PARK HOTELS & RESORTS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements, related notes included thereto and Item 1A., "Risk Factors," appearing elsewhere in this Annual Report on Form 10-K. For the discussion and analysis of our 2018 financial condition and results of operations compared to 2019, refer to Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
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 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. 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 14: "Geographic and Business Segment Information" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information regarding our operating segments. Basis of Presentation The consolidated financial statements reflect our financial position, results of operations and cash flows, in conformity withU.S. generally accepted accounting principles ("U.S. GAAP"). Refer to Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information. 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 and continue to have 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 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 first-half of 2021 and significant reductions in new
reservations.
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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
and quarterly 2020 pro-forma metrics, which exclude results from property
dispositions and include results from property acquisitions, as compared to the
same periods 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 October (43.4 ) (61.6 ) (84.5 ) 23.3 November (41.5 ) (61.8 ) (86.0 ) 19.5 December (30.0 ) (57.8 ) (83.2 ) 18.3 Q4 (38.8 ) (60.4 ) (84.5 ) 20.4 We believe that imposed or re-imposed government restrictions and the economic contraction associated with COVID-19 will continue to significantly affect our business. 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. However, the announcements of COVID-19 vaccines inNovember 2020 and the reports of their initial effectiveness appear to have resulted in an improvement in traveler and general consumer sentiment. Although we were able to recommence operations at reduced capacity at most of our previously suspended hotels by the end of 2020, there remains considerable uncertainty as to both the time it will take to see travel and demand for lodging and travel-related experiences to increase and the long-term impacts on consumer attitudes to travel. We cannot predict whether our reopened hotels will be forced to suspend operations again or decrease capacity in the future. We believe that the distribution of COVID-19 vaccines will eventually ease government regulation and decrease the number of COVID-19 cases, resulting in an improvement in business and other consumer preferences for travel. Due to the effects of COVID-19, during the year endedDecember 31, 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 at least the first-half of 2021. 35
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We and our hotel managers have taken various actions to mitigate the effect of COVID-19 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, reducing 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 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 5.875% 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. Additionally, we reduced budgeted 2021 capital expenditures to approximately$40 million . Since originally suspending operations, we have commenced the phased reopening of 28 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 ofFebruary 26, 2021 is as follows: Status Number of Hotels Total Rooms Consolidated Open 43 20,338 Consolidated Suspended 10 8,593 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 the remaining 10 suspended hotels by the end of the second 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 contraction 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 over the last 6 months, these metrics remain significantly below levels prior to the COVID-19 pandemic. The exact impact, magnitude and duration of the economic contraction 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 contraction, to be dictated by, among other things, its duration, the success of efforts to contain it, efficacy, availability and deployment of vaccinations and other treatments to combat COVID-19 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 2021. 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 "Item 1A. Risk Factors" included in this Annual Report on Form 10-K. 36
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Principal Components of and Factors Affecting Our Results of Operations
Revenues
Revenues from our hotels are primarily derived from two categories of customers: transient and group, which historically have accounted for approximately two thirds and one third, respectively, of our rooms revenue. Transient guests are individual travelers who are traveling for business or leisure. Group guests are traveling for group events that reserve rooms for meetings, conferences or social functions sponsored by associations, corporate, social, military, educational, religious or other organizations. Group business usually includes a block of room accommodations, as well as other ancillary services, such as meeting facilities, catering and banquet services. A majority of our food and beverage sales and other ancillary services are provided to customers who also are occupying rooms at our hotels. As a result, occupancy affects all components of revenues from our hotels. Due to the effects of COVID-19, we have experienced a greater shift to transient business as a result of the cancellation or postponement of business conferences and other group events.
Principal Components
Rooms. Represents the sale of room rentals at our hotels and accounts for a substantial majority of our total revenue.
Food and beverage. Represents revenue from group functions, which may include both banquet revenue and audio and visual revenue, as well as revenue from outlets such as restaurants and lounges at our hotels.
Ancillary hotel. Represents revenue for guest services provided at our hotels,
including parking, telecommunications, golf course and spa. Also includes tenant
leases and other rental revenue.
Other. Primarily related to support services we provide to Hilton Grand
Vacations ("HGV") timeshare properties that have a presence within or adjacent
to certain of our hotels, which include cost reimbursements for the costs of
providing housekeeping, landscaping, general maintenance and other services plus
a fee representing a percentage of cost reimbursements. Also included, revenue
from our laundry business prior to permanent suspension of operations in 2020.
Factors Affecting our Revenues
Consumer demand. Consumer demand for our products and services is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Leading indicators of demand include gross domestic product, non-residential fixed investment and the consumer price index. Declines in consumer demand due to adverse general economic conditions, reductions in travel patterns, lower consumer confidence, outbreaks of pandemic or contagious diseases, and adverse political conditions can lower the revenues and profitability of our hotels. Further, competition for guests and the supply of services at our hotels affect our ability to sustain or increase rates charged to customers at our hotels. As a result, changes in consumer demand and general business cycles have historically subjected and could in the future subject our revenues to significant volatility. In addition, leisure travelers currently make up the majority of our transient demand. Therefore, we will be significantly more affected by trends in leisure travel than trends in business travel.
Supply. New room supply is an important factor that can affect the lodging industry's performance. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. The addition of new competitive hotels and resorts affects the ability of existing hotels and resorts to sustain or grow RevPAR, and thus profits. New development is determined largely by construction costs, the availability of financing and expected performance of existing hotels and resorts.
Expenses
Principal Components
Rooms. These costs include housekeeping, reservation systems, room supplies, laundry services at our hotels and front desk costs.
Food and beverage. These costs primarily include food, beverage and the associated labor and will correlate closely with food and beverage revenues.
Other departmental and support. These costs include labor and other costs
associated with other ancillary revenue, such as parking, telecommunications,
golf course and spa, as well as labor and other costs associated with
administrative departments, sales and marketing, repairs and minor maintenance
and utility costs. Additionally, these costs include franchise fees and are
generally
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-------------------------------------------------------------------------------- computed as a percentage of rooms revenues. Refer to Item 1: "Business - Our Principal Agreements," included elsewhere in this Annual Report on Form 10-K for additional information on franchise fees.
Other property-level. These costs consist primarily of real and personal property taxes, other local taxes, ground rent, equipment rent and property insurance.
Management fees. Base management fees are computed as a percentage of gross revenue. Incentive management fees generally are paid if specified financial performance targets are achieved. Refer to Item 1: "Business - Our Principal Agreements," included elsewhere in this Annual Report on Form 10-K for additional information. Impairment loss and casualty (gain) loss, net. Impairment losses are non-cash expenses that are recognized when circumstances indicate that the carrying value of a long-lived asset is not recoverable. An impairment loss is recognized for the excess of the carrying value over the fair value of the asset. Casualty losses are expenses that represent losses incurred resulting from property damage or destruction caused by any sudden, unexpected or unusual event such as a hurricane. Casualty gains are insurance proceeds for property damage claims that are in excess of any associated impairment loss recognized and clean-up and recovery costs incurred, less any insurance deductible. Depreciation and amortization. These are non-cash expenses that primarily consist of depreciation of fixed assets such as buildings, furniture, fixtures and equipment at our hotels, as well as amortization of finite lived intangible assets.
Corporate general & administrative. These costs include general and administrative expenses, including costs associated with the potential disposition of hotels. General and administrative expenses consist primarily of compensation expense for our corporate staff and personnel supporting our business, professional fees, travel and entertainment expenses, and office administrative and related expenses.
Acquisition costs. These costs include expenses associated with our hotel acquisitions.
Other. These costs include costs to provide support services to certain HGV timeshare properties and expenses for our laundry business.
Factors Affecting our Costs and Expenses
Variable expenses. Expenses associated with our room expense and food and
beverage expense are mainly affected by occupancy and correlate closely with
their respective revenues. These expenses can increase based on increases in
salaries and wages, as well as on the level of service and amenities that are
provided. Additionally, food and beverage expense is affected by the mix of
business between banquet, catering and outlet sales.
Fixed expenses. Many of the other expenses associated with our hotels are
relatively fixed. These expenses include 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, any resulting
decline in our revenues can have a greater adverse effect on our net cash flow,
margins and profits. This effect can be especially pronounced during periods of
economic contraction or slow economic growth. The effectiveness of any
cost-cutting efforts is limited by the amount of fixed costs inherent in our
business. As a result, we may not be able to successfully offset revenue
reductions through cost cutting. The individuals employed at certain of our
hotels are party to collective bargaining agreements with our hotel managers
that may also limit the manager's ability to make timely staffing or labor
changes in response to declining revenues. In addition, any efforts to reduce
costs, or to defer or cancel capital improvements, could adversely affect the
economic value of our hotels. We have taken steps to reduce our fixed costs to
levels we believe are appropriate to maximize profitability and respond to
market conditions without jeopardizing the overall customer experience or the
value of our hotels.
Changes in depreciation and amortization expense. Changes in depreciation
expense are due to renovations of existing hotels, acquisition or development of
new hotels, the disposition of existing hotels through sale or closure or
changes in estimates of the useful lives of our assets. As we place new assets
into service, we will be required to recognize additional depreciation expense
on those assets.
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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 and ADR 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 year endedDecember 31, 2020 as compared to the year endedDecember 31, 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;
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• 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, 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.
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The following table provides a reconciliation of Net (loss) income toHotel Adjusted EBITDA : Year Ended December 31, 2020 2019 (in millions) Net (loss) income$ (1,444 ) $ 316 Depreciation and amortization expense 298 264 Interest income (2 ) (6 ) Interest expense 213 140 Income tax (benefit) expense (6 )
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Interest expense, income tax and depreciation and
amortization included in equity in earnings from
investments in affiliates 16 23 EBITDA (925 ) 772 Gain on sales of assets, net (62 ) (19 ) Gain on sale of investments in affiliates(1) (1 ) (44 ) Acquisition costs 10 70 Severance expense 33 2 Share-based compensation expense 20
16
Impairment loss and casualty (gain), net 696 (18 ) Other items(2) 35 7 Adjusted EBITDA (194 ) 786 Less: Adjusted EBITDA from investments in affiliates 3 (37 ) Add: All other(3) 44 53 Hotel Adjusted EBITDA $ (147 )$ 802
(1) Included in other (loss) gain, net.
(2) For the years ended
million reserve, respectively, related to ongoing claims in connection with
our obligation to indemnify Hilton under the spin-off agreements. Refer to
Note 15: "Commitments and Contingencies" in our audited consolidated
financial statements included elsewhere within this Annual Report on Form
10-K for additional information.
(3) 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.
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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;
• Casualty gains or losses; 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) income attributable to stockholders to Nareit FFO attributable to stockholders and Adjusted FFO attributable to stockholders:
Year Ended December 31,
2020 2019
(in millions)
Net (loss) income attributable to stockholders $ (1,440 ) $ 306
Depreciation and amortization expense 298 264
Depreciation and amortization expense attributable to
noncontrolling interests (4 ) (4 ) Gain on sales of assets, net (62 ) (19 ) Gain on sale of investments in affiliates(1) (1 ) (44 ) Impairment loss 697 - Equity investment adjustments: Equity in losses (earnings) from investments in affiliates 22 (14 ) Pro rata FFO of investments in affiliates (10 ) 31 Nareit FFO attributable to stockholders (500 ) 520 Casualty gain, net (1 ) (18 ) Acquisition costs 10 70 Severance expense 33 2 Share-based compensation expense 20 16 Other items(2) 49 23 Adjusted FFO attributable to stockholders$ (389 ) $ 613 Nareit FFO per share - Diluted(3)$ (2.12 ) $ 2.44 Adjusted FFO per share - Diluted(3)$ (1.65 ) $ 2.88
(1) Included in other (loss) gain, net.
(2) Includes
sold during 2020 and 2019, respectively.
(3) Per share amounts are calculated based on unrounded numbers.
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Results of Operations
The following items have had a significant effect on the year-over-year
comparability of our operations and are illustrated further discussed 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 year ended
included in our consolidated results.
• Property Dispositions: Since January 1, 2019 , we disposed of tenconsolidated hotels, including two hotels acquired in the Merger that were
subsequently sold. As a result of these dispositions, our revenues and
operating expenses decreased for the year ended
compared to the same period in 2019. The results of 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 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 year ended
to the same period in 2019.
Year Ended December 31,
Change from Change from Change
Property Property from Other
2020 2019 Change Acquisitions Dispositions Factors(1)
Rooms revenue $ 526 $ 1,764 $ (1,238 ) $ (2 ) $ (71 ) $ (1,165 )
Food and beverage revenue 189 743 (554 ) (8 ) (23 ) (523 )
Ancillary hotel revenue 108 260 (152 ) 8 (4 ) (156 )
Rooms expense 193 467 (274 ) 10 (14 ) (270 )
Food and beverage expense 173 518 (345 ) 1 (15 ) (331 )Other departmental and support
expense 359 638 (279 ) 31 (29 ) (281 ) Other property-level expense 258 219 39 31 (12 ) 20 Management fees expense 30 139 (109 ) (1 ) (5 ) (103 )
(1) Change from other factors primarily relates to the effects of COVID-19.
Other revenue and Other expense
During the year endedDecember 31, 2020 , we permanently closed operations at all three of our laundry facilities resulting in a decrease in both laundry revenue and laundry expense. The decreases in support services revenue and expense are due to reductions in expenses as well as lower cost reimbursements as a result of operations being suspended at most hotels that have a service arrangement with Hilton Grand Vacations ("HGV"). Year ended December 31, 2020 2019 Percent Change (in millions) Support services revenue$ 27 $ 66 (59.1 ) Laundry revenue 2 11 (81.8 )% Total other revenue$ 29 $ 77 (62.3 )% 43
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Year Ended December 31,
2020 2019 Percent Change
(in millions)
Support services expense $ 26 $ 62 (58.1 )%
Laundry expense 10 16 (37.5 )
Total other expense $ 36 $ 78 (53.8 )%
Corporate general and administrative
Year Ended December 31,
2020 2019 Percent Change
(in millions)
General and administrative expenses $ 40 $ 43 (7.0 )%
Share-based compensation expense 20 16 25.0
Disposition costs 1 2 (50.0 )
Severance expense 2 1 100.0
Total corporate general and administrative $ 63 $ 62 1.6 %
Acquisition costs
During the year ended December 31, 2020 , we incurred $10 million of acquisition
costs, primarily as a result of $9 million of transfer tax in connection with
the Merger with Chesapeake based on new information received during the year.
Acquisition costs of $70 million for the year ended December 31, 2019 related to
costs incurred in connection with the Merger.
Impairment loss and casualty (gain) loss, net
During the year endedDecember 31, 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. During the year endedDecember 31, 2019 , we recognized a net gain of$18 million within impairment loss and casualty (gain) loss, net in our consolidated statements of comprehensive (loss) income, which included a gain of$27 million for amounts recovered from insurance in excess of the insurance receivable and a loss of$9 million relating to property damage at certain of our hotels.
Gain on sales of assets, net
During the year endedDecember 31, 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, Dispositions and Assets Held for Sale" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information.
During the year ended
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--------------------------------------------------------------------------------Non-operating Income and Expenses
Interest expense
Year ended December 31,
2020 2019 Percent Change
(in millions)
SF and HHV CMBS Loans(1) $ 85 $ 85 - %
Mortgage Loans 22 13 69.2 %
2016 Term Loan(2) 15 29 (48.3 )%
2019 Term Facility(3) 20 8 150.0 %
Revolver 19 - NM(4)
2025 Senior Secured Notes 29 - NM(4)
2028 Senior Secured Notes 12 - NM(4)
Other 11 5 120.0 %
Total interest expense $ 213 $ 140 52.1 %
(1) In
CMBS Loan") and a
(2) We repaid the 2016 Term Loan by
and
2020.
(3) In
into a credit agreement with
providing a
Term Facility"), with the
tranche fully drawn on
million, two-year delayed draw term loan tranche was unfunded and the
commitments thereunder terminated on
2019, we repaid
(4) Percentage change is not meaningful.
Interest expense increased in 2020 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 . Our current debt outstanding is approximately$5.1 billion at a weighted average interest rate of 4.6%, of which approximately 79% is fixed-rate debt, refer to Item 7A: "Interest Rate Risk" and Note 7 "Debt" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information.
Equity in (losses) earnings from investments in affiliates
The decrease in equity in earnings from investments in affiliates in 2020 compared to the same period in 2019 was primarily due to the effects of COVID-19.
Other (loss) gain, net During the year endedDecember 31, 2020 , we recognized a net loss of$15 million , which is primarily due to an additional$12 million reserve related to ongoing claims in connection with our obligation to indemnify Hilton under the spin-off agreements. Refer to Note 15: "Commitments and Contingencies" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information. The net gain of$45 million duringDecember 31, 2019 primarily included a$7 million reserve related to these claims offset by a net gain of$44 million due to the sale of our ownership interest in the Conrad Dublin. 45 --------------------------------------------------------------------------------
Income tax benefit (expense)
Year Ended December 31,
2020 2019 Percent Change
(in millions)
Income tax benefit (expense) $ 6 $ (35 ) NM(1)
(1) Percentage change is not meaningful.
Income tax expense for the year endedDecember 31, 2020 includes$37 million of income tax expense associated with sales of hotels sold during the period, partially offset by a TRS income tax benefit of$24 million from utilizing the NOL carryback provisions of the CARES Act. Additionally, the year endedDecember 31, 2020 includes$22 million of a net tax benefit from the derecognition of deferred tax liabilities. Refer to Note 10: "Income Taxes" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information. Income tax expense for the year endedDecember 31, 2019 includes$15 million of income tax expense associated with the sales of hotels in 2019 and$9 million of income tax primarily associated with our taxable REIT subsidiaries.
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 ofDecember 31, 2020 , we had total cash and cash equivalents of$951 million and$30 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 flows through the first-half 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 partially 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), 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 budgeted capital expenditures to approximately$40 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. 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 an average monthly burn rate of$42 million , 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 33 months of liquidity available to meet our financial obligations. This estimate does not take into account planned capital expenditures (which are expected to be approximately$40 million for 2021) or any possible alternative sources of revenue that may arise, any hotel property dispositions or payment of future cash dividends, if any. The estimated burn rate amount does not take into account any amount available to us under existing or future debt facilities, or proceeds from issuance of any additional debt, equity or equity-linked securities. 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, 46
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placed certain restrictions on the Company. Refer to Note 7: "Debt" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K 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, 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 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.
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 , and we do not currently anticipate renewing the stock repurchase program. 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 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. During the year endedDecember 31, 2020 , we repurchased 4.6 million shares of our common stock for a total purchase price of$66 million . As ofDecember 31, 2020 , approximately$234 million remained available for stock repurchases. Our credit facility and term loan amendments impose restrictions surrounding our ability to repurchase stock until certain financial ratio metrics are achieved.
Sources and Uses of Our Cash and Cash Equivalents
The following tables summarize our net cash flows and key metrics related to our
liquidity:
Year Ended December 31,
2020 2019 Percent Change
(in millions)
Net cash (used in) provided by operating activities
499 NM(1) Net cash provided by (used in) investing activities 119 (635 ) NM(1) Net cash provided by financing activities 914 97 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.
47
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The $937 million decrease in net cash provided by operating activities for the
year ended December 31, 2020 compared to the year ended December 31, 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 $52 million .
Investing Activities
The$119 million in net cash provided by investing activities for the year endedDecember 31, 2020 was primarily attributable to$207 million in net proceeds received from the sale of hotels, partially offset by$86 million in capital expenditures. The$635 million in net cash used in investing activities for the year endedDecember 31, 2019 was primarily attributable to the$914 million used in the acquisition of Chesapeake and$240 million used for capital expenditures for property and equipment at our hotels, partially offset by$480 million in net proceeds received from the sale of hotels.
Financing Activities
The$914 million in net cash provided by financing activities for the year endedDecember 31, 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 2028 Senior Secured Notes, partially offset by$1.1 billion of debt repayments,$241 million in dividends paid and the repurchase of 4.6 million shares of our common stock for$66 million . The$97 million in net cash provided by financing activities for the year endedDecember 31, 2019 was primarily attributable to borrowings of$850 million from the 2019 Term Facility entered into inSeptember 2019 to fund the Merger, partially offset by the repayment of$232 million of outstanding debt and$494 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.
We declared the following dividends to holders of our common stock during 2020:
Record Date Payment Date Dividend per Share
0.45
Debt
As of December 31, 2020 , our total indebtedness was approximately $5.1 billion ,
including approximately $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 $225 million of our share
of debt of investments in affiliates. Substantially all the debt of such
unconsolidated affiliates is secured solely by the affiliates' assets or is
guaranteed by other partners without recourse to us. Refer to Note 7: "Debt" in
our audited consolidated financial statements included elsewhere within this
Annual Report on Form 10-K for additional information.
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Contractual Obligations The following table summarizes our significant contractual obligations as ofDecember 31, 2020 : Payments Due by Period Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years (in millions) Debt(1)(2)$ 6,288 $ 375 $ 1,838 $ 1,624 $ 2,451 Operating leases(3) 472 30 53 48 341
Total contractual obligations
(1) Assumes the exercise of all extensions that are exercisable solely at our
option. The
2042 but is callable by the lender beginning
our joint venture executed a forbearance agreement for the
secured by the Doubletree Spokane in which the lender agreed to forbear
exercising its rights and remedies arising from the joint venture's
non-payment of the loan at maturity due to market conditions until
2021.
(2) Includes principal, as well as estimated interest payments. For our
variable-rate debt not subject to a LIBOR floor, we have assumed a constant
30-day LIBOR rate of 0.14% as of
(3) Only includes our future minimum lease payments, refer to Note 9: "Leases" in
our audited consolidated financial statements included elsewhere within this
Annual Report on Form 10-K for additional information.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as ofDecember 31, 2020 included construction contract commitments of approximately$10 million for capital expenditures at our properties. Our contracts contain clauses that allow us to cancel all or some portion of the work. If cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract.
Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance 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 historical consolidated financial statements and accompanying footnotes. We believe that of our significant accounting policies, which are described in Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K, the following accounting policies are critical because they involve a higher degree of judgment, and the estimates required to be made were based on assumptions that are inherently uncertain. As a result, these accounting policies could materially affect our financial position, results of operations and related disclosures. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that are believed to reflect the current circumstances. While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material effect on our financial position or results of operations. Acquisitions We evaluate each of our acquisitions to determine if it is as an asset acquisition or a business combination. An asset acquisition occurs when substantially all the fair value of an acquisition is concentrated in a single identifiable asset or a group of similar identifiable assets. In an acquisition of assets, the total cash consideration, including transaction costs is allocated to the individual assets acquired and liabilities assumed, respectively, on a relative fair value basis. In a business combination, the assets acquired and liabilities assumed are measured at fair value. We evaluate several factors, including market data for similar assets, expected future cash flows discounted at risk-adjusted rates and replacement cost for the assets to determine an appropriate fair value of the assets. Changes to these factors could affect the measurement of assets and liabilities.
Impairment of Long-Lived Assets with Finite Lives
We evaluate the carrying value of our property and equipment and intangible
assets with finite lives by comparing the expected undiscounted future cash
flows to the net book value of the assets if we determine there are indicators
of potential impairment. If it is determined that the expected undiscounted
future cash flows are less than the net book value of the assets, the excess of
the net book value over the estimated fair value is recorded in our consolidated
statements of comprehensive (loss) income as an impairment loss.
49
--------------------------------------------------------------------------------As part of the process described above, we exercise judgment to:
• determine if there are indicators of impairment present. Factors we
consider when making this determination include assessing the overall
effect of trends in the hospitality industry and the general economy,
historical experience, capital costs and other asset-specific information;
• determine the projected undiscounted future cash flows when indicators of
impairment are present. Judgment is required when developing projections
of future revenues and expenses based on estimated growth rates over the
expected hold period of the asset group. These estimated growth rates are
based on historical operating results, as well as various internal
projections and external sources; and
• determine the asset fair value when required. In determining the fair
value, we often use internally-developed discounted cash flow models.
Assumptions used in the discounted cash flow models include estimating
cash flows, which may require us to adjust for specific market conditions,
as well as capitalization rates, which are based on location, property or
asset type, market-specific dynamics and overall economic performance. The
discount rate takes into account our weighted average cost of capital
according to our capital structure and other market specific
considerations.
Changes in estimates and assumptions used in our impairment testing of property and equipment and intangible assets with finite lives could result in future impairment losses, which could be material. We did not identify any additional property and equipment or intangible assets with finite lives with indicators of impairment for which an additional 10% change in our estimates of undiscounted future cash flows or other significant assumptions would result in material impairment losses.
Investments in Affiliates
We evaluate our investments in affiliates for impairment when there are indicators that the fair value of our investment may be less than our carrying value. We record an impairment loss when we determine there has been an "other-than-temporary" decline in the investment's fair value. If an identified event or change in circumstances requires an evaluation to determine if the value of an investment may have an other-than-temporary decline, we assess the fair value of the investment based on the accepted valuation methods, which include discounted cash flows, estimates of sales proceeds and external appraisals. If an investment's fair value is below its carrying value and the decline is considered to be other-than-temporary, we will recognize an impairment loss in equity in (losses) earnings from investments in affiliates for equity method investments in our consolidated statements of comprehensive (loss) income. Our investments in affiliates consist primarily of our interests in entities that own or lease properties. As such, the factors we consider when determining if there are indicators of potential impairment are similar to property and equipment discussed above. If there are indicators of potential impairment, we estimate the fair value of our equity method and cost method investments by internally developed discounted cash flow models. The principal factors used in our discounted cash flow models that require judgment are the same as the items discussed in property and equipment above.
Changes in estimates and assumptions used in our impairment testing of investments in affiliates could result in future impairment losses, which could be material.
We did not identify any investments in affiliates with indicators of impairment for which a 10% change in our estimates of future cash flows or other significant assumptions would result in material impairment losses.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax basis of assets and
liabilities using currently enacted tax rates. In relation to our deferred tax
liabilities, to the extent we dispose of hotels we owned as of the date of
spin-off within a five-year period in a taxable sale, we would be subject to
income tax on any gain on sale, to the extent the gain existed as of the date of
the spin-off ("built-in-gain"). Each period we are required to assess our intent
and ability to hold or dispose of hotels that had built-in-gains as of the
spin-off, as well as the fair value of those hotels relative to the fair value
at the spin-off. Changes in these assumptions could result in an increase or
decrease in our deferred tax liabilities associated with built-in-gains.
50
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We use a prescribed more-likely-than-not recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return if there is uncertainty
in income taxes recognized in the financial statements. Assumptions and
estimates are used to determine the more-likely-than-not designation. Changes to
these assumptions and estimates can lead to an additional income tax expense
(benefit), which can materially change our consolidated financial statements.
Consolidations
We use judgment when evaluating whether we have a controlling financial interest
in an entity, including the assessment of the importance of rights and
privileges of the partners based on voting rights, as well as financial
interests in an entity that are not controllable through voting interests. If
the entity is considered to be a variable interest entity ("VIE"), we use
judgment determining whether we are the primary beneficiary, and then
consolidate those VIEs for which we have determined we are the primary
beneficiary. If the entity in which we hold an interest does not meet the
definition of a VIE, we evaluate whether we have a controlling financial
interest through our voting interest in the entity. Changes to judgments used in
evaluating our partnerships and other investments could materially affect our
consolidated financial statements.
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