) investing
activities 136 (855 ) NM(1)
Net cash provided by financing activities 921 445 NM(1)
(1) Percentage change is not meaningful.
Operating Activities
Cash flow from operating activities are primarily generated from the operating income or losses generated at our hotels.
The$623 million decrease in net cash provided by operating activities for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 was primarily due to a decrease in cash from operations related to the effects of COVID-19 coupled with an increase in cash paid for interest of$28 million . Investing Activities The$136 million in net cash provided by investing activities for the nine months endedSeptember 30, 2020 was primarily attributable to$207 million in net proceeds received from the sale of hotels, partially offset by$70 million in capital expenditures. The$855 million in net cash used in investing activities for the nine months endedSeptember 30, 2019 was primarily attributable to the$913 million used in the acquisition of Chesapeake and$182 million used for capital expenditures for property and equipment at our hotels, partially offset by$230 million in net proceeds received from the sale of hotels.
Financing Activities
The$921 million in net cash provided by financing activities for the nine months endedSeptember 30, 2020 is 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 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 . The$445 million in net cash provided by financing activities for the nine months endedSeptember 30, 2019 is primarily attributable to borrowings of$850 million from the 2019 Term Facility entered into inSeptember 2019 to fund the Merger, partially offset by$382 million in dividends paid.
Dividends
As a REIT, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders on an annual basis. Therefore, as a general matter, it is unlikely that we will be able to retain substantial cash balances that could be used to meet our liquidity needs from our annual taxable income. Instead, we will need to meet these needs from external sources of capital and amounts, if any, by which our cash flow generated from operations exceeds taxable income. However, as a precautionary measure in light of COVID-19, after the payment of the first quarter dividend, we suspended our quarterly dividend until such time that our Board of Directors determines our year-end dividend, if any.
We declared the following dividends to holders of our common stock during 2020:
Record Date Payment Date Dividend per Share
0.45
31
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Debt
As ofSeptember 30, 2020 , our total indebtedness was approximately$5.1 billion , including$601 million of borrowings from our Revolver,$650 million of 2025 Senior Secured Notes and$725 million of 2028 Senior Secured Notes, as disclosed above, and excluding approximately$225 million of our share of debt of investments in affiliates. Substantially all the debt of such unconsolidated affiliates is secured solely by the affiliates' assets or is guaranteed by other partners without recourse to us. 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, 2020 included construction contract commitments of approximately$23 million for capital expenditures at our properties. Our contracts contain clauses that allow us to cancel all or some portion of the work. If cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract. As a liquidity preservation initiative to mitigate the effects of COVID-19, we have deferred approximately$150 million of the originally budgeted$200 million of capital expenditures for 2020. None of these deferred expenditures will affect the ability of the hotels to quickly resume operations once normal travel patterns return. We will continue to assess when the deferred capital expenditures will resume or if any of the deferred expenditures will be cancelled.
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, 2019 , filed with theSecurities and Exchange Commission onFebruary 27, 2020 . There have been no material changes to our critical accounting policies or the methods or assumptions we apply.
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