EX-99.1 8 d102835dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

LOGO

                    , 2016

Dear Hilton Worldwide Holdings Inc. Stockholder:

I am pleased to inform you that the board of directors of Hilton Worldwide Holdings Inc. (“Hilton Parent” and, together with its consolidated subsidiaries, “Hilton”) approved a plan to enhance long-term stockholder value by separating Hilton into three independent, publicly traded companies. Under the plan, Hilton Parent will execute tax-free spin-offs of Park Hotels & Resorts Inc. (“Park Parent” and, together with its consolidated subsidiaries, “Park Hotels & Resorts”), which will hold a portfolio of Hilton’s owned and leased hotels and resorts, and Hilton Grand Vacations Inc. (“HGV Parent” and, together with its consolidated subsidiaries, “Hilton Grand Vacations”), which will own and operate Hilton’s timeshare business. Upon completion of the spin-offs, Hilton Parent stockholders will own 100% of the outstanding shares of common stock of each of Park Parent and HGV Parent, and will continue to own 100% of the outstanding shares of common stock of Hilton Parent. Park Parent will be a leading lodging real estate investment trust with a diverse portfolio of iconic and market-leading hotels and resorts with significant underlying real estate value, and Hilton Grand Vacations will be a rapidly growing timeshare company that markets and sells vacation ownership intervals and manages resorts in top destinations. Hilton Parent will retain its core management and franchise business and continue to trade on the New York Stock Exchange as a leading global hospitality company.

We believe that this separation is in the best interests of Hilton Parent, its stockholders and other constituents, as it will result in three pure-play companies, enabling dedicated management teams to fully activate their respective businesses, take advantage of both organic and inorganic growth opportunities, and align their structures and capital allocation strategies with a dedicated investor base.

The spin-offs will be completed by way of a pro rata distribution of Park Parent and HGV Parent common stock to our stockholders of record as of 5:00 p.m., Eastern time, on December 15, 2016, the spin-off record date. Each Hilton Parent stockholder will receive one share of Park Parent common stock for every five shares of Hilton Parent common stock and one share of HGV Parent common stock for every ten shares of Hilton Parent common stock, in each case, held by such stockholder on the record date. The distribution of these shares will be made in book-entry form, which means that no physical share certificates will be issued. The transaction is subject to certain customary conditions. Stockholder approval of the distributions is not required, and you are not required to take any action to receive your shares of Park Parent and HGV Parent common stock. Immediately following the spin-offs, you will own common stock in Hilton Parent, Park Parent and HGV Parent. The common stock of Hilton Parent will continue to trade on the New York Stock Exchange under the symbol “HLT.” Both Park Parent and HGV Parent intend to have their common stock listed on the New York Stock Exchange under the symbols “PK” and “HGV,” respectively. We expect the spin-offs to be tax-free to the stockholders of Hilton Parent, except to the extent of cash received in lieu of fractional shares. The spin-offs are conditioned on, among other things, the ruling received by Hilton Parent from the Internal Revenue Service regarding certain U.S. federal income tax aspects of the spin-offs remaining in effect as of the distribution date, and the receipt of an opinion of our tax counsel confirming that the spin-offs will qualify as tax-free distributions under Section 355 of the Internal Revenue Code of 1986, as amended.

We have prepared the enclosed information statements, which describe the spin-offs in detail and contain important information about each of Park Hotels & Resorts and Hilton Grand Vacations, including historical financial statements. We are mailing to all Hilton Parent stockholders a notice with instructions informing holders how to access the information statements online. We urge you to read the information statements carefully.

We want to thank you for your continued support of Hilton, and we look forward to your support of all three companies in the future.

Sincerely,

Christopher J. Nassetta

President and Chief Executive Officer

Hilton Worldwide Holdings Inc.


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LOGO

                    , 2016

Dear Park Hotels & Resorts Inc. Stockholder:

It is our pleasure to welcome you as a stockholder of our company, Park Hotels & Resorts Inc. (“Park Parent” and, together with its consolidated subsidiaries, “Park Hotels & Resorts”). Following the distribution of all of the outstanding shares of Park Parent common stock by Hilton Worldwide Holdings Inc. (“Hilton Parent”), Park Parent will be one of the largest publicly traded lodging real estate investment trusts (“REITs”) with a diverse portfolio of iconic and market-leading hotels and resorts with significant underlying real estate value.

Our objective is to be the preeminent lodging REIT and to generate premium long-term total returns for our stockholders. As an independent company, our dedicated management team will focus on diligent asset management and strategic capital allocation to maximize performance, growth and value creation over time. 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.

Park Parent intends to elect to qualify as a REIT for U.S. federal income tax purposes beginning immediately after the distribution of its common shares by Hilton Parent. We believe our election of REIT status combined with the strong income generation of our assets will enhance our ability to pay an attractive dividend, offering a compelling value proposition for investors seeking current income, as well as long-term growth.

We expect to have Park Parent common stock listed on the New York Stock Exchange under the symbol “PK” in connection with the distribution of Park Parent common stock by Hilton Parent.

We invite you to learn more about Park Parent by reviewing the enclosed information statement. We look forward to our future as an independent, publicly traded company and to your support as a holder of Park Parent common stock.

Sincerely,

Thomas J. Baltimore, Jr.

Chairman of the Board of Directors,

President and Chief Executive Officer

Park Hotels & Resorts Inc.


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 23 2016

INFORMATION STATEMENT

 

LOGO

Park Hotels & Resorts Inc.

Common Stock

(par value $0.01 per share)

 

 

This information statement is being sent to you in connection with the separation of Park Hotels & Resorts Inc. (“Park Parent” and, together with its consolidated subsidiaries, “Park Hotels & Resorts”) from Hilton Worldwide Holdings Inc. (“Hilton Parent” and, together with its consolidated subsidiaries, “Hilton”), following which Park Parent will be an independent, self-administered, publicly traded lodging real estate investment trust (“REIT”). As part of the separation, Hilton will undergo an internal reorganization, after which it will complete the separation by distributing all of the outstanding shares of Park Parent common stock on a pro rata basis to the holders of Hilton Parent common stock. We refer to this pro rata distribution as the “distribution” and we refer to the separation, including the internal reorganization and distribution, as the “spin-off.” We expect that the spin-off will be tax-free to Hilton Parent stockholders for U.S. federal income tax purposes, except to the extent of cash received in lieu of fractional shares. Each Hilton Parent stockholder will receive one share of Park Parent common stock for every five shares of Hilton Parent common stock held by such stockholder on December 15, 2016, the record date. The distribution of shares will be made in book-entry form only. Hilton Parent will not distribute any fractional shares of Park Parent common stock. Instead, the distribution agent will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate net cash proceeds from the sales pro rata to each holder who would otherwise have been entitled to receive a fractional share in the spin-off. The distribution will be effective as of 5:00 p.m., Eastern time, on January 3, 2017. Immediately after the distribution becomes effective, we will be an independent, self-administered, publicly traded company.

No vote or other action of Hilton Parent stockholders is required in connection with the spin-off. We are not asking you for a proxy and you should not send us a proxy. Hilton Parent stockholders will not be required to pay any consideration for the shares of Park Parent common stock they receive in the spin-off, and they will not be required to surrender or exchange shares of their Hilton Parent common stock or take any other action in connection with the spin-off.

All of the outstanding shares of Park Parent common stock are currently owned, directly or indirectly, by Hilton Parent. Accordingly, there is no current trading market for Park Parent common stock. We expect, however, that a limited trading market for Park Parent common stock, commonly known as a “when-issued” trading market, will develop at least two trading days prior to the record date for the distribution, and we expect “regular-way” trading of Park Parent common stock will begin the first trading day after the distribution date. We intend to list Park Parent common stock on the New York Stock Exchange under the ticker symbol “PK.”

We intend to elect to qualify as a REIT for U.S. federal income tax purposes beginning immediately after the distribution. Shares of our common stock will be subject to limitations on ownership and transfer that are primarily intended to assist us in qualifying as a REIT. Our amended and restated certificate of incorporation will contain certain restrictions relating to the ownership and transfer of our common stock, including, subject to certain exceptions, a 4.9% limit, in value or by number of shares, whichever is more restrictive, on the ownership of outstanding shares of our common stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

 

In reviewing this information statement, you should carefully consider the matters described in “Risk Factors” beginning on page 29 of this information statement.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement is not an offer to sell, or a solicitation of an offer to buy, any securities.

The date of this information statement is                     , 2016.

 

 

A Notice of Internet Availability of Information Statement Materials containing instructions describing how to access this Information Statement was first mailed to Hilton Parent stockholders on or about                     , 2016.


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TABLE OF CONTENTS

 

    Page  

Summary

    1   

Risk Factors

    29   

Special Note About Forward-Looking Statements

    69   

The Spin-Off

    70   

Trading Market

    84   

Distribution Policy

    86   

Capitalization

    87   

Selected Historical Combined Consolidated Financial Data

    88   

Unaudited Pro Forma Combined Consolidated Financial Statements

    90   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    99   

Market Opportunity

    129   

Business and Properties

    130   

Management

    148   

Executive and Director Compensation

    155   

Certain Relationships and Related Party Transactions

    162   

Investment Policies and Policies with respect to Certain Activities

    172   

Description of Certain Indebtedness

    176   

Security Ownership of Certain Beneficial Owners and Management

    182   

Description of Capital Stock

    185   

Material U.S. Federal Income Tax Considerations

    196   

Where You Can Find More Information

    222   

Index to Combined Consolidated Financial Statements

    F-1   

Unless otherwise indicated or the context otherwise requires, references herein to:

 

    “Park Hotels & Resorts,” “we,” “our,” “us” and the “Company” refer to Park Hotels & Resorts Inc. and its consolidated subsidiaries, and references to “Park Parent” refer only to Park Hotels & Resorts Inc., exclusive of its subsidiaries;

 

    “Hilton Grand Vacations” refer to Hilton Grand Vacations Inc. and its consolidated subsidiaries, and references to “HGV Parent” refer only to Hilton Grand Vacations Inc., exclusive of its subsidiaries; and

 

    “Hilton” refer to Hilton Worldwide Holdings Inc. and its consolidated subsidiaries, and references to “Hilton Parent” or “Parent” refer only to Hilton Worldwide Holdings Inc., exclusive of its subsidiaries;

in each case giving effect to the spin-off, including the internal reorganization and distribution, and our election to be subject to tax as a REIT for U.S. federal income tax purposes.


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INDUSTRY AND MARKET DATA

The market data and certain other statistical information used throughout this information statement are based on independent industry publications, government publications or other published independent sources. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry, and there is no assurance that any of the projected amounts will be achieved. We believe that the surveys and market research others have performed are reliable, but we have not independently verified this information. STR, Inc. (“STR”) is the primary source for third-party market data and industry statistics and forecasts. STR does not guarantee the performance of any company about which it collects and provides data. The reproduction of STR’s data without their written permission is strictly prohibited. Nothing in the STR data should be construed as advice. Some data is also based on our good faith estimates.

CERTAIN DEFINED TERMS

Except where the context suggests otherwise, we define certain terms in this information statement as follows:

 

    “Adjusted EBITDA” means EBITDA (as defined below) further adjusted to exclude gains, losses and expenses in connection with: (i) asset dispositions for both consolidated and unconsolidated investments; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) furniture, fixtures and equipment (“FF&E”) replacement reserves required by certain lease agreements; (vi) reorganization costs; (vii) share-based and certain other compensation expenses; (viii) severance, relocation and other expenses; and (ix) other items. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for information regarding our use of Adjusted EBITDA, which is a non-GAAP financial measure.

 

    “Adjusted EBITDA margin” means Adjusted EBITDA as a percentage of total revenue. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for information regarding our use of Adjusted EBITDA margin, which is a non-GAAP financial measure.

 

    “Adjusted FFO attributable to Parent” means NAREIT FFO attributable to Parent (as defined below) as further adjusted for the following items: (i) gain on debt extinguishment; (ii) foreign currency (gain) loss; (iii) acquisition costs; and (iv) litigation gains and losses. In unusual circumstances, we may also adjust NAREIT FFO attributable to Parent for additional gains or losses that management believes are not representative of our current operating performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for information regarding our use of Adjusted FFO attributable to Parent, which is a non-GAAP financial measure.

 

    “ADR” or “average daily rate” means hotel rooms revenue divided by total number of room nights sold in a given period;

 

    “comparable hotels” mean those hotels that: (i) were active and operating in our system since January 1st of the previous year; and (ii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results are not available.

 

    “EBITDA” means net income (loss) excluding interest expense, a provision for income taxes and depreciation and amortization. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for information regarding our use of EBITDA, which is a non-GAAP financial measure.

 

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    “Hotel Adjusted EBITDA” means property-level results before debt service, depreciation and corporate expenses for our consolidated properties, including both comparable and non-comparable hotels but excluding properties owned by unconsolidated affiliates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for information regarding our use of Hotel Adjusted EBITDA, which is a non-GAAP financial measure.

 

    a “luxury” hotel refers to a luxury hotel as defined by STR;

 

    “NAREIT FFO attributable to Parent” means net income (loss) attributable to Parent (calculated in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)), excluding gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, real estate-related depreciation, amortization and impairments and 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. We calculate NAREIT FFO attributable to Parent for a given operating period in accordance with the guidelines of the National Association of Real Estate Investment Trusts (“NAREIT”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for information regarding our use of NAREIT FFO attributable to Parent, which is a non-GAAP financial measure.

 

    “occupancy” means the total number of room nights sold divided by the total number of room nights available at a property or group of properties;

 

    “RevPAR” or “revenue per available room” means hotel rooms revenue divided by total number of room nights available to guests for a given period, and does not include non-rooms revenues such as food and beverage revenue or other operating revenues;

 

    “Select Hotels” means the hotels that will be managed by Park Hotels & Resorts rather than a third-party hotel management company, consisting of the following four hotels: the Hilton Garden Inn LAX/El Segundo in El Segundo, California; the Hampton Inn & Suites Memphis—Shady Grove in Memphis, Tennessee, the Hilton Suites Chicago/Oak Brook in Chicago, Illinois and the Hilton Garden Inn Chicago/Oak Brook in Chicago, Illinois;

 

    “TRS” refers to a taxable REIT subsidiary under the Internal Revenue Code of 1986, as amended, and includes any subsidiaries or other, lower-tier entities of the taxable REIT subsidiary;

 

    an “upper midscale” hotel refers to an upper midscale hotel as defined by STR;

 

    an “upper upscale” hotel refers to an upper upscale hotel as defined by STR; and

 

    an “upscale” hotel refers to an upscale hotel as defined by STR.

 

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SUMMARY

This summary highlights information contained in this information statement and provides an overview of our company, our separation from Hilton and the distribution of Park Parent common stock by Hilton Parent to its stockholders. For a more complete understanding of our business and the spin-off, you should read this entire information statement carefully, particularly the discussion set forth under “Risk Factors” and our audited historical combined financial statements, our unaudited pro forma combined consolidated financial statements and the respective notes to those statements included in this information statement.

Park Hotels & Resorts

We are a leading lodging real estate company with a diverse portfolio of iconic and market-leading hotels and resorts with significant underlying real estate value. Our portfolio consists of 67 premium-branded hotels and resorts with over 35,000 rooms located in prime U.S. and international markets with high barriers to entry. Over 85% of our rooms are luxury and upper upscale and nearly 90% are located in the United States, including 14 of the top 25 markets as defined by Smith Travel Research (STR). Over 70% of our rooms are located in the central business districts of major cities and resort/conference destinations. We have a long-standing and mutually beneficial relationship with Hilton, one of the world’s leading hotel branding and management companies. We are focused on driving premium long-term total returns by continuing to enhance the value of our existing properties and utilizing our scale to efficiently allocate capital to drive growth while maintaining a strong and flexible balance sheet. With $2.7 billion of revenue, $817 million of Adjusted EBITDA and $299 million of net income in 2015, we will be one of the largest lodging REITs and expect to have significant liquidity.

Our portfolio is anchored by a collection of iconic properties located in gateway cities and premium resort destinations. Our top 10 properties contributed more than 60% of our Hotel Adjusted EBITDA in 2015 and achieved an average RevPAR of $201.78.

 

Top 10 Properties

 

•      Hilton Hawaiian Village

 

•      Hilton Waikoloa Village

 

•      Hilton San Francisco Union Square

 

•      Parc 55 Hotel San Francisco

 

•      Hilton New York Midtown

  

•      Hilton New Orleans Riverside

 

•      Hilton Chicago

 

•      Waldorf Astoria Bonnet Creek Orlando

 

•      Hilton Orlando Bonnet Creek

 

•      Waldorf Astoria Casa Marina Resort Key West

We believe these premier properties, which average more than 1,400 rooms and 120,000 square feet of meeting space, are relatively insulated from incremental competition as a result of high replacement costs, long-lead times for new development and irreplaceable locations in prime city center and resort/convention destinations.

Our portfolio is competitively positioned and well-maintained. Over the past five years, we have invested more than $1.2 billion, or nearly $40 thousand per room and 10% of revenues, in our consolidated properties with a focus on enhancing the overall guest experience with updated guestroom design, open and activated lobby areas, food and beverage and public spaces, and modernized meeting space. Approximately 80% of this investment was made in guest rooms, lobbies and other guest-facing areas. We also have enhanced the offerings and amenities of our hotels and resorts by repositioning food and beverage outlets, optimizing retail platforms, and redeveloping under-utilized space, thus generating incremental returns. We believe our portfolio continues to present significant opportunities for strategic value-enhancing investment over time.

 



 

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As an independent company, our dedicated management team will focus on diligent asset management and strategic capital allocation to maximize performance, growth and value creation over time. 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 (“ROI”) 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 enjoy a mutually beneficial relationship with Hilton. Hilton’s diverse collection of powerful brands creates a network effect that drives industry-leading revenue premiums. Hilton’s award-winning HHonors customer loyalty program, with over 58 million members as of September 30, 2016, provides our hotels and resorts with a large and growing base of loyal guests, representing nearly half of our rooms sold in 2015. Hilton has the expertise and track record to effectively manage our large-scale properties, and its robust sales and marketing platform drives strong group business, which enhances the stability and predictability of our revenues throughout the lodging cycle. As Hilton’s largest property owner, with six of the 10 largest properties in their global system by room count, we accounted for more than 13% of Hilton’s total group revenue and approximately 41% of Hilton-operated domestic group revenue in 2015.

We intend to elect and qualify to be subject to tax as a REIT for U.S. federal income tax purposes beginning immediately after the distribution. See “Material U.S. Federal Income Tax Considerations.” We believe our election of REIT status combined with the strong income generation of our assets will enhance our ability to pay an attractive dividend, offering a compelling value proposition for investors seeking current income as well as long-term growth.

 



 

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Our Competitive Strengths

We believe the following strengths distinguish us from other lodging real estate companies and effectively position us to execute on our business plan and growth strategies:

 

    Premium Assets with Significant Underlying Real Estate Value. Our portfolio includes iconic and market-leading properties with significant scale and embedded asset value. Our top 10 properties contributed more than 60% of our Hotel Adjusted EBITDA and generated an average RevPAR of $201.78 for the year ended December 31, 2015.

Top 10 Properties

 

Hotel

 

 

Rooms

 

 

Meeting

Space

(sq. ft.)

 

  

Description

 

     

 Hilton Hawaiian Village

 Honolulu, Hawaii

  2,860   96,000     

• ~22-acre oceanfront resort along Waikiki Beach, with nearly 145,000 sq. ft. of retail space

 Hilton Waikoloa Village

 Waikoloa Village, Hawaii

  1,241(1)    57,000     

• 62-acre oceanfront resort on Hawaii Island

 Hilton San Francisco Union

 Square

 Parc 55 Hotel San Francisco

 San Francisco, California

  1,919

 

1,024

  136,000  

 

32,000  

  

• Two adjacent convention hotels together comprising 2,943 rooms with 168,000 square feet of meeting space spanning two city blocks in downtown San Francisco

 Hilton New York Midtown

 New York, New York

  1,929(2)    150,000     

• One of the largest hotels in New York City in the heart of midtown Manhattan

     

 Hilton New Orleans Riverside

 New Orleans, Louisiana

  1,622   143,000     

• Overlooks the Mississippi River, adjacent to one of the largest U.S. convention centers

 Hilton Chicago

 Chicago, Illinois

  1,544   190,000     

• Convention hotel that covers a full city block in downtown Chicago

 Waldorf Astoria Orlando

 Hilton Orlando Bonnet Creek

 Orlando, Florida

  498

1,001

  34,000  

113,000  

  

 

• Together comprising a 482-acre resort complex near Walt Disney World® with an 18-hole golf course and surrounded by private nature preserve

 Waldorf Astoria Casa Marina

 Resort Key West

 Key West, Florida

  311   11,000     

• Landmark luxury beach resort in Key West overlooking nearly a quarter mile of private beachfront

 

(1)  Includes approximately 600 rooms that will become part of Hilton Grand Vacations prior to the completion of the spin-offs.
(2) Includes approximately 25 rooms that will become part of Hilton Grand Vacations prior to the completion of the spin-offs.

We believe these premier properties, which average 1,400 rooms and 120,000 square feet of meeting space, are relatively insulated from incremental competition as a result of high replacement costs, long-lead times for new development and irreplaceable locations in prime city center and resort/convention destinations.

 

   

Scaled Platform with Strong Growth Potential. With over 35,000 rooms and $817 million of Adjusted EBITDA in 2015, we will be the second-largest publicly traded lodging REIT, more than 55% larger than our next-largest competitor based on number of rooms, and more than twice as large as our next largest competitor based on 2015 Adjusted EBITDA. Our significant scale and expected liquidity will allow us to create value throughout all phases of the lodging cycle through disciplined capital allocation and portfolio management. We believe we will have a competitive advantage in competing

 



 

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for large-scale opportunities to invest in properties and portfolios, both as a result of superior access to capital and our expertise as an owner of complex lodging properties. Additionally, our diverse portfolio enables us to opportunistically sell assets and recycle capital accretively. Finally, we believe we can expand our operating margins through proactive asset management and by leveraging our modest corporate overhead across a large and growing asset base.

 

    Diversified Exposure to Attractive Markets. We will be one of the most geographically diversified lodging REITs, with hotels and resorts in 14 of the top 25 markets in the United States, as well as select international markets. We are focused on enhancing our exposure to attractive, high barrier-to-entry markets. The following charts illustrate our concentration by market and property type by portfolio room-count:

 

Percentage of Total Rooms by Market

 

  

Percentage of Total Rooms by Property Type

 

LOGO

   LOGO

 

  (1)  New York market information includes the 304 room Hilton Short Hills in New Jersey.

 

In our top five markets, which represented 52% of our 2015 Hotel Adjusted EBITDA, average demand growth is projected to exceed supply growth over the next several years, based on CBRE forecasts. Additionally, average RevPAR for our top five markets is expected to grow at a compound annual growth rate of 5.3% over the next three years, outpacing the U.S. industry average by roughly 70 basis points.

 

    Leading Group Platform. With 26 properties with over 25,000 square feet of meeting space and six properties with over 125,000 square feet of meeting space in top convention markets, our portfolio generates robust corporate meeting and group business, which represented approximately one-third of bookings at our comparable hotels in 2015. We believe the strong group positioning of our portfolio increases our visibility into forward bookings and reduces operating volatility by enhancing the stability and predictability of our revenue throughout the lodging cycle. For example, our portfolio revenue declined on a percentage basis approximately 400 basis points less than peers in 2009. Additionally, we entered 2016 with over 75% of anticipated annual group business on the books, which equated to 20% of total expected portfolio bookings for the year, lowering our dependency on in-the-year for-the-year business and enabling more effective revenue management. Moreover, we expect new supply of hotels with over 500 rooms and significant meeting space to continue to be very limited in the near to intermediate term based on STR forecasts, creating a favorable macro environment for our large convention hotels to continue to capture strong market share in group business.

 

   

Beneficial Relationship with Hilton. We enjoy a strong and mutually beneficial relationship with Hilton. Hilton’s diverse collection of powerful brands creates a network effect that drives industry-leading revenue premiums. Hilton’s award-winning HHonors customer loyalty program, with over 58 million members as of September 30, 2016, provides our hotels and resorts with a large and growing base of loyal guests, representing nearly half of our rooms sold in 2015. As an independent company, we will be Hilton’s largest property owner and our portfolio will include six of the 10 largest properties in Hilton’s global system by room count. We believe this relationship will continue to drive significant

 



 

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benefits and mutual alignment of strategic interests. Hilton has the experience and expertise to manage the complexities of large-scale, multi-use hotels and resorts, and its robust commercial services platform drives significant levels of demand and premium pricing that enhances the performance of our properties. For example, Hilton’s global sales team, with approximately 500 sales professionals in 90 offices around the world, drives significant group business to our large convention and resort properties through preferred relationships with direct customers, group meeting planners and other distribution partners. We accounted for more than 13% of total group business for the Hilton system and 41% for Hilton-operated domestic properties in 2015.

 

    Experienced Senior Leadership. Our senior management team will be led by Thomas J. Baltimore, Jr., who will serve as our President and Chief Executive Officer, and Sean M. Dell’Orto, who will serve as our Executive Vice President, Chief Financial Officer and Treasurer. Our senior management team are proven lodging industry operators, with an average of over 20 years of experience in the real estate and lodging industries. Our senior management team has extensive and long-standing business relationships with leading hotel management companies, major franchisors, lenders, brokers and institutional investors, established through many years of industry experience, as well as significant expertise in asset management, acquisitions, dispositions, financing and renovations and repositioning of hotel properties over multiple lodging cycles. They lead a highly skilled team of asset management professionals that have a long history with our portfolio and have managed hotel portfolios through a number of lodging cycles, and that possess an intimate knowledge of our properties, markets and potential investment opportunities. We believe that the extensive operating expertise of our team enables us to achieve superior operational efficiency and pursue innovative asset management strategies.

Our Business and Growth Strategies

Our objective is to be the preeminent lodging REIT and to generate premium long-term total returns for our stockholders through proactive and sophisticated asset management, value-enhancing investment and disciplined capital allocation. We intend to pursue this objective through the following strategies:

 

    Maximizing Hotel Profitability through Proactive and Sophisticated Asset Management. We are focused on continually improving the operating performance and profitability of each of our hotels and resorts through our proactive asset management efforts. We will continue to identify opportunities to increase market share, drive cost efficiencies and thereby maximize the operating performance, cash flow and value of each property. We have a demonstrated record of improving profitability, increasing Hotel Adjusted EBITDA margins more than 600 basis points in the last five years to 30.5% in 2015, and believe that further opportunities exist to improve operating results in our portfolio. Following the spin-off, we will be even better positioned to provide independent oversight of our properties to ensure optimal results are achieved.

 

   

Identifying and Executing Value Enhancement Opportunities. We have a demonstrated record of executing on strategic plans for our properties to generate strong unlevered returns on investment, which we target to significantly exceed our weighted average cost of capital on a risk-adjusted basis. As a pure-play lodging real estate company with significant financial resources and an extensive portfolio of large, multi-use assets, including 27 hotels with 400 rooms or more, we believe our ability to continue to implement compelling ROI initiatives represents a significant embedded growth opportunity. These may include the expansion of meeting platforms in convention and resort markets; the upgrade or redevelopment of existing amenities, including retail platforms, food and beverage outlets, pools and other facilities; the development of vacant land into income-generating uses, including retail or mixed-use properties; or the redevelopment or optimization of underutilized spaces. We also may create value through repositioning select hotels across brands or chain scale segments and exploring adaptive reuse opportunities to ensure our assets achieve their highest and best use. Finally,

 



 

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we are focused on maintaining the competitive strength of our properties and adapting to evolving customer preferences by renovating properties to provide updated guestroom design, open and activated lobby areas, food and beverage and public spaces, and modernized meeting space.

 

    Pursuing Growth and Diversification through Disciplined Capital Allocation. We intend to leverage our scale, expected liquidity and mergers and acquisitions expertise to create value throughout all phases of the lodging cycle through opportunistic acquisitions, dispositions and/or corporate transactions. We believe this platform also will enable us to further diversify our portfolio. For example, our portfolio includes six properties located in high-growth markets we acquired in February 2015 with the proceeds from the sale of the Waldorf Astoria New York as part of a tax deferred exchange of real property that was significantly accretive to Adjusted EBITDA. We will continue to opportunistically seek to expand our presence in target markets and further diversify over time, including by acquiring hotels that are affiliated with other leading hotel brands and operators.

 

    Maintaining a Strong and Flexible Balance Sheet. We intend to maintain a strong and flexible balance sheet with continued focus on optimizing our cost of capital by targeting modest leverage levels, which we will target to be approximately three- to five-times Net Debt/Adjusted EBITDA throughout the lodging cycle. We also will focus on maintaining sufficient liquidity with minimal short-dated maturities, and intend to have a mix of debt that will provide us with the flexibility to prepay when desired, dispose of assets, pursue our value enhancement strategies within our existing portfolio, and support acquisition activity. Additionally, we expect to reduce our level of secured debt over time, which will provide additional balance sheet flexibility. Our senior management team has extensive experience managing capital structures over multiple lodging cycles and has extensive and long-standing relationships with numerous lending institutions and financial advisors to address our capital needs.

Market Opportunity

The U.S. lodging industry is highly fragmented. The publicly traded lodging REIT universe, composed of 22 companies as of December 31, 2015, collectively comprises over 340,000 rooms and over 1,650 hotels, which in total generated approximately $21 billion in total revenues during the 2015 fiscal year. With 35,418 rooms and 67 hotels and $2.7 billion in total revenues for the 2015 fiscal year, we will be the second-largest publicly traded lodging REIT, more than 55% larger than our next largest competitor based on number of rooms and nearly twice as large as our next largest competitor based on 2015 revenues. Given our scale advantage, we will look to be an active consolidator of hotel assets to utilize efficiencies achieved through owning a broad portfolio of assets.

HNA Group Strategic Investment

On October 24, 2016, Hilton Parent, The Blackstone Group L.P. and its affiliates (“Blackstone”) and HNA Tourism Group Co., Ltd. (“HNA”) announced that affiliates of Blackstone agreed to sell to HNA 247,500,000 shares of common stock of Hilton Parent, representing approximately 25% of the outstanding shares of common stock of Hilton Parent, pursuant to a stock purchase agreement between HNA and Blackstone (the “Sale”). The Sale is expected to close, subject to customary closing conditions (including receipt of regulatory approvals in the United States, China and certain other countries), in the first quarter of 2017. If the Sale closes after the spin-off record date, the Sale also will include the shares of common stock of HGV Parent and Park Parent received by Blackstone with respect to the shares of common stock of Hilton Parent being sold to HNA.

In connection with the Sale, Park Parent entered into a stockholders agreement and a registration rights agreement with HNA, which will become effective upon the later to occur of (i) the closing of the Sale and (ii) the consummation of the spin-off. Park Parent also entered into a registration rights agreement with Blackstone (which will become effective upon the consummation of the spin-off) and Park Parent further intends to enter into a stockholders agreement with Blackstone at the consummation of the spin-off which will be

 



 

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substantially the same as Blackstone’s stockholders agreement with Hilton Parent. See “Certain Relationships and Related Party Transactions—Stockholders Agreements” and “—Registration Rights Agreements” for more detailed descriptions of these agreements.

On November 15, 2016, certain selling stockholders affiliated with Blackstone completed a secondary offering of 55,000,000 shares of common stock of Hilton Parent (the “Secondary Offering”). In this information statement, information with respect to the anticipated beneficial ownership of our common stock by Blackstone reflects the completion of the Secondary Offering.

Summary Risk Factors

There are a number of risks related to our business and the spin-off and related transactions, including:

 

    we are subject to the business, financial and operating risks inherent to the lodging industry, any of which could reduce our revenues, the value of our properties and our ability to make distributions and limit opportunities for growth;

 

    macroeconomic and other factors beyond our control can adversely affect and reduce lodging demand, which could adversely affect our profitability as well as limit or slow our future growth;

 

    the lodging industry is subject to seasonal and cyclical volatility, which is expected to contribute to fluctuations in our results of operations and financial condition;

 

    we operate in a highly competitive industry;

 

    we are subject to risks associated with the concentration of our portfolio in the Hilton family of brands. Any deterioration in the quality or reputation of the Hilton brands could have an adverse effect on our reputation, business, financial condition or results of operations;

 

    there are inherent risks with investments in real estate, including the relative illiquidity of such investments;

 

    contractual and other disagreements with or involving Hilton or other future third-party hotel managers and franchisors could make us liable to them or result in litigation costs or other expenses;

 

    we have investments in joint venture projects, which limit our ability to manage third-party risks associated with these projects;

 

    our indebtedness and other contractual obligations could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry and our ability to pay our debts and could divert our cash flow from operations for debt payments;

 

    we may be unable to achieve some or all of the benefits that we expect to achieve from the spin-off;

 

    we do not have a recent operating history as an independent company and our historical financial information does not predict our future results;

 

    we may have been able to receive better terms from unaffiliated third parties than the terms we receive in our agreements related to the spin-off;

 

    we may be responsible for U.S. federal income tax liabilities that relate to the distribution;

 

    if we do not qualify or maintain our qualification as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability;

 

    if the distribution is not considered grandfathered under new REIT legislation, either the spin-off would not qualify for tax-free treatment, or we will not be eligible to elect REIT status for a 10-year period following the spin-off;

 



 

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    complying with REIT requirements may cause us to forego otherwise attractive investments, force us to liquidate or restructure otherwise attractive investments or force us to borrow to make distributions to stockholders; and

 

    upon consummation of the spin-off, approximately 40% of the voting power in Park Parent will be controlled by Blackstone, and upon consummation of the Sale, 25% of the voting power in Park Parent will be controlled by HNA and approximately 15% will be controlled by Blackstone, and their respective interests may conflict with ours or yours in the future.

These and other risks related to our business and the spin-off are discussed in greater detail under the heading “Risk Factors” in this information statement. You should read and consider all of these risks carefully.

Distribution Policy

The Internal Revenue Code of 1986, as amended (the “Code”), generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and imposes tax on any taxable income retained by a REIT, including capital gains. To satisfy the requirements for qualification as a REIT and generally not be subject to U.S. federal income and excise taxes, we intend to make quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock out of assets legally available for such purposes. Our future distributions will be at the sole discretion of our board of directors.

To the extent we are prevented by provisions of our financing arrangements or otherwise from distributing 100% of our REIT taxable income or otherwise do not distribute 100% of our REIT taxable income, we will be subject to income tax, and potentially excise tax, on the retained amounts. If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, borrow funds, raise additional equity capital, sell assets or reduce such distributions. See “Distribution Policy.”

REIT Qualification

We intend to make a tax election to be treated as a REIT for U.S. federal income tax purposes beginning immediately after the distribution, and expect to continue to operate so as to qualify as a REIT. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on net taxable income that we distribute annually to our stockholders. To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the real estate qualification of sources of our income, the composition and values of our assets, the amounts we distribute to our stockholders and the ownership of our stock, including certain ownership limitations and restrictions on our stock. Qualification as a REIT involves the interpretation and application of highly technical and complex Code provisions for which no or only a limited number of judicial or administrative interpretations exist. To comply with REIT requirements, we may need to forego otherwise attractive opportunities and limit our expansion opportunities and the manner in which we conduct our operations. See “Risk Factors—Risks Related to our REIT Status and Certain Other Tax Items.”

Restrictions on Ownership of our Stock

Subject to certain exceptions, our amended and restated certificate of incorporation will provide that no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 4.9% (in value or by number of shares, whichever is more restrictive) of our outstanding common stock or more than 4.9% (in value or by number of shares, whichever is more restrictive) of any outstanding class or series of our preferred stock, which we refer to as the “ownership limit,” and will impose certain other restrictions on ownership and transfer of our stock. Our board of directors has granted exemptions from the ownership limit to certain entities affiliated with Blackstone and to HNA. See “Certain Relationships and Related Party Transactions—Blackstone Waiver Letter Agreement” and “—HNA Waiver Letter Agreement.”

 



 

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Our amended and restated certificate of incorporation also will prohibit any person from, among other things:

 

    owning shares of our stock that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT (including, but not limited to, as a result of any “eligible independent contractor” that operates a “qualified lodging facility” (as such terms are defined in Section 856(d)(9)(A) and 856(d)(9)(D) of the Code, respectively) on behalf of our TRS lessees failing to qualify as such);

 

    transferring shares of our stock if the transfer would result in shares of our stock being beneficially owned by fewer than 100 persons; and

 

    beneficially owning shares of our stock to the extent such ownership would result in our failing to qualify as a “domestically controlled qualified investment entity” within the meaning of Section 897(h) of the Code.

Any attempted transfer of our stock which, if effective, would result in violation of the above limitations or the ownership limit (except for a transfer which results in shares being owned by fewer than 100 persons, in which case such transfer will be void and of no force and effect and the intended transferee shall acquire no rights in such shares) will cause the number of shares causing the violation, rounded up to the nearest whole share, to be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries designated by us, and the intended transferee will not acquire any rights in the shares.

These restrictions are intended to assist with our REIT compliance under the Code and otherwise to promote our orderly governance, among other purposes. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

 

 

Park Hotels & Resorts Inc. was incorporated in the State of Delaware on May 29, 1946 under the name Hilton Hotels Corporation, was later renamed Hilton Worldwide, Inc. on December 10, 2009 and renamed Park Hotels & Resorts Inc. on June 1, 2016. Our headquarters are located in McLean, Virginia, at 7930 Jones Branch Drive, Suite 1100. Our telephone number is (703) 883-1000.

 



 

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The Spin-Off

Overview

On February 26, 2016, Hilton Parent announced its intention to implement the spin-off of Park Hotels & Resorts and Hilton Grand Vacations from Hilton, following which Park Parent and HGV Parent will be independent, publicly traded companies.

Before our spin-off from Hilton, we will enter into a Distribution Agreement and several other agreements with Hilton Parent and HGV Parent related to the spin-off. These agreements will govern the relationship among us, Hilton and Hilton Grand Vacations after completion of the spin-off and provide for the allocation among us, Hilton and Hilton Grand Vacations of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities). These agreements also will include arrangements with respect to transitional services to be provided by Hilton to Park Hotels & Resorts and Hilton Grand Vacations. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent Related to the Spin-Off.”

The distribution of Park Parent common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. In addition, Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton Parent determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents, or that market conditions or other circumstances are such that it is not advisable at that time to separate Park Hotels & Resorts from Hilton. See “The Spin-Off—Conditions to the Spin-Off.”

Organizational Structure

The simplified diagrams below (which omit certain wholly owned intermediate holding companies) depict the organizational structure of Hilton, Park Hotels & Resorts and Hilton Grand Vacations before and after giving effect to the spin-offs.

Current Hilton Organizational Structure

 

LOGO

 



 

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Organizational Structure Following the Spin-Offs

 

LOGO

Financing Transactions

Subject to market conditions, Park Hotels & Resorts expects to complete one or more financing transactions on or prior to the completion of the spin-off, including the repayment of certain of its existing indebtedness (the “Financing Transactions”), which we expect will result in an estimated net reduction of its outstanding indebtedness at September 30, 2016 of approximately $66 million. See “The Spin-Off—Financing Transactions” and “Description of Certain Indebtedness.”

Purging Distribution

Hilton Parent will allocate its accumulated earnings and profits (as determined for U.S. federal income tax purposes) for periods prior to the spin-off between Hilton Parent, HGV Parent and Park Parent in a manner that, in its best judgment, is in accordance with the provisions of the Code. As a result of our intended election to be treated as a REIT for U.S. federal income tax purposes, and to comply with certain REIT qualification requirements, we intend to declare a dividend to our stockholders to distribute our accumulated earnings and profits attributable to our non-REIT years (the “Purging Distribution”), including any earnings and profits allocated to us in connection with the spin-off and the earnings and profits generated by us in our taxable year ending on the date of the spin-off. The Purging Distribution will be paid to our stockholders in a combination of cash and Park Parent common stock, with the cash portion constituting at least 20% of the total amount of the Purging Distribution. We expect to pay the majority of the Purging Distribution in Park Parent common stock. We expect to declare and pay the Purging Distribution prior to the end of 2017. We currently expect the amount of the Purging Distribution will be between approximately $550 million and $650 million. See “The Spin-Off—The Purging Distribution.”

 



 

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Questions and Answers About the Spin-Off

The following provides only a summary of the terms of the spin-off. For a more detailed description of the matters described below, see “The Spin-Off.”

 

Q: What is the spin-off?

 

A: The spin-off is the series of transactions by which Park Hotels & Resorts will separate from Hilton. To complete the spin-off, Hilton Parent will distribute to its stockholders all of the outstanding shares of Park Parent common stock. We refer to this as the distribution. Following the spin-off, Park Hotels & Resorts will be a separate company from Hilton, and Hilton will not retain any ownership interest in Park Hotels & Resorts

 

Q: What will I receive in the spin-off?

 

A: As a holder of Hilton Parent common stock, you will retain your Hilton Parent shares and will receive one share of Park Parent common stock for every five shares of Hilton Parent common stock you own as of the record date. You also will receive one share of common stock of HGV Parent for every ten shares of Hilton Parent common stock you own as of the record date in connection with the spin-off of that company. The number of shares of Hilton Parent common stock you own and your proportionate interest in Hilton Parent will not change as a result of the spin-off. See “The Spin-Off.”

 

Q: What is Park Parent?

 

A: Park Parent is a leading lodging real estate company with a diverse portfolio of iconic and market-leading hotels and resorts with significant underlying real estate value. Park Parent is currently a subsidiary of Hilton Parent whose shares will be distributed to Hilton Parent stockholders when the spin-off is completed. After the spin-off is completed, Park Parent will be an independent, self-administered, publicly traded lodging REIT.

 

Q: Why is Park Parent referred to as a REIT, and what is a REIT?

 

A: Following the spin-off, we intend to elect to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes beginning immediately after the distribution.

A REIT is a company that derives most of its income from real property or real estate mortgages and has elected to be subject to tax as a REIT. If a corporation elects to be subject to tax as a REIT and qualifies as a REIT, it generally will not be subject to U.S. federal corporate income taxes on income that it currently distributes to its stockholders. A company’s qualification as a REIT depends on its ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels to its stockholders and the diversity of ownership of its capital stock.

 

Q: Why is the separation of Park Parent structured as a spin-off?

 

A:

Hilton Parent intends to implement the spin-off of (i) a portfolio of 67 owned and leased hotel and resort properties, with over 35,000 rooms, comprising a substantial portion of Hilton’s ownership business, and certain related assets and operations consisting of the hotel laundry operations described under “Business and Properties—Portfolio Summary—Hotel Laundry Operations,” which we refer to collectively as the “Separated Real Estate business” and (ii) its timeshare business, which we refer to as Hilton’s “Timeshare business.” Hilton determined, and continues to believe, that a spin-off is the most efficient way to accomplish a separation of the Separated Real Estate business from Hilton for various reasons, including: (i) a spin-off would be a tax-free distribution of Park Parent common stock to Hilton Parent stockholders;

 



 

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  (ii) a spin-off offers a higher degree of certainty of completion in a timely manner, lessening disruption to current business operations; and (iii) a spin-off provides greater assurance that decisions regarding the capital structure of Park Hotels & Resorts support future financial stability. After consideration of strategic alternatives, Hilton believes that a tax-free spin-off will enhance the long-term value of both Hilton and Park Hotels & Resorts See “The Spin-Off—Reasons for the Spin-Off.”

 

Q: Why aren’t all of Hilton’s real estate assets included in Park Hotels & Resorts?

 

A: As a general matter, Hilton sought to include substantially all of its owned and leased properties in Park Hotels & Resorts. After undertaking an extensive review of its real estate portfolio, in conjunction with its advisors, Hilton identified certain properties that will not be separated as part of the spin-off. More specifically, following the spin-off, Hilton or joint ventures in which Hilton holds an interest, will continue to own or lease an aggregate of 75 hotels, of which 65 are leased hotels located outside the United States. In 2015, such hotels represented approximately $1.6 billion of revenue. In general, these properties were retained by Hilton for one or more of the following reasons:

 

    in the case of international leased hotels, the interest and tenure of Hilton under such leases is more akin to that of a hotel management company under a management agreement than a real estate interest;

 

    there are legal or contractual impediments to their inclusion in Park Hotels & Resorts; or

 

    there are potentially adverse tax consequences to their inclusion in Park Hotels & Resorts.

 

Q: How much of our portfolio is owned versus leased?

 

A: Nearly 80% of our portfolio by room count is wholly or primarily owned in fee simple, with the remaining hotels subject to ground lease. Nine of our hotels, comprising 5,082 rooms are owned or leased by unconsolidated joint ventures in which we own an interest. See “Business and Properties—Type of Property Interest,” “—Our Hotels” and “—Ground Leases” for additional information.

 

Q: Can Hilton decide to cancel the distribution of the Park Parent common stock even if all the conditions have been met?

 

A: Yes. The distribution of Park Parent common stock is subject to the satisfaction or waiver of certain conditions. See “The Spin-Off—Conditions to the Spin-Off.” Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton Parent determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents, or that market conditions or other circumstances are such that it is not advisable at that time to separate Park Hotels & Resorts from Hilton.

 

Q: What is being distributed in the spin-off?

 

A: Approximately 198 million shares of Park Parent common stock will be distributed in the spin-off, based on the number of shares of Hilton Parent common stock expected to be outstanding as of December 15, 2016, the record date, and assuming a distribution ratio of one-to-five. The actual number of shares of Park Parent common stock to be distributed will be calculated on the record date. The shares of Park Parent common stock to be distributed by Hilton Parent will constitute all of the issued and outstanding shares of Park Parent common stock immediately prior to the distribution. See “Description of Capital Stock—Common Stock.”

 



 

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Q: When is the record date for the distribution?

 

A: The record date is December 15, 2016.

 

Q: When will the distribution occur?

 

A: The distribution date of the spin-off is January 3, 2017. We expect that it will take the distribution agent, acting on behalf of Hilton Parent, up to two weeks after the distribution date to fully distribute the shares of Park Parent common stock to Hilton Parent stockholders.

 

Q: What do I have to do to participate in the spin-off?

 

A: Nothing. You are not required to take any action, although we urge you to read this entire document carefully. No stockholder approval of the distribution is required or sought. You are not being asked for a proxy. No action is required on your part to receive your shares of Park Parent common stock. You will neither be required to pay anything for the new shares nor be required to surrender any shares of Hilton Parent common stock to participate in the spin-off.

 

Q: How will stock options, time-vesting restricted stock units, and performance-vesting restricted stock units and restricted shares held by Park Hotels & Resorts employees be affected as a result of the spin-off?

 

A: At the time of the distribution, subject to approval of the board of directors of Hilton Parent, in general, it is expected that all outstanding Hilton Parent equity-based compensation awards, whether vested or unvested, and which are held by any individual who is employed by us as of the separation, other than those of our employees who serve as General Managers at our properties outside of the United States, will convert into awards that will settle in shares of Park Hotels & Resorts common stock following the spin-off, and performance-vesting awards will generally be converted into time-vesting awards based upon a performance level to be determined by the Hilton Parent Compensation Committee prior to the separation. For more information on the treatment of equity-based compensation awards in the spin-off, see “The Spin-Off—Treatment of Outstanding Equity Awards.”

 

Q: How will fractional shares be treated in the spin-off?

 

A: Fractional shares of Park Parent common stock will not be distributed. Fractional shares of Park Parent common stock to which Hilton Parent stockholders of record would otherwise be entitled will be aggregated and sold in the public market by the distribution agent at prevailing market prices. The distribution agent, in its sole discretion, will determine when, how and through which broker-dealers, provided that such broker-dealers are not affiliates of Hilton Parent or Park Parent, and at what prices to sell these shares. The aggregate net cash proceeds of the sales will be distributed ratably to those stockholders who would otherwise have received fractional shares of Park Parent common stock. See “The Spin-Off—Treatment of Fractional Shares” for a more detailed explanation. Receipt by a stockholder of proceeds from these sales in lieu of a fractional share generally will result in a taxable gain or loss to those stockholders for U.S. federal income tax purposes. Each stockholder entitled to receive cash proceeds from these shares should consult his, her or its own tax advisor as to such stockholder’s particular circumstances. We describe the material U.S. federal income tax consequences of the distribution in more detail under “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 

Q: Why has Hilton determined to undertake the spin-off?

 

A: Hilton Parent’s board of directors has determined that the spin-off is in the best interests of Hilton Parent, its stockholders and other constituents because the spin-off will provide the following key benefits:

 

   

Direct and Differentiated Access to Capital Resources to Pursue Tailored Growth Strategies. Following the spin-off, Park Parent will be free to allocate capital with a focus on optimizing the value of our portfolio without having to balance the countervailing economic imperatives of a capital-light

 



 

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management and franchising business. As a pure-play real estate company with direct access to capital and independent financial resources, we believe our enhanced ability to execute compelling return on investment initiatives within our portfolio represents a significant embedded growth opportunity. Moreover, the anticipated liquidity of our stock should enhance our ability to pursue single-asset and portfolio acquisition opportunities. Similarly, as a pure-play hotel management and franchising company, Hilton Parent expects to benefit from alignment with a dedicated investor base, resulting in enhanced and more efficient access to capital to pursue a growth strategy best suited for its core, capital-light fee business.

 

    Enhanced Investor Choices by Offering Investment Opportunities in Separate Entities. Hilton’s management and franchising and real estate businesses exhibit different financial and operating characteristics and appeal to different types of investors with different investment goals and risk profiles. Finding investors who want to invest in the businesses together is more challenging than finding investors for each business individually. After the spin-off, investors should be better able to evaluate the financial performance of each company, as well as its strategy within the context of its particular market, thereby enhancing the likelihood that each company will achieve an appropriate market valuation.

 

    Dedicated Management Team with Enhanced Strategic Focus. Following the spin-off, Hilton’s management and franchising and real estate businesses will no longer compete for the attention and resources of a single management team and will benefit from dedicated management teams focused on designing and implementing tailored strategies to achieve the distinct goals and opportunities of each business. Moreover, free from constraints that arise from being part of a larger hotel management business, Park Parent’s dedicated management team will be able to more effectively and independently oversee the management of our properties to ensure optimal results are achieved and will be able to pursue separate and optimal business strategies.

 

    Improved Management Incentive Tools. We expect to use equity-based and other incentive awards to compensate current and future employees. In multi-business companies such as Hilton, it is difficult to structure incentives that reward employees in a manner directly related to the performance of their respective business units. By granting awards linked to the performance of a pure-play business, the compensation arrangements of each company should provide enhanced incentives for employee performance and improve the ability of each company to attract, retain and motivate qualified personnel.

 

    Tax-Efficient Structure. The spin-off will allow Hilton Parent’s stockholders to hold their interest in the Park Hotels & Resorts portfolio, comprising most of Hilton Parent’s ownership segment, through an entity that will elect to be taxed as a REIT for U.S. federal income tax purposes. We believe this will result in Hilton Parent’s stockholders realizing significant tax savings on the earnings from the portfolio of Park Hotels & Resorts.

 

Q: What are the U.S. federal income tax consequences of the spin-off?

 

A: Hilton Parent has received a ruling (“IRS Ruling”) from the Internal Revenue Service (“IRS”) regarding certain U.S. federal income tax aspects of the spin-off. The spin-off is conditioned on the IRS Ruling remaining in effect as of the distribution date. In addition, the spin-off is conditioned on the receipt of an opinion of Simpson Thacher & Bartlett LLP, Hilton Parent’s tax counsel (“Spin-off Tax Counsel”), confirming tax-free treatment under Section 355 of the Code of the distributions. Although Hilton Parent has no current intention to do so, such conditions are solely for the benefit of Hilton Parent and its stockholders and may be waived by Hilton Parent in its sole discretion. The material U.S. federal income tax consequences of the distribution are described in more detail under “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 



 

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Q: Will the Park Parent common stock be listed on a stock exchange?

 

A: Yes. Although there is not currently a public market for Park Parent common stock, before completion of the spin-off, Park Parent will apply to list its common stock on the New York Stock Exchange under the symbol “PK .” It is anticipated that trading of Park Parent common stock will commence on a “when-issued” basis at least two trading days prior to the record date. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. “When-issued” trades generally settle within four trading days after the distribution date. On the first trading day following the distribution date, any “when-issued” trading with respect to Park Parent common stock will end, and “regular-way” trading will begin. “Regular-way” trading refers to trading after a security has been issued and typically involves a transaction that settles on the third full trading day following the date of the transaction. See “Trading Market.”

 

Q: Will my shares of Hilton Parent common stock continue to trade?

 

A: Yes. Hilton Parent common stock will continue to be listed and trade on the New York Stock Exchange under the symbol “HLT.”

 

Q: If I sell, on or before the distribution date, shares of Hilton Parent common stock that I held on the record date, am I still entitled to receive shares of Park Parent common stock distributable with respect to the shares of Hilton Parent common stock I sold?

 

A: Beginning on or shortly before the record date and continuing through the distribution date for the spin-off, Hilton Parent common stock will begin to trade in two markets on the New York Stock Exchange: a “regular-way” market and an “ex-distribution” market. If you hold shares of Hilton Parent common stock as of the record date for the distribution and choose to sell those shares in the “regular-way” market after the record date for the distribution and on or before the distribution date, you also will be selling the right to receive the shares of Park Parent common stock in connection with the spin-off. However, if you hold shares of Hilton Parent common stock as of the record date for the distribution and choose to sell those shares in the “ex-distribution” market after the record date for the distribution and on or before the distribution date, you will still receive the shares of Park Parent common stock in the spin-off.

 

Q: Will the spin-off affect the trading price of my Hilton Parent stock?

 

A: Yes. The trading price of shares of Hilton Parent common stock immediately following the distribution is expected to be lower than immediately prior to the distribution because its trading price will no longer reflect the value of the Separated Real Estate business and Timeshare business. However, we cannot predict the price at which the Hilton Parent shares will trade following the spin-off.

 

Q: What financing transactions will be undertaken in connection with the spin-off?

 

A: Subject to market conditions, Park Hotels & Resorts expects to complete one or more financing transactions on or prior to the completion of the spin-off, including the repayment of certain of its existing indebtedness, which we expect will result in an estimated net reduction of its outstanding indebtedness at September 30, 2016 of approximately $66 million. See “The Spin-Off—Financing Transactions” and “Description of Certain Indebtedness.”

 

Q: Who will comprise the senior management team and board of directors of Park Parent after the spin-off?

 

A:

Our senior management team will be led by Thomas J. Baltimore, Jr., who will serve as our President and Chief Executive Officer, and Sean M. Dell’Orto, who will serve as our Executive Vice President, Chief

 



 

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  Financial Officer and Treasurer. Mr. Baltimore has served most recently as President and Chief Executive Officer of RLJ Lodging Trust (NYSE: RLJ), a publicly traded lodging REIT that he co-founded. Mr. Baltimore has led RLJ since its IPO in 2011 and its predecessor entities since 2000. RLJ currently owns 125 hotels in major markets in North America, with more than 20,900 guest rooms and a portfolio value in excess of $4 billion. Mr. Dell’Orto has served most recently as Senior Vice President, Treasurer of Hilton Parent since September 2012, and he has been integral in Hilton’s corporate strategy, capital markets and investor relations activities, including the company’s IPO in 2013. Messrs. Baltimore and Dell’Orto lead a talented team of executive officers, with an average of over 20 years of experience in the real estate and lodging industries. We expect to identify additional members of the senior management team prior to the distribution date. See “Management” for information on our executive officers and board of directors.

 

Q: What will the relationship be between Hilton and Park Hotels & Resorts after the spin-off?

 

A: Following the spin-off, Park Parent will be an independent, self-administered, publicly traded lodging REIT, and Hilton Parent will have no continuing stock ownership interest in Park Parent. Park Parent will have entered into a Distribution Agreement with Hilton Parent and HGV Parent and will enter into several other agreements for the purpose of allocating among Hilton Parent, Park Parent and HGV Parent various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities). These agreements also will govern our relationship with Hilton and Hilton Grand Vacations following the spin-off and will provide arrangements for employee matters, tax matters, intellectual property matters, insurance matters and other specified liabilities, rights and obligations attributable to periods before and, in some cases, after the spin-off. These agreements also will include arrangements with respect to transitional services to be provided by Hilton to Park Hotels & Resorts and Hilton Grand Vacations. The Distribution Agreement will provide, in general, that Park Hotels & Resorts will indemnify Hilton against any and all liabilities arising out of the business of Park Hotels & Resorts as constituted in connection with the spin-off and any other liabilities and obligations assumed by Park Hotels & Resorts, and that Hilton will indemnify Park Hotels & Resorts against any and all liabilities arising out of the businesses of Hilton as constituted in connection with the spin-off and any other liabilities and obligations assumed by Hilton.

To qualify as a REIT, we will not directly or indirectly operate any of our hotels, other than the Select Hotels. Upon consummation of the spin-off, we expect to lease all or substantially all of our hotels to our TRS lessees, which, in turn, will engage Hilton to manage these hotels pursuant to management agreements. We will operate the Select Hotels pursuant to franchise agreements with Hilton.

The terms of the management and franchise agreements that we and Hilton will enter into in connection with the spin-off are described under “Business and Properties—Our Principal Agreements—Management Agreements” and “—Franchise Agreements.”

 

Q: What will Park Parent’s distribution policy be after the spin-off?

 

A: We intend to elect and qualify to be subject to tax as a REIT for U.S. federal income tax purposes beginning immediately after the distribution. The Code generally requires that a REIT annually distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain, and imposes tax on any taxable income retained by a REIT, including capital gains.

All dividends will be made by us at the discretion of our board of directors and will depend on the financial position, results of operations, cash flows, capital requirements, debt covenants (which are expected to include limits on dividends), applicable law and other factors as our board of directors deems relevant. Our board of directors has not yet determined when any dividends will be declared or paid, although we currently expect that dividends will be paid on a quarterly basis. We cannot guarantee, and there can be no assurance, that we will declare or pay any dividends or distributions. See “Distribution Policy.”

 



 

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Q: What are the anti-takeover effects of the spin-off?

 

A: Some provisions of the amended and restated certificate of incorporation and by-laws of Park Parent, Delaware law and possibly the agreements governing Park Parent’s new debt, as each will be in effect immediately following the spin-off, may have the effect of making more difficult an acquisition of control of Park Hotels & Resorts in a transaction not approved by our board of directors. See “Description of Capital Stock—Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws and Certain Provisions of Delaware Law.” In addition, under the Tax Matters Agreement, Park Parent will agree, subject to certain terms, conditions and exceptions, not to enter into any transaction for a period of two years following the distribution involving an acquisition (including issuance) of Park Parent common stock or certain other transactions that could cause the distribution to be taxable to Hilton Parent. The parties also will agree to indemnify each other for any tax resulting from any transaction to the extent a party’s actions caused such tax liability, whether or not the indemnified party consented to such transaction or the indemnifying party was otherwise permitted to enter into such transaction under the Tax Matters Agreement, and for all or a portion of any tax liabilities resulting from the distribution under certain other circumstances. Generally, Hilton Parent will recognize a taxable gain on the distribution if there are (or have been) one or more acquisitions (including issuances) of Park Parent capital stock representing 50% or more of Park Parent’s stock, measured by vote or value, and the acquisitions are deemed to be part of a plan or series of related transactions that include the distribution. Any such acquisition of Park Parent common stock within two years before or after the distribution (with exceptions, including public trading by less-than-5% stockholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted. Moreover, under the Tax Matters Agreement, Park Parent will agree to restrict certain issuances and repurchases of its stock to manage the aggregate shift in ownership of Park Parent’s stock as a result of such acquisitions. As a result, these obligations may discourage, delay or prevent a change of control of Park Hotels & Resorts.

 

Q: What are the risks associated with the spin-off?

 

A: There are a number of risks associated with the spin-off and ownership of Park Parent common stock. These risks are discussed under “Risk Factors.”

 

Q: Where can I get more information?

 

A. If you have any questions relating to the mechanics of the distribution, you should contact the distribution agent at:

Wells Fargo Shareowner Services

P.O. Box 64874

St. Paul, MN 55164-0874

Toll Free: 800-468-9716

Before completion of the spin-off, if you have any questions relating to the spin-off, you should contact Hilton Parent at:

Hilton Worldwide Holdings Inc.

Investor Relations

Phone: 703-883-5476

Email: ir@hilton.com

www.hiltonworldwide.com

After completion of the spin-off, if you have any questions relating to Park Hotels & Resorts, you should contact Park Parent at:

Park Hotels & Resorts Inc.

Investor Relations

Phone: (703) 584-7441

Email: ir@pkhotelsandresorts.com

 



 

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Summary of the Spin-Off

 

Distributing Company

Hilton Worldwide Holdings Inc., a Delaware corporation. After the distribution, Hilton will not own any shares of Park Parent common stock.

 

Distributed Company

Park Hotels & Resorts Inc., a Delaware corporation and a wholly owned subsidiary of Hilton.

 

  After the spin-off, Park Parent will be an independent, self-administered, publicly traded company, and intends to elect to qualify as a REIT for U.S. federal income tax purposes. Prior to the completion of the spin-off, Park Parent will be renamed.

 

Distributed Securities

All of the outstanding shares of Park Parent common stock owned by Hilton Parent, which will be 100% of the Park Parent common stock issued and outstanding immediately prior to the distribution.

 

Record Date

The record date for the distribution is December 15, 2016.

 

Distribution Date

The distribution date is January 3, 2017.

 

Internal Reorganization

As part of the spin-off, Hilton will undergo an internal reorganization, which we refer to as the “internal reorganization,” pursuant to which, among other things and subject to limited exceptions:

 

    all of the assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) associated with the Separated Real Estate business will be retained by or transferred to us or our subsidiaries;

 

    all of the assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) associated with the Timeshare business will be retained by or transferred to HGV Parent or its subsidiaries; and

 

    all other assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) of Hilton will be retained by or transferred to Hilton Parent or its subsidiaries (other than us, HGV Parent and our respective subsidiaries).

 

  After completion of the spin-off:

 

    we will be an independent, self-administered, publicly traded company (NYSE: PK), and will hold a portfolio of Hilton’s real estate assets and certain other assets and operations as described herein;

 

    HGV Parent will be an independent, publicly traded company (NYSE : HGV), and will own and operate Hilton’s timeshare business; and

 



 

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    Hilton will continue to be an independent, publicly traded company (NYSE: HLT) and continue to own and operate its management and franchising business and will continue to hold certain real estate assets not transferred to Park Hotels & Resorts as part of the spin-off.

 

  See “The Spin-Off—Manner of Effecting the Spin-Off—Internal Reorganization.”

 

Distribution Ratio

Each holder of Hilton Parent common stock will receive one share of Park Parent common stock for every five shares of Hilton Parent common stock held at 5:00 p.m., Eastern time, on December 15, 2016.

 

  Immediately following the spin-off, Park Parent expects to have 27 record holders of shares of common stock and approximately 198 million shares of common stock outstanding, based on the number of stockholders and outstanding shares of Hilton Parent common stock on November 8, 2016 and the distribution ratio. The figures exclude shares of Hilton Parent common stock held directly or indirectly by Hilton Parent, if any. The actual number of shares to be distributed will be determined on the record date and will reflect any repurchases of shares of Hilton Parent common stock and issuances of shares of Hilton Parent common stock in respect of awards under Hilton Parent equity-based incentive plans between the date the Hilton Parent board of directors declares the dividend for the distribution and the record date for the distribution.

 

The Distribution

On the distribution date, Hilton Parent will release the shares of Park Parent common stock to the distribution agent to distribute to Hilton Parent stockholders. The distribution of shares will be made in book-entry form only, which means that no physical share certificates will be issued. It is expected that it will take the distribution agent up to two weeks to issue shares of Park Parent common stock to you or to your bank or brokerage firm electronically on your behalf by way of direct registration in book-entry form. Trading of our shares will not be affected during that time. You will not be required to make any payment, surrender or exchange your shares of Hilton Parent common stock or take any other action to receive your shares of Park Parent common stock.

 

Fractional Shares

The distribution agent will not distribute any fractional shares of Park Parent common stock to Hilton Parent stockholders. Fractional shares of Park Parent common stock to which Hilton Parent stockholders of record would otherwise be entitled will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of the sales will be distributed ratably to those stockholders who would otherwise have received fractional shares of Park Parent common stock. Receipt of the proceeds from these sales generally will result in a taxable gain or loss to those stockholders for U.S. federal income tax purposes. Each stockholder entitled to receive cash

 



 

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proceeds from these shares should consult his, her or its own tax advisor as to such stockholder’s particular circumstances. The material U.S. federal income tax consequences of the distribution are described in more detail under “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 

Conditions to the Spin-Off

Completion of the spin-off is subject to the satisfaction or waiver by Hilton Parent of the following conditions:

 

    the final approval by the board of directors of Hilton Parent of the spin-off and all related transactions and the determination of the record date, which approval may be given or withheld at its absolute and sole discretion;

 

    our Registration Statement on Form 10, of which this information statement forms a part, shall have been declared effective by the Securities and Exchange Commission (the “SEC”), no stop order suspending the effectiveness thereof shall be in effect, no proceedings for such purpose shall be pending before or threatened by the SEC, and this information statement, or a notice of internet availability thereof, shall have been mailed to the Hilton Parent stockholders;

 

    Park Parent common stock shall have been approved for listing on the New York Stock Exchange, subject to official notice of distribution;

 

    Hilton Parent shall have obtained an opinion from Spin-off Tax Counsel, in form and substance satisfactory to Hilton Parent, to the effect that the spin-off will qualify as a tax-free distribution under Section 355 of the Code;

 

    the IRS Ruling shall not have been revoked or modified in any material respect;

 

    the receipt by Park Parent of a tax opinion, in form and substance reasonably satisfactory to Park Parent, to the effect that, commencing with Park Parent’s taxable year ending on December 31, 2017, Park Parent should be considered to be organized in conformity with the requirements for qualification as a REIT under the Code, and its proposed method of operation should enable it to meet the requirements for qualification and taxation as a REIT;

 

    prior to the distribution date, the Hilton Parent board of directors shall have obtained opinions from a nationally recognized valuation firm, in form and substance satisfactory to Hilton, with respect to the capital adequacy and solvency of each of Hilton, Park Hotels & Resorts and Hilton Grand Vacations after giving effect to the spin-off;

 

    any material governmental approvals and other consents necessary to consummate the spin-off shall have been received;

 

   

no order, injunction or decree issued by any governmental entity of competent jurisdiction or other legal restraint or prohibition

 



 

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preventing the consummation of all or any portion of the spin-off shall be pending, threatened, issued or in effect, and no other event shall have occurred or failed to occur that prevents the consummation of all or any portion of the spin-off;

 

    no other events or developments shall have occurred or failed to occur that, in the judgment of the board of directors of Hilton Parent, would result in the distribution having a material adverse effect on Hilton or its stockholders;

 

    the internal reorganization shall have been completed, except for such steps as Hilton Parent in its sole discretion shall have determined may be completed after the distribution date;

 

    all necessary actions shall have been taken to cause the board of directors of Park Parent to consist of the individuals identified in this information statement as directors of Park Parent;

 

    all necessary actions shall have been taken to cause the officers of Park Parent to be the individuals identified as such in this information statement;

 

    all necessary actions shall have been taken to adopt the form of amended and restated certificate of incorporation and by-laws filed by Park Parent with the SEC as exhibits to the Registration Statement on Form 10, of which this information statement forms a part; and

 

    each of the Distribution Agreement, the Tax Matters Agreement, the Employee Matters Agreement, the Transition Services Agreement and the other ancillary agreements shall have been executed by each party.

 

  Completion of the spin-off of Hilton Grand Vacations will be subject to similar conditions as those listed above.

 

  The fulfillment of the foregoing conditions will not create any obligation on the part of Hilton to effect the spin-off. We are not aware of any material federal, foreign or state regulatory requirements that must be complied with or any material approvals that must be obtained, other than compliance with SEC rules and regulations, approval for listing on the New York Stock Exchange and the declaration of effectiveness of the Registration Statement on Form 10, of which this information statement forms a part, by the SEC, in connection with the distribution. Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton Parent determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents or that it is not advisable for Park Hotels & Resorts to separate from Hilton at that time. For more information, see “The Spin-Off—Conditions to the Spin-Off.”

 



 

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Trading Market and Symbol

We intend to list Park Parent common stock on the New York Stock Exchange under the ticker symbol “PK.” We anticipate that, at least two trading days prior to the record date, trading of shares of Park Parent common stock will begin on a “when-issued” basis and will continue up to and including the distribution date, and we expect “regular-way” trading of Park Parent common stock will begin the first trading day after the distribution date. We also anticipate that, at least two trading days prior to the record date, there will be two markets in Hilton Parent common stock: (i) a “regular-way” market on which shares of Hilton Parent common stock will trade with an entitlement for the purchaser of Hilton Parent common stock to shares of Park Parent common stock to be distributed pursuant to the distribution; and (ii) an “ex-distribution” market on which shares of Hilton Parent common stock will trade without an entitlement for the purchaser of Hilton Parent common stock to shares of Park Parent common stock. For more information, see “Trading Market.”

 

Tax Consequences of the Spin-Off

Hilton Parent has received the IRS Ruling regarding certain U.S. federal income tax aspects of the spin-off. The spin-off is conditioned upon, among other things, the IRS Ruling remaining in effect as of the distribution date. In addition, the spin-off is conditioned on the receipt of an opinion of Spin-off Tax Counsel, confirming the tax-free treatment of the spin-off. See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

 

  Each stockholder is urged to consult his, her or its tax advisor as to the specific tax consequences of the spin-off to such stockholder, including the effect of any state, local or non-U.S. tax laws and of changes in applicable tax laws.

 

Relationship with Hilton after the Spin-Off

We will enter into a Distribution Agreement and several other agreements with Hilton Parent and HGV Parent related to the spin-off. These agreements will govern the relationship among us, Hilton and Hilton Grand Vacations after completion of the spin-off and provide for the allocation among us, Hilton and Hilton Grand Vacations of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities). The Distribution Agreement will provide for the allocation of assets and liabilities among Hilton, Park Hotels & Resorts and Hilton Grand Vacations and will establish the rights and obligations between and among the parties following the distribution. We intend to enter into one or more Transition Services Agreements with Hilton Parent pursuant to which certain services will be provided on an interim basis following the distribution. We also intend to enter into an Employee Matters Agreement that will set forth the agreements among us, Hilton Grand Vacations and Hilton concerning certain employee, compensation and benefit-related matters. Further, we intend to enter into a Tax Matters Agreement with Hilton Parent and Hilton Grand Vacations regarding the sharing

 



 

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of taxes incurred before and after completion of the spin-off, certain indemnification rights with respect to tax matters and certain restrictions on our conduct following the distribution intended to preserve the tax-free status of the spin-off. We describe these arrangements in greater detail under “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent Related to the Spin-Off,” and describe some of the risks of these arrangements under “Risk Factors—Risks Relating to the Spin-Off.”

 

  To qualify as a REIT, we will not directly or indirectly operate any of our hotels, other than the Select Hotels. Upon consummation of the spin-off, we expect to lease all or substantially all of our hotels to our TRS lessees, which, in turn, will engage Hilton to manage these hotels pursuant to management agreements. We will operate the Select Hotels pursuant to franchise agreements with Hilton.

 

  The terms of the management and franchise agreements that we and Hilton will enter into in connection with the spin-off are described under “Business and Properties—Our Principal Agreements—Management Agreements” and “—Franchise Agreements.”

 

Distribution Policy

Following the spin-off and our election and qualification to be treated as a REIT for U.S. federal income tax purposes beginning immediately after the distribution, we intend to make quarterly dividend payments of at least 90% of our REIT taxable income to holders of our common stock out of assets legally available for this purpose. Dividends will be authorized by and at the sole discretion of our board of directors based on a number of factors including actual results of operations, dividend restrictions under Delaware law or applicable debt covenants, our liquidity and financial condition, our taxable income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and other factors it may deem relevant. For more information, see “Distribution Policy.”

 

Purging Distribution

Hilton Parent will allocate its accumulated earnings and profits (as determined for U.S. federal income tax purposes) for periods prior to the spin-off between Hilton Parent, HGV Parent and Park Parent in a manner that, in its best judgment, is in accordance with the provisions of the Code. As a result of our intended election to be subject to tax as a REIT for U.S. federal income tax purposes, to comply with certain REIT qualification requirements, we will make the Purging Distribution by declaring a dividend to our stockholders to distribute our accumulated earnings and profits attributable to our non-REIT years, including the earnings and profits allocated to us in connection with the spin-off and the earnings and profits generated by us in our taxable year ending on the date of the spin-off. The Purging Distribution will be paid to Park Parent stockholders in a combination of cash and Park Parent common stock, with the cash portion constituting at least 20% of the total amount of the Purging

 



 

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Distribution. We expect to pay the majority of the Purging Distribution in Park Parent common stock. Additionally, we expect to declare and pay the Purging Distribution prior to the end of 2017. We currently expect the aggregate amount of the Purging Distribution will be between $550 million and $650 million. See “The Spin-Off—The Purging Distribution.”

 

Tax Consequences of the Purging Distribution

In general, any and all of the cash and stock we distribute to our stockholders as part of the Purging Distribution will be treated as a taxable distribution of property with respect to our stock, and the amount of any distribution of stock received by any of our stockholders as part of the Purging Distribution will be considered to equal the amount of the money that could have been received instead. In the Purging Distribution, a holder of our common stock will be required to report dividend income as a result of the Purging Distribution even if we distribute no cash or only nominal amounts of cash to such stockholder. See “The Spin-Off—The Purging Distribution.”

 

  Each stockholder is urged to consult his, her or its tax advisor as to the specific tax consequences of the Purging Distribution to such stockholder, including the effect of any U.S. federal, state, local and non-U.S. tax laws.

 

Financing Transactions

Subject to market conditions, Park Hotels & Resorts expects to complete one or more financing transactions on or prior to the completion of the spin-off, including the repayment of certain of its existing indebtedness, which we expect will result in an estimated net reduction from its outstanding indebtedness at September 30, 2016 of approximately $66 million. See “The Spin-Off—Financing Transactions” and “Description of Certain Indebtedness.”

 

Transfer Agent

Wells Fargo Bank, N.A.

 

Risk Factors

We face both general and specific risks and uncertainties relating to our business, our relationship with Hilton and our being an independent, publicly traded company. We also are subject to risks relating to the spin-off. You should carefully read the risk factors set forth in the section entitled “Risk Factors” in this information statement.

 



 

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Summary Historical and Unaudited Pro Forma Combined Consolidated Financial Data

The following summary historical combined consolidated statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the summary historical combined consolidated balance sheet data as of December 31, 2015 and 2014 are derived from our audited combined consolidated financial statements included elsewhere in this information statement. The summary historical combined consolidated statement of operations data for the nine months ended September 30, 2016 and 2015 and the summary historical combined consolidated balance sheet data as of September 30, 2016 are derived from our unaudited condensed combined consolidated financial statements included elsewhere in this information statement. The summary historical combined consolidated balance sheet data as of September 30, 2015 and December 31, 2013, are derived from our unaudited condensed combined consolidated financial statements, which are not included in this information statement. We have prepared our unaudited condensed combined consolidated financial statements on the same basis as our audited combined consolidated financial statements and, in our opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. The results of any interim period are not necessarily indicative of the results that may be expected for the full year.

The unaudited summary pro forma financial information has been prepared to reflect the spin-off and related transactions described under “Unaudited Pro Forma Combined Consolidated Financial Statements.” The following unaudited summary pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the relevant transactions had been consummated on the date indicated, nor is it indicative of future operating results. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and we believe such assumptions are reasonable under the circumstances.

This summary financial data is not indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we been operating as an independent, publicly traded company during the periods presented, including changes that will occur in our operations and capitalization as a result of the spin-off from Hilton. For example, our historical combined consolidated financial statements include allocations of certain expenses from Hilton, including expenses for costs related to functions such as information technology support, systems maintenance, financial services, human resources and other shared services. These costs may not be representative of the future costs we will incur, either positively or negatively, as an independent, public company.

The summary historical financial data below should be read together with the audited combined consolidated financial statements, unaudited condensed combined consolidated financial statements, including the related notes thereto, as well as “Selected Historical Combined Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain Indebtedness” and the other financial information included elsewhere in this information statement.

 



 

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    As of and for the Nine
Months ended September 30,
    As of and for the Year
ended December 31,
 
    Pro
Forma
    Historical     Pro
Forma
    Historical  
        2016             2016             2015             2015             2015             2014             2013      
    (in millions)  

Summary Statement of Operations Data:

             

Revenues

             

Rooms

  $ 1,361       $ 1,361       $ 1,340       $ 1,783       $ 1,783       $ 1,679       $ 1,556    

Food and beverage

    536         536         512         691         691         644         607    

Other

    160         160         161         214         214         190         170    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    2,057         2,057         2,013         2,688         2,688         2,513         2,333    

Expenses

             

Rooms

    352         352         343         456         456         457         422    

Food and beverage

    375         375         362         487         487         454         437    

Other departmental and support

    498         500         487         647         650         592         556    

Other property-level

    135         135         135         180         180         178         178    

Management fees

    106         73         69         138         89         77         61    

Impairment loss

    15         15         —         —         —         —         —    

Depreciation and amortization

    220         220         212         287         287         248         246    

Corporate and other

    51         56         80         89         96         67         103    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,752         1,726         1,688         2,284         2,245         2,073         2,003    

Operating income

    306         332         468         547         586         440         330    

Net income attributable to Parent

    199         116         224         408         292         176         144    

Summary Balance Sheet Data:

             

Cash and cash equivalents

  $ 338       $ 346       $ 54         $ 72       $ 42       $ 48    

Restricted cash

    22         79         99           72         32         42    

Total assets

    9,914         9,969         9,827           9,787         9,714         9,792    

Debt

    3,007         3,073         4,186           4,057         4,246         4,174    

Total equity

    6,246         4,071         2,737           2,797         2,593         2,868    

 



 

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    Nine months ended
September 30,
     Year ended December 31,  
           2016                    2015                    2015                    2014                    2013         
    ($ in millions, except RevPAR and ADR)  

Operational and Other Financial Data:

             

Number of Hotels

    67            69            69            64            70      

Number of Rooms

    35,418            36,065            36,062            34,263            35,664      

Hotel Data:

             

RevPAR(1)

  $ 162.67          $ 160.40          $ 160.37          $ 160.53          $ 153.95      

Occupancy(1)

    81.5%         83.0%         81.8%         81.0%         79.5%   

ADR(1)

  $ 199.51          $ 193.26          $ 196.10          $ 198.26          $ 193.70      

Total Hotel Revenue

  $ 2,047          $ 2,004          $ 2,675          $ 2,503          $ 2,323      

Hotel Adjusted EBITDA(2)

  $ 615          $ 611          $ 815          $ 747          $ 670      

Hotel Adjusted EBITDA Margin(3)

    30.0%         30.5%         30.5%         29.8%         28.8%   

NAREIT FFO attributable to Parent(4)

  $ 363          $ 306          $ 454          $ 424          $ 416      

Adjusted FFO attributable to Parent(4)

  $ 363          $ 332          $ 480          $ 427          $ 349      

 

(1)  Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics Used by Management.” Excludes operating statistics for hotels owned by unconsolidated investments in affiliates.
(2)  Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for the definition of Hotel Adjusted EBITDA and reconciliation to net income, which we believe is the most closely comparable U.S. GAAP financial measure.
(3)  Hotel Adjusted EBITDA Margin is calculated as Hotel Adjusted EBITDA divided by Total Hotel Revenue.
(4)  Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for the definitions of NAREIT FFO attributable to Parent and Adjusted FFO attributable to Parent and reconciliation to net income attributable to Parent, which we believe is the most closely comparable U.S. GAAP financial measure.

 



 

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RISK FACTORS

Owning our common stock involves a high degree of risk. You should consider carefully the following risk factors and all other information contained in this information statement. If any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, occur, our business, liquidity, financial condition and results of operations could be materially and adversely affected. If this were to happen, the market price of our common stock could decline significantly, and you could lose all or a part of the value of your ownership in our common stock. Some statements in this information statement, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section in this information statement entitled “Forward-Looking Statements.”

Risks Related to Our Business and Industry

We are subject to the business, financial and operating risks inherent to the lodging industry, any of which could reduce our revenues, the value of our properties and our ability to make distributions and limit opportunities for growth.

Our business is subject to a number of business, financial and operating risks inherent to the lodging industry, including:

 

    significant competition from other lodging businesses and hospitality providers in the markets in which we operate;

 

    changes in operating costs, including energy, food, employee compensation and benefits and insurance;

 

    increases in costs due to inflation or otherwise, including increases in our operating costs, that may not be fully offset by revenue increases in our business;

 

    changes in taxes and governmental regulations that influence or set wages, prices, interest rates or construction and maintenance procedures and costs;

 

    the costs and administrative burdens associated with complying with applicable laws and regulations;

 

    the costs or desirability of complying with local practices and customs;

 

    significant increases in cost for health care coverage for employees and potential government regulation with respect to health care coverage;

 

    shortages of labor or labor disruptions;

 

    the ability of third-party internet and other travel intermediaries to attract and retain customers;

 

    the availability and cost of capital necessary to fund investments, capital expenditures and service debt obligations;

 

    delays in or cancellations of planned or future development or refurbishment projects;

 

    the quality of services provided by Hilton and any other future third-party hotel managers;

 

    the financial condition of Hilton and any other future third-party hotel managers and franchisors, developers and joint venture partners;

 

    relationships with Hilton and any other future third-party hotel managers, developers and joint venture partners, including the risk that Hilton or any other future third-party hotel managers or franchisors may terminate our management or franchise agreements and that joint venture partners may terminate joint venture agreements;

 

    cyclical over-building in the hotel industry;

 

    changes in desirability of geographic regions of the hotels in our portfolio, geographic concentration in our portfolio and shortages of desirable locations for development;

 

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    changes in the supply and demand for hotel services (including rooms, food and beverage and other products and services); and

 

    decreases in the frequency of business travel that may result from alternatives to in-person meetings, including virtual meetings hosted online or over private teleconferencing networks.

Any of these factors could increase our costs or reduce our revenues, adversely impact our ability to make distributions to our stockholders or otherwise affect our ability to maintain existing properties or develop new properties.

Macroeconomic and other factors beyond our control can adversely affect and reduce lodging demand.

Macroeconomic and other factors beyond our control can reduce demand for our products and services, including demand for rooms at our hotels. These factors include, but are not limited to:

 

    changes in general economic conditions, including low consumer confidence, unemployment levels and depressed real estate prices resulting from the severity and duration of any downturn in the U.S. or global economy;

 

    war, political conditions or civil unrest, violence or terrorist activities or threats and heightened travel security measures instituted in response to these events;

 

    decreased corporate or government travel-related budgets and spending, as well as cancellations, deferrals or renegotiations of group business such as industry conventions;

 

    statements, actions, or interventions by governmental officials related to travel and corporate travel-related activities and the resulting negative public perception of such travel and activities;

 

    the financial and general business condition of the airline, automotive and other transportation-related industries and its effect on travel, including decreased airline capacity and routes, as well as the price of crude oil and refined products;

 

    conditions that negatively shape public perception of travel, including travel-related accidents and outbreaks of pandemic or contagious diseases, such as Ebola, avian flu, severe acute respiratory syndrome (SARS), H1N1 (swine flu) and the Zika virus;

 

    cyber-attacks;

 

    climate change or availability of natural resources;

 

    natural or manmade disasters, such as earthquakes, windstorms, tsunamis, tornadoes, hurricanes, typhoons, tsunamis, volcanic eruptions, floods, drought, fires, oil spills and nuclear incidents;

 

    changes in the desirability of particular locations or travel patterns of customers; and

 

    organized labor activities, which could cause a diversion of business from hotels involved in labor negotiations and loss of business for our hotels generally as a result of certain labor tactics.

Any one or more of these factors can adversely affect, and from time to time have adversely affected, individual hotels, particular regions and our business, financial condition and results of operations.

Contraction in the global economy or low levels of economic growth could adversely affect our revenues and profitability as well as limit or slow our future growth.

Consumer demand for products and services provided by the lodging industry is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Decreased global or regional demand for products and services provided by the lodging industry can be especially pronounced during periods of economic contraction or low levels of economic growth, and the

 

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recovery period in our industry may lag overall economic improvement. Declines in demand for our products and services due to general economic conditions could negatively affect our business by decreasing the revenues and profitability of our properties. In addition, many of the expenses associated with our business, including personnel costs, interest, rent, property taxes, insurance and utilities, are relatively fixed. During a period of overall economic weakness, if we are unable to meaningfully decrease these costs as demand for our hotels decreases, our business operations and financial performance may be adversely affected.

In addition to general economic conditions, new hotel room supply is an important factor that can affect the lodging industry’s performance and overbuilding has the potential to further exacerbate the negative impact of an economic downturn. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. A reduction or slowdown in growth of lodging demand or increased growth in lodging supply could result in returns that are substantially below expectations or result in losses, which could materially and adversely affect our revenues and profitability as well as limit or slow our future growth.

The lodging industry is subject to seasonal and cyclical volatility, which is expected to contribute to fluctuations in our financial condition and results of operations.

The lodging industry is seasonal in nature. The periods during which our properties experience higher revenues vary from property to property, depending principally upon location and the customer base served. This seasonality can be expected to cause periodic fluctuations in a hotel’s rooms revenues, occupancy levels, room rates and operating expenses. We can provide no assurances that our cash flows will be sufficient to offset any shortfalls that occur as a result of these fluctuations. As a result, we may have to enter into short-term borrowings in certain quarters to make distributions to our stockholders, and we can provide no assurances that such borrowings will be available on favorable terms, if at all. Consequently, volatility in our financial performance resulting from the seasonality of the lodging industry could adversely affect our financial condition and results of operations. In addition, the lodging industry is cyclical and demand generally follows the general economy on a lagged basis. The seasonality and cyclicality of our industry may contribute to fluctuations in our financial condition and results of operations.

Our expenses may not decrease even if our revenue decreases.

Many of the expenses associated with owning and operating hotels, such as debt-service payments, property taxes, insurance, utilities, and employee wages and benefits, are relatively inflexible. They do not necessarily decrease in tandem with a reduction in revenue at the hotels and may be subject to increases that are not tied to the performance of our hotels or the increase in the rate of inflation generally. In addition some of our third-party ground leases require periodic increases in ground rent payments. Our ability to pay these rents could be affected adversely if our hotel revenues do not increase at the same or a greater rate than the increases in rental payments under the ground leases.

Additionally, certain costs, such as wages, benefits and insurance, may exceed the rate of inflation in any given period. In the event of a significant decrease in demand, Hilton or other third-party hotel managers that we may engage in the future may not be able to reduce the size of hotel work forces to decrease wages and benefits. Our hotel managers also may be unable to offset any fixed or increased expenses with higher room rates. Any of our efforts to reduce operating costs also could adversely affect the future growth of our business and the value of our hotel properties.

There are inherent risks with investments in real estate, including the relative illiquidity of such investments.

Investments in real estate are subject to varying degrees of risk. For example, an investment in real estate cannot generally be quickly sold, and we cannot predict whether we will be able to sell any hotel we desire to for the price or on the terms set by us or acceptable to us, or the length of time needed to find a willing purchaser and to close the sale of the hotel. Moreover, the Code imposes restrictions on a REIT’s ability to dispose of properties

 

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that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs require that we hold our hotels for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of hotels that otherwise would be in our best interests. Therefore, we may not be able to vary our portfolio promptly in response to changing economic, financial and investment conditions and dispose of assets at opportune times or on favorable terms, which may adversely affect our cash flows and our ability to make distributions to stockholders.

In addition, our ability to dispose of some of our hotels could be constrained by their tax attributes. Hotels that we own may have low tax bases. If we dispose of these hotels outright in taxable transactions, we may be required to distribute the taxable gain to our stockholders under the requirements of the Code applicable to REITs or to pay tax on that gain, either of which, in turn, would impact our cash flow. To dispose of low basis hotels efficiently, we may from time to time use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the hotel for which the disposed assets are exchanged inheriting their low tax bases and other tax attributes.

In addition, real estate ownership and leasing is subject to various risks, including:

 

    governmental regulations relating to real estate ownership or operations, including tax, environmental, zoning and eminent domain laws;

 

    loss in value of real estate due to changes in market conditions or the area in which real estate is located;

 

    potential civil liability for accidents or other occurrences on owned or leased properties;

 

    the ongoing need for owner-funded capital improvements and expenditures to maintain or upgrade properties;

 

    periodic total or partial closures due to renovations and facility improvements;

 

    risks associated with mortgage debt, including the possibility of default, fluctuating interest rate levels and uncertainties in the availability of replacement financing;

 

    fluctuations in real estate values or potential impairments in the value of our assets;

 

    the relative illiquidity of real estate compared to some other assets;

 

    risks associated with the possibility that cost increases will outpace revenue increases and that in the event of an economic slowdown, the high proportion of fixed costs will make it difficult to reduce costs to the extent required to offset declining revenues;

 

    changes in tax laws and property taxes, or an increase in the assessed valuation of a property for real estate tax purposes; and

 

    force majeure events, such as earthquakes, floods or other uninsured losses.

We operate in a highly competitive industry.

The lodging industry is highly competitive. Our principal competitors are other owners and investors in upper upscale, full-service hotels, including other lodging REITs, as well as major hospitality chains with well-established and recognized brands. Our hotels face competition for individual guests, group reservations and conference business. We also compete against smaller hotel chains, independent and local hotel owners and operators. We compete for these customers based primarily on brand name recognition and reputation, as well as location, room rates, property size and availability of rooms and conference space, quality of the accommodations, customer satisfaction, amenities and the ability to earn and redeem loyalty program points. New hotels may be constructed and these additions to supply create new competitors, in some cases without corresponding increases in demand for hotel rooms. Our competitors may have greater commercial, financial and marketing resources and more efficient technology platforms, which could allow them to improve their

 

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properties and expand and improve their marketing efforts in ways that could affect our ability to compete for guests effectively and adversely affect our revenues and profitability as well as limit or slow our future growth.

We also compete for hotel acquisitions with entities that have similar investment objectives as we do. This competition could limit the number of investment opportunities that we find suitable for our business. It may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms or on the terms contemplated in our business plan.

Our efforts to develop, redevelop or renovate our properties could be delayed or become more expensive, which could reduce revenues or impair our ability to compete effectively.

Certain of the properties in our portfolio were constructed more than a century ago. The condition of our properties could negatively affect our ability to attract guests or result in higher operating and capital costs, if not sufficiently maintained. These factors could reduce revenues or profits from these properties. There can be no assurance that our planned replacements and repairs will occur, or even if completed, will result in improved performance. In addition, these efforts are subject to a number of risks, including:

 

    construction delays or cost overruns (including labor and materials);

 

    obtaining zoning, occupancy and other required permits or authorizations;

 

    changes in economic conditions that may result in weakened or lack of demand for improvements that we make or negative project returns;

 

    governmental restrictions on the size or kind of development;

 

    volatility in the debt and capital markets that may limit our ability to raise capital for projects or improvements;

 

    lack of availability of rooms or meeting spaces for revenue-generating activities during construction, modernization or renovation projects;

 

    force majeure events, including earthquakes, tornadoes, hurricanes, floods or tsunamis; and

 

    design defects that could increase costs.

If our properties are not updated to meet guest preferences, if properties under development or renovation are delayed in opening as scheduled, or if renovation investments adversely affect or fail to improve performance, our operations and financial results could be negatively affected.

We face various risks posed by our acquisition, redevelopment, repositioning, renovation and re-branding activities, as well as our disposition activities.

A key element of our business strategy is to invest in identifying and consummating acquisitions of additional hotels and portfolios. We can provide no assurances that we will be successful in identifying attractive hotels or that, once identified, we will be successful in consummating an acquisition. We face significant competition for attractive investment opportunities from other well-capitalized investors, some of which have greater financial resources and a greater access to debt and equity capital to acquire hotels than we do. This competition increases as investments in real estate become increasingly attractive relative to other forms of investment. As a result of such competition, we may be unable to acquire certain hotels or portfolios that we deem attractive or the purchase price may be significantly elevated or other terms may be substantially more onerous. In addition, we expect to finance future acquisitions through a combination of retained cash flows, borrowings and offerings of equity and debt securities, which may not be available on advantageous terms, or at all. Any delay or failure on our part to identify, negotiate, finance on favorable terms, consummate and integrate such acquisitions could materially impede our growth.

 

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In addition, newly acquired, redeveloped, renovated, repositioned or re-branded hotels may fail to perform as expected and the costs necessary to bring such hotels up to brand standards may exceed our expectations, which may result in the hotels’ failure to achieve projected returns.

In particular, these activities could pose the following risks to our ongoing operations:

 

    we may abandon such activities and may be unable to recover expenses already incurred in connection with exploring such opportunities;

 

    acquired, redeveloped, renovated or re-branded hotels may not initially be accretive to our results, and we and the third-party hotel managers may not successfully manage newly acquired, renovated, redeveloped, repositioned or re-branded hotels to meet our expectations;

 

    we may be unable to quickly, effectively and efficiently integrate new acquisitions, particularly acquisitions of portfolios of hotels, into our existing operations;

 

    our redevelopment, repositioning, renovation or re-branding activities may not be completed on schedule, which could result in increased debt service and other costs and lower revenues, and defects in design or construction may result in delays and additional costs to remedy the defect or require a portion of a property to be closed during the period required to rectify the defect;

 

    management attention may be diverted by our acquisition, redevelopment, repositioning or re-branding activities, which in some cases may turn out to be less compatible with our growth strategy than originally anticipated;

 

    we may not be able to meet the loan covenants in any financing obtained to fund the new development, creating default risks;

 

    we may issue shares of stock or other equity interests in connection with such acquisitions that could dilute the interests of our existing stockholders; and

 

    we may assume various contingent liabilities in connection with such transactions.

We may also divest certain properties or assets, and any such divestments may yield lower than expected returns or otherwise fail to achieve the benefits we expect. In some circumstances, sales of properties or other assets may result in losses. Upon sales of properties or assets, we may become subject to contractual indemnity obligations, incur material tax liabilities or, as a result of required debt repayment, face a shortage of liquidity. Finally, any acquisitions, investments or dispositions could demand significant attention from management that would otherwise be available for business operations, which could harm our business. The occurrence of any of the foregoing events, among others, could materially and adversely affect our results of operations and profitability as well as limit or slow our future growth.

Our hotels are geographically concentrated in a limited number of markets and, accordingly, we could be disproportionately harmed by adverse changes to these markets, force majeure events or threat of a terrorist attack.

A significant portion of our room count is located in a concentrated number of markets that exposes us to greater risk to local economic or business conditions, changes in hotel supply in these markets, and other conditions than more geographically diversified hotel companies. Hotels in New York, Washington, D.C., San Francisco, New Orleans, Florida and Hawaii represented over 50% of our room count, as of September 30, 2016. An economic downturn, an increase in hotel supply in these markets, a force majeure event, a terrorist attack or similar disaster in any one of these markets likely would cause a decline in the hotel market and adversely affect occupancy rates, the financial performance of our hotels in these markets and our overall results of operations. For example, in 2005, our operations in New Orleans were affected negatively by Hurricane Katrina.

 

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In addition, certain of our hotels are located in markets that are more susceptible to natural disasters than others, which could adversely affect those hotels, the local economies, or both. For instance, our hotels in Florida may be susceptible to hurricanes, while our hotels in California may be susceptible to earthquakes.

The threat of terrorism also may negatively impact hotel occupancy and average daily rate, due to resulting disruptions in business and leisure travel patterns and concerns about travel safety. Hotels in major metropolitan areas, such as the gateway cities that represent our target markets, may be particularly adversely affected due to concerns about travel safety. The possibility of future attacks may hamper business and leisure travel patterns and, accordingly, the performance of our business and our operations.

Our properties may not be permitted to be rebuilt if destroyed.

Certain of our properties may qualify as legally permissible nonconforming uses and improvements, including certain of our iconic and most profitable properties. If a substantial portion of any such properties were to be destroyed by fire or other casualty, we might not be permitted to rebuild that property as it now exists, regardless of the availability of insurance proceeds. Any loss of this nature, whether insured or not, could materially adversely affect our results of operations and prospects.

We have investments in joint venture projects, which limit our ability to manage third-party risks associated with these projects.

In certain cases, we are minority participants and do not control the decisions of the joint ventures in which we are involved. Therefore, joint venture investments may involve risks such as the possibility that a co-venturer in an investment might become bankrupt, be unable to meet its capital contribution obligations, have economic or business interests or goals that are inconsistent with our business interests or goals or take actions that are contrary to our instructions or to applicable laws and regulations. In addition, we may be unable to take action without the approval of our joint venture partners, or our joint venture partners could take actions binding on the joint venture without our consent. Consequently, actions by a co-venturer or other third-party could expose us to claims for damages, financial penalties and reputational harm, any of which could adversely affect our business and operations. In addition, we may agree to guarantee indebtedness incurred by a joint venture or co-venturer or provide standard indemnifications to lenders for loss liability or damage occurring as a result of our actions or actions of the joint venture or other co-venturers. Such a guarantee or indemnity may be on a joint and several basis with a co-venturer, in which case we may be liable in the event that our co-venturer defaults on its guarantee obligation. The non-performance of a co-venturer’s obligations may cause losses to us in excess of the capital we initially may have invested or committed.

Preparing our financial statements requires us to have access to information regarding the results of operations, financial position and cash flows of our joint ventures. Any deficiencies in our joint ventures’ internal controls over financial reporting may affect our ability to report our financial results accurately or prevent or detect fraud. Such deficiencies also could result in restatements of, or other adjustments to, our previously reported or announced operating results, which could diminish investor confidence and reduce the market price for our shares. Additionally, if our joint ventures are unable to provide this information for any meaningful period or fail to meet expected deadlines, we may be unable to satisfy our financial reporting obligations or timely file our periodic reports.

Although our joint ventures may generate positive cash flow, in some cases they may be unable to distribute that cash to the joint venture partners. Additionally, in some cases our joint venture partners control distributions and may choose to leave capital in the joint venture rather than distribute it. Because our ability to generate liquidity from our joint ventures depends in part on their ability to distribute capital to us, our failure to receive distributions from our joint venture partners could reduce our cash flow return on these investments.

 

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We own and lease hotels outside the United States, which exposes us to risks related to doing business in international markets.

Our portfolio includes 15 hotels located outside of the United States, including joint venture interests, and this may increase over time. As a result, we are subject to the risks of doing business outside the United States, including:

 

    rapid changes in governmental, economic and political policy, political or civil unrest, acts of terrorism or the threat of international boycotts or U.S. anti-boycott legislation;

 

    increases in anti-American sentiment and the identification of the licensed brands as an American brand;

 

    recessionary trends or economic instability in international markets;

 

    changes in foreign currency exchange rates or currency restructurings and hyperinflation or deflation in the countries in which we operate;

 

    the effect of disruptions caused by severe weather, natural disasters, outbreak of disease or other events that make travel to a particular region less attractive or more difficult;

 

    the presence and acceptance of varying levels of business corruption in international markets and the effect of various anti-corruption and other laws;

 

    the imposition of restrictions on currency conversion or the transfer of funds or limitations on our ability to repatriate non-U.S. earnings in a tax-efficient manner;

 

    the ability to comply with or effect of complying with complex and changing laws, regulations and policies of foreign governments that may affect investments or operations, including foreign ownership restrictions, import and export controls, tariffs, embargoes, increases in taxes paid and other changes in applicable tax laws;

 

    uncertainties as to local laws regarding, and enforcement of, contract and intellectual property rights;

 

    forced nationalization of our properties by local, state or national governments;

 

    the difficulties involved in managing an organization doing business in many different countries; and

 

    difficulties in complying with U.S. rules governing REITs while operating outside of the United States.

These factors may adversely affect the revenues from and the market value of our properties located in international markets. While these factors and the effect of these factors are difficult to predict, any one or more of them could lower our revenues, increase our costs, reduce our profits or disrupt our business operations.

With respect to our leased hotels, we could be materially and adversely affected if we are found to be in breach of a ground lease or are unable to renew a ground lease.

If we are found to be in breach of certain of our third-party ground leases, we could lose the right to use the applicable hotel. In addition, unless we can purchase a fee interest in the underlying land and improvements or extend the terms of these leases before their expiration, as to which no assurance can be given, we will lose our right to operate these properties and our interest in the improvements upon expiration of the leases. Our ability to exercise any extension options relating to our ground leases is subject to the condition that we are not in default under the terms of the ground lease at the time that we exercise such options, and we can provide no assurances that we will be able to exercise any available options at such time. Furthermore, we can provide no assurances that we will be able to renew any ground lease upon its expiration. If we were to lose the right to use a hotel due to a breach or non-renewal of the ground lease, we would be unable to derive income from such hotel, which could adversely affect us.

 

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We will not recognize any increase in the value of the land or improvements subject to our ground leases and may only receive a portion of compensation paid in any eminent domain proceeding with respect to the hotel.

Unless we purchase a fee interest in the land and improvements subject to our ground leases, we will not have any economic interest in the land or improvements at the expiration of our ground leases and therefore we generally will not share in any increase in value of the land or improvements beyond the term of a ground lease, notwithstanding our capital outlay to purchase our interest in the hotel or fund improvements thereon, and will lose our right to use the hotel. Furthermore, if a governmental authority seizes a hotel subject to a ground lease under its eminent domain power, we may only be entitled to a portion of any compensation awarded for the seizure.

We may be subject to unknown or contingent liabilities related to recently acquired hotels and the hotels that we may acquire in the future, which could materially and adversely affect our revenues and profitability growth.

Our recently acquired hotels, and the hotels that we may acquire in the future, may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. In general, the representations and warranties provided under the transaction agreements related to the purchase of the hotels we acquire may not survive the completion of the transactions. Furthermore, indemnification under such agreements may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these hotels may exceed our expectations, and we may experience other unanticipated adverse effects, all of which could materially and adversely affect our revenues and profitability.

We depend on external sources of capital for future growth; therefore, any disruption to our ability to access capital at times and on terms reasonably acceptable to us may affect adversely our business and results of operations.

Ownership of hotels is a capital intensive business that requires significant capital expenditures to acquire, operate, maintain and renovate properties. To qualify as a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income (determine without regard to the deduction for dividends paid and excluding any net capital gain), including taxable income recognized for U.S. federal income tax purposes but with regard to which we do not receive cash. As a result, we must finance our growth, fund debt repayments and fund these significant capital expenditures largely with external sources of capital. Our ability to access external capital could be hampered by a number of factors, many of which are outside of our control, including:

 

    price volatility, dislocations and liquidity disruptions in the U.S. and global equity and credit markets such as occurred during 2008 and 2009;

 

    changes in market perception of our growth potential, including downgrades by rating agencies;

 

    decreases in our current and estimated future earnings;

 

    decreases or fluctuations in the market price of our common stock;

 

    increases in interest rates; and

 

    the terms of our existing indebtedness.

Any of these factors, individually or in combination, could prevent us from being able to obtain the external capital we require on terms that are acceptable to us, or at all, which could have a material adverse effect on our ability to finance our future growth and our financial condition and results of operations. Potential consequences of disruptions in U.S. and global equity and credit markets and, as a result, an inability for us to access external capital at times, and on terms, reasonably acceptable to us could include:

 

    a need to seek alternative sources of capital with less attractive terms, such as more restrictive covenants and shorter maturity;

 

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    adverse effects on our financial condition and liquidity, and our ability to meet our anticipated requirements for working capital, debt service and capital expenditures;

 

    higher costs of capital;

 

    an inability to enter into derivative contracts to hedge risks associated with changes in interest rates and foreign currency exchange rates; or

 

    an inability to execute on our acquisition strategy.

We are subject to risks associated with the concentration of our portfolio in the Hilton family of brands. Any deterioration in the quality or reputation of the Hilton brands could have an adverse effect on our reputation, business, financial condition or results of operations.

All of our properties as of the date of this information statement utilize brands owned by Hilton. As a result, our ability to attract and retain guests depends, in part, on the public recognition of the Hilton brands and their associated reputation. If the Hilton brands become obsolete or consumers view them as unfashionable or lacking in consistency and quality, we may be unable to attract guests to our hotels.

Changes in ownership or management practices, the occurrence of accidents or injuries, force majeure events, crime, individual guest notoriety or similar events at our hotels or other properties managed, owned or leased by Hilton can harm our reputation, create adverse publicity and cause a loss of consumer confidence in our business. Because of the global nature of the Hilton brands and the broad expanse of its business and hotel locations, events occurring in one location could negatively affect the reputation and operations of otherwise successful individual locations, including properties in our portfolio. In addition, the recent expansion of social media has compounded the potential scope of negative publicity. We also could face legal claims related to negative events, along with resulting adverse publicity. If the perceived quality of the Hilton brands declines, or if Hilton’s reputation is damaged, our business, financial condition or results of operations could be adversely affected.

Furthermore, if our relationship with Hilton were to deteriorate or terminate as a result of disputes regarding the management of our hotels or for other reasons, Hilton could, under certain circumstances, terminate our current management agreements or franchise licenses or decline to provide franchise licenses for hotels that we may acquire in the future. If any of the foregoing were to occur, it could materially and adversely affect our results of operations and profitability as well as limit or slow our future growth and impair our ability to compete effectively.

Changes to the Hilton HHonors loyalty program or our access to it could have a material adverse effect on our business, financial condition or results of operations.

All of our properties as of the date of this information statement utilize brands owned by Hilton and participate in Hilton’s HHonors guest loyalty and rewards program. Program members accumulate points based on eligible stays and hotel charges and redeem the points for a range of benefits including free rooms and other items of value. The program is an important aspect of our business and of the affiliation value of our hotels. In addition to the accumulation of points for future hotels stays at the Hilton family of brands, Hilton HHonors arranges with third-party service providers, such as airlines and rail companies, to exchange monetary value represented by points for program awards. Currently, the program benefits are not taxed as income to members. We are not the owner of the Hilton HHonors loyalty program and changes to the program or our access to it could negatively impact our business. If the program deteriorates or materially changes in an adverse manner, or is taxed such that a material number of Hilton HHonors members choose to no longer participate in the program, our business, financial condition or results of operations could be materially adversely affected.

 

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Contractual and other disagreements with or involving Hilton or other future third-party hotel managers and franchisors could make us liable to them or result in litigation costs or other expenses.

Our management and franchise agreements with Hilton require us and Hilton to comply with operational and performance conditions that are subject to interpretation and could result in disagreements, and we expect this will be true of any management and franchise agreements that we enter into with future third-party hotel managers or franchisors. At any given time, we may be in disputes with one or more third-party hotel managers or franchisors. Any such dispute could be very expensive for us, even if the outcome is ultimately in our favor. We cannot predict the outcome of any arbitration or litigation, the effect of any negative judgment against us or the amount of any settlement that we may enter into with Hilton or any other third-party. In the event we terminate a management or franchise agreement early and the hotel manager or franchisor considers such termination to have been wrongful, they may seek damages. Additionally, we may be required to indemnify our third-party hotel managers and franchisors against disputes with third parties, pursuant to our management and franchise agreements. An adverse result in any of these proceedings could materially and adversely affect our revenues and profitability.

We are dependent on the performance of Hilton and other third-party hotel managers and could be materially and adversely affected if Hilton or such other third-party hotel managers do not properly manage our hotels or otherwise act in our best interests.

In order for us to qualify as a REIT, with limited exceptions, third parties must operate our hotels. We expect to lease all or substantially all of our hotels to our TRS lessees. Our TRS lessees, in turn, will enter or have entered into management agreements with Hilton to operate our hotels. We could be materially and adversely affected if Hilton or any other future third-party hotel manager fails to provide quality services and amenities, fails to maintain a quality brand name or otherwise fails to manage our hotels in our best interest, and can be financially responsible for the actions and inactions of our third-party hotel managers pursuant to our management agreements. In addition, Hilton manages, and in some cases may own or lease, or may have invested in or may have provided credit support or operating guarantees to hotels that compete with our hotels, any of which could result in conflicts of interest. As a result, Hilton may make decisions regarding competing lodging facilities that are not in our best interests. Other third-party hotel managers that we engage in the future may also have similar conflicts of interest. From time to time, disputes may arise between us, Hilton and/or any other future third-party hotel manager regarding their performance or compliance with the terms of the hotel management agreements, which in turn could adversely affect our results of operations. If we are unable to reach satisfactory results through discussions and negotiations, we may choose to terminate our management agreement, litigate the dispute or submit the matter to third-party dispute resolution, the outcome of which may be unfavorable to us.

In the event that we terminate any of our management agreements, we can provide no assurances that we could find a replacement hotel manager or that any replacement hotel manager will be successful in operating our hotels. If any of the foregoing were to occur, it could materially and adversely affect us.

Restrictive covenants in certain of our hotel management and franchise agreements will contain provisions limiting or restricting the sale of our hotels, which could materially and adversely affect our profitability.

Many of our hotel management and franchise agreements with Hilton generally will contain restrictive covenants that will limit or restrict our ability to sell a hotel free of the management or franchise encumbrance other than to permitted transferees. Generally, we may not agree to sell, lease or otherwise transfer particular hotels unless the transferee executes a new agreement or assumes the related hotel management and franchise agreements. As a result, we may be prohibited from taking actions that would otherwise be in our and our stockholders’ best interests. In addition, as noted above, Hilton may have a conflict that results in Hilton’s declining to approve a transfer that would be in our and our stockholders’ best interests.

 

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If we are unable to maintain good relationships with Hilton and other third-party hotel managers and franchisors that we may engage in the future, profitability could decrease and our growth potential may be adversely affected.

The success of our properties largely depends on our ability to establish and maintain good relationships with Hilton and other third-party hotel managers and franchisors that we may engage in the future. If we are unable to maintain good relationships with Hilton and such other third-party hotel managers and franchisors, we may be unable to renew existing management or franchise agreements or expand relationships with them. Additionally, opportunities for developing new relationships with additional third-party managers or franchisors may be adversely affected. This, in turn, could have an adverse effect on our results of operations and our ability to execute our growth strategy.

Costs associated with, or failure to maintain, brand operating standards may materially and adversely affect our results of operations and profitability.

The terms of our franchise agreements and management agreements generally require us to meet specified operating standards and other terms and conditions and compliance with such standards may be costly. We expect that Hilton and any other future third-party franchisors will periodically inspect our hotels to ensure that we and any third-party hotel managers follow brand standards. Failure by us, or any hotel management company that we engage, to maintain these standards or other terms and conditions could result in a franchise license being canceled or the franchisor requiring us to undertake a costly property improvement program. If a franchise license is terminated due to our failure to make required improvements or to otherwise comply with its terms, we also may be liable to the franchisor for a termination payment, which will vary by franchisor and by hotel. If the funds required to maintain brand operating standards are significant, or if a franchise license is terminated, it could materially and adversely affect our results of operations and profitability.

If we were to lose a brand license at one or more of our hotels, the value of the affected hotels could decline significantly and we could incur significant costs to obtain new franchise licenses, which could materially and adversely affect our results of operations and profitability as well as limit or slow our future growth.

If we were to lose a brand license, the underlying value of a particular hotel could decline significantly from the loss of associated name recognition, marketing support, participation in guest loyalty programs and the centralized reservation system provided by the franchisor or brand manager, which could require us to recognize an impairment on the hotel. Furthermore, the loss of a franchise license at a particular hotel could harm our relationship with the franchisor or brand manager, which could impede our ability to operate other hotels under the same brand, limit our ability to obtain new franchise licenses or brand management agreements from the franchisor or brand in the future on favorable terms, or at all, and cause us to incur significant costs to obtain a new franchise license or brand management agreement for the particular hotel. Accordingly, if we lose one or more franchise licenses or brand management agreement, it could materially and adversely affect our results of operations and profitability as well as limit or slow our future growth.

Cyber threats and the risk of data breaches or disruptions of our hotel managers’ or our own information technology systems could materially adversely affect our business.

Hilton is dependent on information technology networks and systems, including the internet, to access, process, transmit and store proprietary and customer information, and other hotel managers that we contract with in the future also will be dependent on such networks. These complex networks include reservation systems, vacation exchange systems, hotel management systems, customer databases, call centers, administrative systems, and third-party vendor systems. These systems require the collection and retention of large volumes of personally identifiable information of hotel guests, including credit card numbers.

 

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These information networks and systems can be vulnerable to threats such as system, network or internet failures; computer hacking or business disruption; cyber-terrorism; viruses, worms or other malicious software programs; and employee error, negligence or fraud. The risks from these cyber threats are significant. In November 2015, Hilton Parent announced that it had identified and taken action to eradicate unauthorized malware that targeted payment card information in some point-of-sale systems in its hotels and had determined that specific payment card information was targeted by this malware. We expect Hilton will be subject to additional cyber-attacks in the future and may experience data breaches. We rely on Hilton to protect proprietary and customer information from these threats. Any compromise of Hilton’s networks could result in a disruption to operations, such as disruptions in fulfilling guest reservations, delayed bookings or sales, or lost guest reservations. Any of these events could, in turn, result in disruption of the operations of our hotels, in increased costs and in potential litigation and liability. In addition, public disclosure, or loss of customer or proprietary information could result in damage to Hilton’s reputation and a loss of confidence among hotel guests and result in reputational harm for our hotels, which may have a material adverse effect on our business, financial condition and results of operations.

In addition to the information technologies and systems Hilton uses to operate our hotels, we have our own corporate technologies and systems that are used to access, store, transmit, and manage or support a variety of business processes. There can be no assurance that the security measures we have taken to protect the contents of these systems will prevent failures, inadequacies or interruptions in system services or that system security will not be breached through physical or electronic break-ins, computer viruses, and attacks by hackers. Disruptions in service, system shutdowns and security breaches in the information technologies and systems we use, including unauthorized disclosure of confidential information, could have a material adverse effect on our business, our financial reporting and compliance, and subject us to liability claims or regulatory penalties which could be significant.

The growth of internet reservation channels could adversely affect our business and profitability.

A significant percentage of hotel rooms for individual guests are booked through internet travel intermediaries. Search engines and peer-to-peer inventory sources also provide online travel services that compete with our hotels. If bookings shift to higher cost distribution channels, including internet travel intermediaries and meeting procurement firms, it could materially impact our profits. Additionally, as intermediary bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from our brands and management companies. Moreover, hospitality intermediaries generally employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites. As a result, consumers may develop brand loyalties to the intermediaries’ offered brands, websites and reservations systems rather than to the Hilton brands and systems. If this happens, our business and profitability may be significantly affected. Internet travel intermediaries also have recently been subject to regulatory scrutiny, particularly in Europe. The outcome of this regulatory activity may affect the ability of Hilton to compete for direct bookings through Hilton’s own internet channels, which could have an adverse impact on occupancy at our hotels in Europe.

In addition, although internet travel intermediaries have traditionally competed to attract individual consumers or “transient” business rather than group and convention business, in recent years they have expanded their business to include marketing to large group and convention business. If that growth continues, it could both divert group and convention business away from our hotels and also increase our cost of sales for group and convention business. Consolidation of internet travel intermediaries, and the entry of major internet companies into the internet travel bookings business, also could divert bookings away from Hilton’s websites and increase our cost of sales.

 

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The loss of senior executives or key field personnel, such as general managers, could significantly harm our business.

Our ability to maintain our competitive position depends somewhat on the efforts and abilities of our senior executives. Finding suitable replacements for senior executives could be difficult. Losing the services of one or more of these senior executives could adversely affect strategic relationships, including relationships with Hilton or other hotel managers or franchisors, joint venture partners and vendors, and limit our ability to execute our business strategies.

We also rely on the general managers at each of our hotels to manage daily operations and oversee the efforts of employees. These general managers are trained professionals in the hospitality industry and have extensive experience in many markets worldwide. The failure by us, Hilton or other future third-party hotel managers to retain, train or successfully manage the general managers at our hotels could negatively affect our operations.

We are subject to risks associated with the employment of hotel personnel, particularly with hotels that employ unionized labor, which could increase our operating costs, reduce the flexibility of our hotel managers to adjust the size of the workforce at our hotels and could materially and adversely affect our revenues and profitability.

We have entered into management agreements with Hilton to operate each of our hotels, with the exception of the Select Hotels. Hilton is generally responsible for hiring and maintaining the labor force at each of the hotels they manage. Although, with the exception of the Select Hotels, we generally do not directly employ or manage employees at our hotels, we are subject to many of the costs and risks generally associated with the hotel labor force. Increased labor costs due to factors like additional taxes or requirements to incur additional employee benefits costs, including the requirements of the Affordable Care Act, may adversely impact our operating costs. Labor costs can be particularly challenging at those of our hotels with unionized labor, and additional hotels may be subject to new collective bargaining agreements in the future.

From time to time, strikes, lockouts, public demonstrations or other negative actions and publicity may disrupt hotel operations at any of our hotels, negatively impact our reputation or the reputation of our brands, or harm relationships with the labor forces at our hotels. We also may incur increased legal costs and indirect labor costs as a result of contract disputes or other events. Additionally, hotels where our hotel managers have collective bargaining agreements with employees are more highly affected by labor force activities than others. The resolution of labor disputes or new or re-negotiated labor contracts could lead to increased labor costs, either by increases in wages or benefits or by changes in work rules that raise hotel operating costs. Furthermore, labor agreements may limit the ability of our hotel managers to reduce the size of hotel workforces during an economic downturn because collective bargaining agreements are negotiated between the hotel managers and labor unions. We do not have the ability to control the outcome of these negotiations.

Our active management and operation of the Select Hotels and the hotel laundry business may expose us to potential liabilities beyond those traditionally associated with lodging REITs.

In addition to owning hotels and engaging a hotel manager to operate our hotels, we also will manage and operate the Select Hotels and, through a TRS, manage and operate the hotel laundry business. Managing and operating the Select Hotels and the hotel laundry business will require us to employ significantly more people than a REIT that does not operate a business of such type and scale. In addition, managing and operating a hotel and hotel laundry business exposes us to potential liabilities associated with the operation of those businesses. Such potential liabilities are not typically associated with lodging REITs and include potential liabilities for environmental violations, wage and hour violations, workplace injury and other employment violations. In the event that one or more of the potential liabilities associated with managing and operating a hotel and hotel laundry business materializes, such liabilities could damage our reputation, and could adversely affect our financial position and results of operations, possibly to a material degree.

 

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Failure to comply with laws and regulations applicable to our international operations may increase costs, reduce profits, limit growth or subject us to broader liability.

Our business operations in countries outside the U.S. are subject to a number of laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act (“FCPA”), as well as trade sanctions administered by the Office of Foreign Assets Control (“OFAC”). The FCPA is intended to prohibit bribery of foreign officials and requires us to keep books and records that accurately and fairly reflect our transactions. OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals. Although we have policies in place designed to comply with applicable sanctions, rules and regulations, it is possible that hotels we own in the countries and territories in which we operate may provide services to persons subject to sanctions. In addition, some of our operations may be subject to the laws and regulations of non-U.S. jurisdictions, including the U.K.’s Bribery Act 2010, which contains significant prohibitions on bribery and other corrupt business activities, and other local anti-corruption laws in the countries and territories in which we conduct operations.

If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties, reputational harm and incarceration of employees or restrictions on our operation or ownership of hotels and other properties, including the termination of ownership rights. In addition, in certain circumstances, the actions of parties affiliated with us (including Hilton, other hotel managers or franchisors, joint venture partners, and our and their respective employees and agents) may expose us to liability under the FCPA, U.S. sanctions or other laws. These restrictions could increase costs of operations, reduce profits or cause us to forgo development opportunities that would otherwise support growth.

In August 2012, Congress enacted the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”), which expands the scope of U.S. sanctions against Iran and Syria. In particular, Section 219 of the ITRSHRA amended the Exchange Act of 1934, as amended (the “Exchange Act”) to require SEC-reporting companies to disclose in their periodic reports specified dealings or transactions involving Iran or other individuals and entities targeted by certain OFAC sanctions engaged in by the reporting company or any of its affiliates. These companies are required to separately file with the SEC a notice that such activities have been disclosed in the relevant periodic report, and the SEC is required to post this notice of disclosure on its website and send the report to the U.S. President and certain U.S. Congressional committees. The U.S. President thereafter is required to initiate an investigation and, within 180 days of initiating such an investigation with respect to certain disclosed activities, to determine whether sanctions should be imposed.

Under ITRSHRA, we will be required to report if we or any of our “affiliates” knowingly engaged in certain specified activities during a period covered by one of our Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q. We may engage in activities that would require disclosure pursuant to Section 219 of ITRSHRA. In addition, because the SEC defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us. Because we may be deemed to be a controlled affiliate of Blackstone, affiliates of Blackstone may also be considered our affiliates. Hilton and other affiliates of Blackstone have in the past and may in the future be required to make disclosures pursuant to ITRSHRA, including the activities discussed in the disclosures included on Exhibit 99.2 to the registration statement of which this information statement forms a part, which disclosures are hereby incorporated by reference herein. Disclosure of such activities, even if such activities are permissible under applicable law, and any sanctions imposed on us or our affiliates as a result of these activities could harm our reputation and brands and have a negative impact on our results of operations.

Governmental regulation may adversely affect the operation of our properties.

In many jurisdictions, the hotel industry is subject to extensive foreign or U.S. federal, state and local governmental regulations, including those relating to the service of alcoholic beverages, the preparation and sale of food and those relating to building and zoning requirements. We and our hotel managers are also subject to licensing and regulation by foreign or U.S. state and local departments relating to health, sanitation, fire and

 

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safety standards, and to laws governing our relationships with employees, including minimum wage requirements, overtime, working conditions status and citizenship requirements. We and our hotel managers may be required to expend funds to meet foreign or U.S. federal, state and local regulations in connection with the continued operation or remodeling of certain of our properties. The failure to meet the requirements of applicable regulations and licensing requirements, or publicity resulting from actual or alleged failures, could have an adverse effect on our results of operations.

Foreign or U.S. environmental laws and regulations may cause us to incur substantial costs or subject us to potential liabilities.

We are subject to certain compliance costs and potential liabilities under various foreign and U.S. federal, state and local environmental, health and safety laws and regulations. These laws and regulations govern actions including air emissions, the use, storage and disposal of hazardous and toxic substances, and wastewater disposal. Our failure to comply with such laws, including any required permits or licenses, could result in substantial fines or possible revocation of our authority to conduct some of our operations. We could also be liable under such laws for the costs of investigation, removal or remediation of hazardous or toxic substances at our currently or formerly owned or leased real property or at third-party locations in connection with our waste disposal operations, regardless of whether or not we knew of, or caused, the presence or release of such substances. From time to time, we may be required to remediate such substances or remove, abate or manage asbestos, mold, radon gas, lead or other hazardous conditions at our properties. The presence or release of such toxic or hazardous substances could result in third-party claims for personal injury, property or natural resource damages, business interruption or other losses. Such claims and the need to investigate, remediate or otherwise address hazardous, toxic or unsafe conditions could adversely affect our operations, the value of any affected real property, or our ability to sell, lease or assign our rights in any such property, or could otherwise harm our business or reputation. Environmental, health and safety requirements have also become increasingly stringent, and our costs may increase as a result. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, could affect the operation of our properties or result in significant additional expense and operating restrictions on us or our hotel managers.

The cost of compliance with the Americans with Disabilities Act and similar legislation outside of the U.S. may be substantial.

We are subject to the Americans with Disabilities Act (“ADA”) and similar legislation in certain jurisdictions outside of the U.S. Under the ADA, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. These regulations apply to accommodations first occupied after January 26, 1993; public accommodations built before January 26, 1993 are required to remove architectural barriers to disabled access where such removal is “readily achievable.” The regulations also mandate certain operational requirements that hotel operators must observe. The failure of a property to comply with the ADA could result in injunctive relief, fines, an award of damages to private litigants or mandated capital expenditures to remedy such noncompliance. Any imposition of injunctive relief, fines, damage awards or capital expenditures could adversely impact our business or results of operations. If we fail to comply with the requirements of the ADA, we could be subject to fines, penalties, injunctive action, reputational harm and other business effects which could materially and negatively affect our performance and results of operations.

Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of our business could reduce our profits or limit our ability to operate our business.

In the normal course of our business, we are involved in various legal proceedings. Hilton and other third-party hotel managers that we may engage in the future, whom we indemnify for legal costs resulting from management of our hotels, may also be involved in various legal proceedings relating to the management of our hotels. The outcome of these proceedings cannot be predicted. If any of these proceedings were to be determined adversely to us or our third-party hotel managers or a settlement involving a payment of a material sum of money

 

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were to occur, it could materially and adversely affect our profits or ability to operate our business. Additionally, we could become the subject of future claims by third parties, including current or former third-party property owners, guests who use our properties, our employees, our investors or regulators. Any significant adverse judgments or settlements would reduce our profits and could limit our ability to operate our business. Further, we may incur costs related to claims for which we have appropriate third-party indemnity, but such third parties fail to fulfill their contractual obligations.

If the insurance that we carry does not sufficiently cover damage or other potential losses or liabilities to third parties involving our properties, our profits could be reduced.

We operate in certain areas where the risk of natural disaster or other catastrophic losses vary, and the occasional incidence of such an event could cause substantial damage to our properties or the surrounding area. We carry insurance from solvent insurance carriers that we believe is adequate for foreseeable first- and third-party losses and with terms and conditions that are reasonable and customary. Nevertheless, market forces beyond our control could limit the scope of the insurance coverage that we can obtain or may otherwise restrict our ability to buy insurance coverage at reasonable rates. In the event of a substantial loss, the insurance coverage that we carry may not be sufficient to pay the full value of our financial obligations, our liabilities or the replacement cost of any lost investment or property. Because certain types of losses are uncertain, they may be uninsurable or prohibitively expensive. In addition, there are other risks that may fall outside the general coverage terms and limits of our policies.

In some cases, these factors could result in certain losses being completely uninsured. As a result, we could lose some or all of the capital we have invested in a property, as well as the anticipated future revenues, profits, management fees or franchise fees from the property.

Terrorism insurance may not be available at commercially reasonable rates or at all.

Following the September 11, 2001 terrorist attacks in New York City and the Washington, D.C. area, Congress passed the Terrorism Risk Insurance Act of 2002, which established the Terrorism Risk Insurance Program (the “Program”) to provide insurance capacity for terrorist acts. The Program expired at the end of 2014 but was reauthorized, with some adjustments to its provisions, in January 2015 for six years through December 31, 2020. We carry insurance from solvent insurance carriers to respond to both first-party and third-party liability losses related to terrorism. We purchase our first-party property damage and business interruption insurance from a stand-alone market in place of and to supplement insurance from government run pools. If the Program is not extended or renewed upon its expiration in 2020, or if there are changes to the Program that would negatively affect insurance carriers, premiums for terrorism insurance coverage will likely increase and/or the terms of such insurance may be materially amended to increase stated exclusions or to otherwise effectively decrease the scope of coverage available, perhaps to the point where it is effectively unavailable.

Terrorist attacks and military conflicts may adversely affect the lodging industry.

The terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001 underscore the possibility that large public facilities or economically important assets could become the target of terrorist attacks in the future. In particular, properties that are well-known or are located in concentrated business sectors in major cities where our hotels are located may be subject to the risk of terrorist attacks.

The occurrence or the possibility of terrorist attacks or military conflicts could:

 

    cause damage to one or more of our properties that may not be fully covered by insurance to the value of the damages;

 

    cause all or portions of affected properties to be shut down for prolonged periods, resulting in a loss of income;

 

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    generally reduce travel to affected areas for tourism and business or adversely affect the willingness of customers to stay in or avail themselves of the services of the affected properties;

 

    expose us to a risk of monetary claims arising out of death, injury or damage to property caused by any such attacks; and

 

    result in higher costs for security and insurance premiums or diminish the availability of insurance coverage for losses related to terrorist attacks, particularly for properties in target areas, all of which could adversely affect our results.

The occurrence of a terrorist attack with respect to one of our properties could directly and materially adversely affect our results of operations. Furthermore, the loss of any of our well-known buildings could indirectly affect the value of the brands with which we are affiliated, which would in turn adversely affect our business prospects.

Changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations.

New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. A change in accounting rules or regulations may require retrospective application and affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations. See Note 2: “Basis of Presentation and Summary of Significant Accounting Policies” in our audited combined consolidated financial statements included elsewhere in this information statement for a summary of accounting standards issued but not yet adopted.

Changes to estimates or projections used to assess the fair value of our assets, or operating results that are lower than our current estimates at certain locations, may cause us to incur impairment losses that could adversely affect our results of operations.

Our total assets include goodwill, intangible assets with finite useful lives and substantial amounts of long-lived assets, principally property and equipment, including hotel properties. We evaluate our goodwill for impairment on an annual basis or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value is below the carrying value. We evaluate our intangible assets with finite useful lives and long-lived assets for impairment when circumstances indicate that the carrying amount may not be recoverable. Our evaluation of impairment requires us to make certain estimates and assumptions including projections of future results. After performing our evaluation for impairment, including an analysis to determine the recoverability of long-lived assets, we will record an impairment loss when the carrying value of the underlying asset, asset group or reporting unit exceeds its fair value. If the estimates or assumptions used in our evaluation of impairment change, we may be required to record additional impairment losses on certain of these assets. If these impairment losses are significant, our results of operations would be adversely affected.

Exchange rate fluctuations and foreign exchange hedging arrangements could result in significant foreign currency gains and losses and affect our business results.

Conducting business in currencies other than the U.S. dollar subjects us to fluctuations in currency exchange rates that could have a negative effect on our financial results. We earn revenues and incur expenses in foreign currencies as part of our operations outside of the U.S. As a result, fluctuations in currency exchange rates may significantly increase the amount of U.S. dollars required for foreign currency expenses or significantly decrease the U.S. dollars received from foreign currency revenues. We also have exposure to currency translation risk because, generally, the results of our business outside of the U.S. are reported in local currency and then translated to U.S. dollars for inclusion in our consolidated financial statements. As a result, changes between the foreign exchange rates and the U.S. dollar will affect the recorded amounts of our foreign assets, liabilities,

 

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revenues and expenses and could have a negative effect on our financial results. Our exposure to foreign currency exchange rate fluctuations will grow if the relative contribution of our operations outside the U.S. increases.

To attempt to mitigate foreign currency exposure, we may enter into foreign exchange hedging agreements with financial institutions. However, these hedging agreements may not eliminate foreign currency risk entirely and involve costs and risks of their own in the form of transaction costs, credit requirements and counterparty risk.

Risks Related to Our Indebtedness

Our indebtedness and other contractual obligations could adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in the economy or our industry and our ability to pay our debts and could divert our cash flow from operations for debt payments.

As of September 30, 2016, on a pro forma basis after giving effect to the spin-off and the Financing Transactions, our total indebtedness would have been approximately $3 billion. Our substantial debt and other contractual obligations could have important consequences, including:

 

    requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, distributions to stockholders and to pursue future business opportunities;

 

    increasing our vulnerability to adverse economic, industry or competitive developments;

 

    exposing us to increased interest expense, as our degree of leverage may cause the interest rates of any future indebtedness (whether fixed or floating rate interest) to be higher than they would be otherwise;

 

    exposing us to the risk of increased interest rates because certain of our indebtedness is at variable rates of interest;

 

    making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants, could result in an event of default that accelerates our obligation to repay indebtedness;

 

    restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

    limiting our ability to obtain additional financing for working capital, capital expenditures, product development, satisfaction of debt service requirements, acquisitions and general corporate or other purposes; and

 

    limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who may be better positioned to take advantage of opportunities that our leverage prevents us from exploiting.

Certain of our debt agreements impose significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities.

The debt agreements that govern our outstanding indebtedness impose, and we expect that the credit agreement that will govern our anticipated new senior unsecured credit facilities will impose, significant operating and financial restrictions on us. These restrictions may limit our ability and/or the ability of our subsidiaries to, among other things:

 

    incur or guarantee additional debt or issue disqualified stock or preferred stock;

 

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    make certain investments;

 

    incur certain liens;

 

    enter into transactions with affiliates;

 

    merge or consolidate;

 

    enter into agreements that restrict the ability of restricted subsidiaries to make dividends or other payments to the issuers;

 

    designate restricted subsidiaries as unrestricted subsidiaries; and

 

    transfer or sell assets.

In addition, we expect that the credit agreement that will govern our new senior unsecured credit facilities will contain certain affirmative covenants that will require us to be in compliance with certain leverage and financial ratios and the mortgage-backed loans of our subsidiaries also will require them to maintain certain debt service coverage ratios and minimum net worth requirements.

As a result of these restrictions, we are limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We may not be able to maintain compliance with these covenants in the future and, if we fail to do so, we may not be able to obtain waivers from the lenders and/or amend the covenants.

Our failure to comply with the restrictive covenants described above, as well as other terms of our other indebtedness and/or the terms of any future indebtedness from time to time, could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms or are unable to refinance these borrowings, our financial condition and results of operations could be adversely affected.

Servicing our indebtedness will require a significant amount of cash. Our ability to generate sufficient cash depends on many factors, some of which are not within our control.

Our ability to make payments on our indebtedness, to fund planned capital expenditures and to make distributions to our stockholders will depend on our ability to generate cash in the future. To a certain extent, this is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we are unable to generate sufficient cash flow to service our debt and meet our other commitments, we may need to restructure or refinance all or a portion of our debt, sell material assets or operations or raise additional debt or equity capital. We may not be able to effect any of these actions on a timely basis, on commercially reasonable terms or at all, and these actions may not be sufficient to meet our capital requirements. In addition, the terms of our existing or future debt arrangements may restrict us from effecting any of these alternatives. Finally, our ability to raise additional equity capital may be restricted because the issuance of our stock may cause the spin-off to be a taxable event for Hilton Parent under Section 355(e) of the Code, and under the Tax Matters Agreement, we could be required to indemnify Hilton Parent or HGV Parent for that tax and certain covenants may restrict issuances of our stock during the two-year period following the spin-off. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent Related to the Spin-Off—Tax Matters Agreement.”

Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions, which could further exacerbate the risks to our financial condition described above.

We may be able to incur significant additional indebtedness, including secured debt, in the future. Although we expect that the agreements that will govern substantially all of our indebtedness will contain restrictions on the incurrence of additional indebtedness and entering into certain types of other transactions, these restrictions

 

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will be subject to a number of qualifications and exceptions. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt instruments. In addition, our organizational documents contain no limitation on the amount of debt we may incur, and our board of directors may change our financing policy at any time without stockholder notice or approval. To the extent new debt is added to our current debt levels, the substantial leverage risks described in the preceding three risk factors would increase.

The use of debt to finance future acquisitions could restrict operations, inhibit our ability to grow our business and revenues, and negatively affect our business and financial results.

We intend to incur additional debt in connection with future hotel acquisitions. We may, in some instances, borrow under our anticipated senior unsecured revolving credit facility or borrow new funds to acquire hotels. In addition, we may incur mortgage debt by obtaining loans secured by a portfolio of some or all of the hotels that we own or acquire. If necessary or advisable, we also may borrow funds to make distributions to our stockholders to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes. To the extent that we incur debt in the future and do not have sufficient funds to repay such debt at maturity, it may be necessary to refinance the debt through debt or equity financings, which may not be available on acceptable terms or at all and which could be dilutive to our stockholders. If we are unable to refinance our debt on acceptable terms or at all, we may be forced to dispose of hotels at inopportune times or on disadvantageous terms, which could result in losses. To the extent we cannot meet our future debt service obligations, we will risk losing to foreclosure some or all of our hotels that may be pledged to secure our obligation.

For tax purposes, a foreclosure of any of our hotels would be treated as a sale of the hotel for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the hotel, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code. In addition, we may give full or partial guarantees to lenders of mortgage debt on behalf of the entities that own our hotels. When we give a guarantee on behalf of an entity that owns one of our hotels, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any of our hotels are foreclosed on due to a default, our ability to pay cash distributions to our stockholders will be limited.

Hedging against interest rate exposure may adversely affect us.

Subject to maintaining our qualification as a REIT, we intend to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as cap agreements and swap agreements. These agreements involve the risks that these arrangements may fail to protect or adversely affect us because, among other things:

 

    interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

 

    available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;

 

    the duration of the hedge may not match the duration of the related liability;

 

    the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

 

    the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.

As a result of any of the foregoing, our hedging transactions, which are intended to limit losses, could have a material adverse effect on us. In addition, if we fail to maintain adequate hedging arrangements, an increase in interest rates would increase our interest expense on our floating rate debt, including our anticipated senior unsecured credit facilities, reducing our cash flow available for other corporate purposes, including investments and distributions to stockholders.

 

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Covenants applicable to future debt could restrict our ability to make distributions to our stockholders, and as a result, we may be unable to make distributions necessary to qualify as a REIT, which could materially and adversely affect us and the market price of our common shares.

We intend to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. To qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code. If, as a result of covenants applicable to our future debt, we are restricted from making distributions to our stockholders, we may be unable to make distributions necessary for us to avoid U.S. federal corporate income and excise taxes and to qualify and maintain our qualification as a REIT, which could materially and adversely affect us.

Risks Related to the Spin-Off

We may be responsible for U.S. federal income tax liabilities that relate to the distribution.

Unless waived by Hilton Parent, the completion of the spin-off is conditioned upon the absence of any withdrawal, invalidation or modification of the IRS Ruling in an adverse manner prior to the effective time of the spin-off. Although the IRS Ruling generally will be binding on the IRS, the continued validity of the IRS Ruling will be based upon and subject to the accuracy of factual statements and representations made to the IRS by Hilton Parent. In addition, there is a risk that the IRS could promulgate new administrative guidance prior to the spin-off that could adversely impact the tax-free treatment of the spin-off (even taking into account the receipt of the IRS Ruling). As a result of the IRS’s general ruling policy with respect to transactions under Section 355 of the Code, the IRS Ruling is limited to specified aspects of the spin-off under Section 355 of the Code and will not represent a determination by the IRS that all of the requirements necessary to obtain tax-free treatment to holders of Hilton Parent’s common stock and to Hilton Parent have been satisfied. Moreover, if any statement or representation upon which the IRS Ruling is based is incorrect or untrue in any material respect, or if the facts upon which the IRS Ruling is based are materially different from the facts that prevail at the time of the spin-off, the IRS Ruling could be invalidated. Additionally, recently enacted legislation denies tax-free treatment to a spin-off in which either the distributing corporation or the spun-off corporation is a REIT and prevents a distributing corporation or a spun-off corporation from electing REIT status for a 10-year period following a tax-free spin-off. Moreover, recently promulgated U.S. Treasury temporary regulations would require the recognition of taxable gain in connection with the spin-off of an entity that is a REIT or elects REIT status. Under effective date provisions, the legislation and temporary regulations do not apply to distributions described in a ruling request initially submitted to the IRS before December 7, 2015. Because the initial request for the IRS Ruling was submitted before that date and because we believe the distribution will be considered to have been described in that initial request, we believe the legislation and temporary regulations will not apply to the spin-off. However, no ruling will be obtained on that issue and thus no assurance can be given in that regard. In particular, the IRS or a court could disagree with our view regarding the effective date provisions based on any differences that exist between the description in the ruling request and the actual facts relating to the spin-off. If the effective date provisions did not apply to the spin-off, either the spin-off would not qualify for tax-free treatment or we would not be eligible to elect REIT status for a 10-year period following the spin-off.

In addition, the spin-off is conditioned on the receipt of an opinion of Spin-off Tax Counsel to the effect that the distributions of Park Parent and HGV Parent common stock will qualify as tax-free distributions under Section 355 of the Code. An opinion of Spin-off Tax Counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the spin-off that are different from the conclusions reached in the opinion. The opinion will be based on certain factual statements and representations, which, if incomplete or untrue in any material respect, could alter Spin-off Tax Counsel’s conclusions.

 

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Hilton Parent is not aware of any facts or circumstances that would cause any such factual statements or representations in the IRS Ruling or the opinion of Spin-off Tax Counsel to be incomplete or untrue or cause the facts on which the IRS Ruling and legal opinion are based to be materially different from the facts at the time of the spin-off.

If all or a portion of the spin-off does not qualify as a tax-free transaction for any reason, including because any of the factual statements or representations in the IRS Ruling or the legal opinion are incomplete or untrue, because the facts upon which the IRS Ruling is based are materially different from the facts at the time of the spin-off or because one or more sales of our common stock, Hilton Parent common stock or HGV Parent common stock by our respective stockholders, including Blackstone, after the spin-off cause the spin-off not to qualify as a tax-free transaction, we would recognize a substantial gain attributable to the management and franchising business and/or the Timeshare business for U.S. federal income tax purposes, and Hilton Parent may recognize a substantial gain attributable to the Separated Real Estate business and/or Timeshare business for U.S. federal income tax purposes. In such case, under U.S. Treasury regulations, each member of the Hilton consolidated group at the time of the spin-off (including us and our subsidiaries) would be jointly and severally liable for the resulting entire amount of any U.S. federal income tax liability. Additionally, if the distribution of HGV Parent common stock and/or the distribution of Park Parent common stock do not qualify as tax-free under Section 355 of the Code, Hilton Parent stockholders will be treated as having received a taxable dividend to the extent of Hilton Parent’s current and accumulated earnings and profits and then would have a tax-free basis recovery up to the amount of their tax basis in their shares and then would have taxable gain from the sale or exchange of the shares to the extent of any excess.

Even if the spin-off otherwise qualifies as a tax-free transaction for U.S. federal income tax purposes, the distribution will be taxable to us and/or to Hilton Parent (but not to Hilton Parent stockholders) pursuant to Section 355(e) of the Code if there are (or have been) one or more acquisitions (including issuances) of our stock, the stock of HGV Parent or the stock of Hilton Parent, representing 50% or more, measured by vote or value, of the stock of any such corporation and the acquisition or acquisitions are deemed to be part of a plan or series of related transactions that include the distribution. Any acquisition of our common stock within two years before or after the distribution (with exceptions, including public trading by less-than-5% stockholders and certain compensatory stock issuances) generally will be presumed to be part of such a plan unless that presumption is rebutted. The resulting tax liability would be substantial, and under U.S. Treasury regulations, each member of the Hilton consolidated group at the time of the spin-off (including us and our subsidiaries) would be jointly and severally liable for the resulting U.S. federal income tax liability.

We will agree not to enter into certain transactions that could cause any portion of the spin-off to be taxable to Hilton Parent, including under Section 355(e) of the Code. Pursuant to the Tax Matters Agreement, we also will agree to indemnify Hilton Parent and HGV Parent for any tax liabilities resulting from such transactions or other actions we take, and Hilton Parent and HGV Parent will agree to indemnify us for any tax liabilities resulting from transactions entered into by Hilton Parent or HGV Parent. These obligations may discourage, delay or prevent a change of control of our company. For additional detail, see “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent Related to the Spin-Off—Tax Matters Agreement.”

We may be unable to take certain actions after the spin-off because such actions could jeopardize the tax-free status of the spin-off, and such restrictions could be significant.

To preserve the tax-free treatment of the spin-off, for the initial two-year period following the spin-off, we are prohibited, except in limited circumstances, from taking or failing to take certain actions that would prevent the spin-off and related transactions from being tax-free, including: (1) entering into any transaction pursuant to which our stock would be acquired, whether by merger or otherwise; (2) issuing any equity securities or securities that could possibly be converted into our equity securities (other than with respect to the Purging Distribution); or (3) repurchasing our equity securities.

 

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These restrictions may limit our ability to issue equity and to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business. In addition, if we take, or fail to take, actions that prevent the spin-off and related transactions from being tax-free, we could be liable for the adverse tax consequences resulting from such actions. For a more detailed description, see “Certain Relationships and Related Party Transactions—Tax Matters Agreement.”

The spin-off and related transactions may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal distribution requirements.

The spin-off could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor or an entity vested with the power of such creditor (such as a trustee or debtor-in-possession in a bankruptcy) could claim that Hilton Parent did not receive fair consideration or reasonably equivalent value in the spin-off, and that the spin-off left Hilton Parent insolvent or with unreasonably small capital or that Hilton Parent intended or believed it would incur debts beyond its ability to pay such debts as they mature. If a court were to agree with such a plaintiff, then such court could void the spin-off as a fraudulent transfer and could impose a number of different remedies, including without limitation, returning our assets or your shares in our company to Hilton Parent or providing Hilton Parent with a claim for money damages against us in an amount equal to the difference between the consideration received by Hilton Parent and the fair market value of our company at the time of the spin-off.

In addition, the Purging Distribution by Park Parent, could similarly be challenged as a fraudulent conveyance or transfer. If a court were to find that the Purging Distribution was a fraudulent transfer or conveyance, a court could void the Purging Distribution, require stockholders to return to us some or all of the Purging Distribution or require stockholders to pay as money damages an equivalent of the value of the Purging Distribution. Moreover, stockholders could be required to return any dividends previously paid by us.

The measure of insolvency for purposes of the fraudulent conveyance laws may vary depending on which jurisdiction’s law is applied. Generally, however, an entity would be considered insolvent if the fair saleable value of its assets is less than the amount of its liabilities (including the probable amount of contingent liabilities), and such entity would be considered to have unreasonably small capital if it lacked adequate capital to conduct its business in the ordinary course and pay its liabilities as they become due. No assurance can be given as to what standard a court would apply to determine insolvency or that a court would determine that Hilton Parent were solvent at the time of or after giving effect to the spin-off, including the distribution of our common stock, or that Park Parent were solvent at the time of or after giving effect to the Purging Distribution.

We could be required to assume responsibility for obligations allocated to Hilton Parent or Hilton Grand Vacations under the Distribution Agreement.

Under the Distribution Agreement and related ancillary agreements, from and after the spin-off, each of Hilton Parent, Park Hotels & Resorts and Hilton Grand Vacations will be generally responsible for the debts, liabilities and other obligations related to the business or businesses which they own and operate following the consummation of the spin-off. Although we do not expect to be liable for any obligations that are not allocated to us under the Distribution Agreement, a court could disregard the allocation agreed to between the parties, and require that we assume responsibility for obligations allocated to Hilton Parent or Hilton Grand Vacations (for example, tax and/or environmental liabilities), particularly if Hilton Parent or Hilton Grand Vacations were to refuse or were unable to pay or perform the allocated obligations. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent Related to the Spin-Off—Distribution Agreement.”

In addition, losses in respect of certain shared contingent liabilities, which generally are not specifically attributable to any of the Separated Real Estate business, the Timeshare business or the retained business of Hilton, will be determined on or prior to the date on which the Distribution Agreement is entered. The percentage of shared contingent liabilities for which we are responsible will be fixed in a manner that is intended to approximate our estimated enterprise value on the distribution date relative to the estimated enterprise values of Hilton Grand Vacations and Hilton. Subject to certain limitations and exceptions, Hilton will generally be vested

 

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with the exclusive management and control of all matters pertaining to any such shared contingent liabilities, including the prosecution of any claim and the conduct of any defense. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent Related to the Spin-Off—Distribution Agreement.”

We do not have a recent operating history as an independent company and our historical financial information does not predict our future results.

The historical financial information we have included in this information statement has been derived from the consolidated financial statements of Hilton Parent and does not necessarily reflect what our financial position, results of operations and cash flows would have been as a separate, stand-alone entity during the periods presented. Hilton Parent did not account for us, and we were not operated, as a single stand-alone entity for the periods presented. The costs and expenses reflected in our historical financial statements include an allocation for certain corporate functions historically provided by Hilton Parent. These allocations were based on what we and Hilton Parent considered to be reasonable reflections of the historical utilization levels of these services required in support of our business. The historical information does not necessarily indicate what our results of operations, financial position, cash flows or costs and expenses will be in the future. Our pro forma adjustments reflect changes that may occur in our funding and operations as a result of the separation. However, there can be no assurances that these adjustments will reflect our costs as a publicly traded, stand-alone company. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Combined Consolidated Financial Data,” “Unaudited Pro Forma Combined Consolidated Financial Statements” and the notes to those statements included elsewhere in this information statement.

We may incur greater costs as an independent company than we did when we were part of Hilton.

As part of Hilton, we can take advantage of its size and purchasing power in procuring certain goods and services such as insurance and health care benefits, and technology such as computer software licenses. We also rely on Hilton to provide various corporate functions. After the spin-off, as a separate, independent entity, we may be unable to obtain these goods, services and technologies at prices or on terms as favorable to us as those we obtained prior to the distribution. We may also incur costs for functions previously performed by Hilton that are higher than the amounts reflected in our historical financial statements, which could cause our profitability to decrease.

Our ability to meet our capital needs may be harmed by the loss of financial support from Hilton.

The loss of financial support from Hilton could harm our ability to meet our capital needs. Hilton can currently provide certain capital that may be needed in excess of the amounts generated by our operating activities and historically has provided financing to us at rates that we believe are not representative of the cost of financing that we will incur as a stand-alone company. After the spin-off, we expect to obtain any funds needed in excess of the amounts generated by our operating activities through the capital markets or bank financing, and not from Hilton. However, given the smaller relative size of our company, as compared to Hilton after the spin-off, we may incur higher debt servicing and other costs relating to new indebtedness than we would have otherwise incurred as a part of Hilton. As a stand-alone company, the cost of our financing also will depend on other factors such as our performance and financial market conditions generally. Further, we cannot guarantee you that we will be able to obtain capital market financing or credit on favorable terms, or at all, in the future. We cannot assure you that our ability to meet our capital needs, including servicing our own debt, will not be harmed by the loss of financial support from Hilton.

We may be unable to achieve some or all of the benefits that we expect to achieve from the spin-off.

As discussed under “The Spin-Off—Reasons for the Spin-Off,” we and Hilton believe that a tax-free spin-off will enhance our long-term value. However, by separating from Hilton, we may be more susceptible to market fluctuations and other adverse events than we would have been were we still a part of Hilton. In addition, we may not be able to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all.

 

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Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the distribution, and failure to achieve and maintain effective internal controls could have a material adverse effect on our business and the price of our common stock.

Our financial results previously were included within the consolidated results of Hilton Parent, and we believe that our financial reporting and internal controls were appropriate for a subsidiary of a public company. However, we were not directly subject to the reporting and other requirements of the Exchange Act. As a result of the distribution, we will be directly subject to reporting and other obligations under the Exchange Act. Beginning with our Annual Report on Form 10-K for the year ending December 31, 2017, we will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) which will require annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm as to whether we maintained, in all material respects, effective internal controls over financial reporting as of the last day of the year. These reporting and other obligations may place significant demands on our management, administrative and operational resources, including accounting systems and resources.

The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. Under the Sarbanes-Oxley Act, we are required to maintain effective disclosure controls and procedures and internal controls over financial reporting. To comply with these requirements, we may need to upgrade our systems; implement additional financial and management controls, reporting systems and procedures; and hire additional accounting and finance staff. We expect to incur additional annual expenses for the purpose of addressing these requirements, and those expenses may be significant. If we are unable to upgrade our financial and management controls, reporting systems, information technology systems and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired.

If, during periods we are required to assess the effectiveness of our internal controls, we are unable to conclude that we have effective internal controls over financial reporting or our independent public accounting firm is unwilling or unable to provide us with an unqualified report on the effectiveness of our internal controls as required by Section 404 of the Sarbanes-Oxley Act, we may be unable to report our financial information on a timely basis, investors may lose confidence in our operating results, the price of our common stock could decline and we may be subject to litigation or regulatory enforcement actions, which would require additional financial and management resources. This could have a material adverse effect on our business and lead to a decline in the price of our common stock.

Following the spin-off, we will be dependent on Hilton Parent to provide certain services pursuant to the Transition Services Agreement.

Currently, we rely on Hilton Parent to provide certain corporate and administrative services such as certain information technology, financial and human resource services. We expect to develop the capability to provide all such services internally at Park Hotels & Resorts. However, to the extent that we are unable to develop such capabilities prior to the separation, we will rely on Hilton Parent to continue to provide certain services for a period of time pursuant to a Transition Services Agreement that we intend to enter in connection with the spin-off. If Hilton Parent is unable or unwilling to provide such services pursuant to the Transition Services Agreement, or if the agreement is terminated prior to the end of its term, we may be unable to provide such services ourselves or we may have to incur additional expenditures to obtain such services from another provider.

We may have been able to receive better terms from unaffiliated third parties than the terms we receive in our agreements related to the spin-off.

We expect that the agreements related to the spin-off, including the Distribution Agreement, Employee Matters Agreement, Tax Matters Agreement, Transition Services Agreements and any other agreements, will be

 

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negotiated in the context of our separation from Hilton while we are still part of Hilton. Accordingly, these agreements may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements being negotiated in the context of our separation are related to, among other things, allocations of assets and liabilities, rights and indemnification and other obligations among Hilton Parent, Hilton Grand Vacations and us. To the extent that certain terms of those agreements provide for rights and obligations that could have been procured from third parties, we may have received better terms from third parties because third parties may have competed with each other to win our business. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent Related to the Spin-Off.”

The spin-off may not be completed on the terms or timeline currently contemplated, if at all.

We are actively engaged in planning for the spin-off. We expect to incur expenses in connection with the spin-off and any delays in the anticipated completion of the distribution may increase these expenses. Unanticipated developments could delay or negatively impact the distribution, including those related to the filing and effectiveness of appropriate filings with the SEC, the listing of our common stock on a trading market, obtaining the tax opinion regarding the tax-free nature of the spin-off and receiving any required regulatory approvals. In addition, Hilton Parent’s board of directors may, in its absolute and sole discretion, decide at any time prior to the consummation of the spin-off not to proceed with the spin-off. Therefore, we cannot assure that the spin-off will be completed. Until the consummation of the spin-off, Hilton Parent’s board of directors will have the sole and absolute discretion to determine and change the terms of the spin-off, including the establishment of the record date and distribution date.

Risks Related to our REIT Status and Certain Other Tax Items

If we do not qualify and maintain our qualification as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability.

We intend to elect to be taxed as a REIT for U.S. federal income tax purposes beginning immediately after the distribution. We expect to continue to operate so as to qualify as a REIT under the Code. However, qualification as a REIT involves the interpretation and application of highly technical and complex Code provisions for which no or only a limited number of judicial or administrative interpretations exist. Notwithstanding the availability of cure provisions in the Code, we could fail to meet various compliance requirements, which could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

 

    we would be taxed as a regular domestic corporation, which under current laws, among other things, means being unable to deduct distributions to stockholders in computing taxable income and being subject to U.S. federal income tax on our taxable income at regular corporate income tax rates;

 

    any resulting tax liability could be substantial and could have a material adverse effect on our book value and financial condition;

 

    unless we were entitled to relief under applicable statutory provisions, we would be required to pay taxes, and thus, our cash available for distribution to stockholders would be reduced for each of the years during which we did not qualify as a REIT and for which we had taxable income; and

 

    we generally would not be eligible to requalify as a REIT for the subsequent four full taxable years.

Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, any of our domestic TRSs will be subject to regular corporate federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders.

 

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Liquidation of assets may jeopardize our REIT qualification.

To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

We have no operating history as a REIT, and our inexperience may impede our ability to successfully manage our business or implement effective internal controls.

We have no operating history as a REIT. We cannot assure you that our past experience will be sufficient to successfully operate our company as a REIT. Upon completion of the spin-off, we will be required to implement substantial control systems and procedures to qualify and maintain our qualification as a REIT. As a result, we will incur significant legal, accounting and other expenses that we have not previously incurred, and our management and other personnel will need to devote a substantial amount of time to comply with these rules and regulations and establish the corporate infrastructure and controls demanded of a REIT. These costs and time commitments could be substantially more than we currently expect. Therefore, our historical combined consolidated and unaudited pro forma condensed combined consolidated financial statements may not be indicative of our future costs and performance as a REIT.

If the distribution is not considered grandfathered under new REIT legislation, we will not be eligible to elect REIT status for a 10-year period following the spin-off.

Recently enacted legislation denies tax-free treatment to a spin-off in which either the distributing corporation or the spun-off corporation is a REIT and prevents a distributing corporation or a spun-off corporation from electing REIT status for a 10-year period following a tax-free spin-off. Moreover, recently promulgated U.S. Treasury temporary regulations would require the recognition of taxable gain in connection with the spin-off of an entity that is a REIT or elects REIT status. Under effective date provisions, the legislation and temporary regulations do not apply to distributions described in a ruling request initially submitted to the IRS before December 7, 2015. Because the initial request for the IRS Ruling was submitted before that date and because we believe the distribution will be considered to have been described in that initial request, we believe the legislation will not apply to the spin-off. However, no ruling will be obtained on that issue and thus no assurance can be given in that regard. In particular, the IRS or a court could disagree with our view regarding the effective date provisions based on any differences that exist between the description in the ruling request and the actual facts relating to the spin-off. If the effective date provisions did not apply to the spin-off, either the spin-off would not qualify for tax-free treatment or we would not be eligible to elect REIT status for a 10-year period following the spin-off.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities and limit our expansion opportunities.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature of our investments in real estate and related assets, the amounts we distribute to our stockholders and the ownership of our stock. We may also be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments.

To qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The

 

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remainder of our investments in securities cannot include more than 10% of the outstanding voting securities of any one issuer or 10% of the total value of the outstanding securities of any one issuer unless we and such issuer jointly elect for such issuer to be treated as a TRS under the Code. The total value of all of our investments in TRSs cannot exceed 25% of the value of our total assets (and 20% in taxable years beginning after December 31, 2017). No more than 5% of the value of our assets can consist of the securities of any one issuer other than a TRS. In addition, not more than 25% of our total assets may be represented by debt instruments issued by publicly offered REITs that are “nonqualified” debt instruments. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets (each such hedge, a “Borrowings Hedge”), or to manage risk of foreign currency exchange rate fluctuations with respect to any item of qualifying income (each such hedge, a “Currency Hedge”), if clearly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests that we must satisfy to qualify and maintain our qualification as a REIT. This exclusion from the 95% and 75% gross income tests also will apply if we previously entered into a Borrowings Hedge or a Currency Hedge, a portion of the hedged indebtedness or property is disposed of and in connection with such extinguishment or disposition, we enter into a new properly identified hedging transaction to offset the prior hedging position. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. See “Material U.S. Federal Income Tax Considerations—Taxation of Park Parent.” As a result of these rules, we intend to limit our use of advantageous hedging techniques or implement those hedges through one or more domestic TRSs. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in any TRS generally will not provide any tax benefit, except for being carried forward against future taxable income in such TRS.

Complying with REIT requirements may force us to borrow to make distributions to stockholders.

From time to time, our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other funds available in these situations, we may be unable to distribute substantially all of our taxable income as required by the REIT provisions of the Code. Thus, we could be required to borrow funds, raise additional equity capital, sell a portion of our assets at disadvantageous prices or find another alternative. These options could increase our costs or reduce our equity.

The ownership of our TRSs (including our TRS lessees) increases our overall tax liability.

Our domestic TRSs will be subject to U.S. federal, state and local income tax on their taxable income, which in the case of our TRS lessees, will consist of the revenues from the hotels leased by our TRS lessees, net of the operating expenses for such hotels and rent payments to us. Accordingly, although our ownership of our TRS lessees will allow us to participate in the operating income from our hotels in addition to receiving rent, that operating income will be fully subject to income tax. The after-tax net income of each TRS lessee is available for distribution to us.

Our TRS lessee structure subjects us to the risk of increased hotel operating expenses that could adversely affect our operating results and our ability to make distributions to stockholders.

Our leases with our TRS lessees require such TRS lessees to pay us rent based in part on revenues from our hotels. Our operating risks include decreases in hotel revenues and increases in hotel operating expenses,

 

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including but not limited to the increases in wage and benefit costs, repair and maintenance expenses, energy costs, property taxes, insurance costs and other operating expenses, which would adversely affect each TRS lessees’ ability to pay us rent due under the leases.

Increases in these operating expenses can have a significant adverse impact on our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our stockholders.

Our ownership of our TRSs, and any other TRSs we form, will be subject to limitations, and our transactions with our TRSs, and any other TRSs we form, will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs (and 20% in taxable years beginning after December 31, 2017). In addition, the Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. The 100% tax would apply, for example, to the extent that we were found to have charged our TRS lessees rent in excess of an arm’s-length rent. Furthermore, it is our policy to evaluate material intercompany transactions and to attempt to set the terms of such transactions so as to achieve substantially the same result as they believe would have been the case if they were unrelated parties. As a result, we believe that all material transactions between and among us and the entities in which we own a direct or indirect interest have been and will be negotiated and structured with the intention of achieving an arm’s-length result and that the potential application of the 100% excise tax will not have a material effect on us. There can be no assurance, however, that we will be able to comply with the TRS limitation or to avoid application of the 100% excise tax.

If the leases of our hotels to our TRS lessees are not respected as true leases for U.S. federal income tax purposes, we will fail to qualify as a REIT.

To qualify as a REIT, we must annually satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” Rents paid to us by our TRS lessees pursuant to the leases of our hotels will constitute substantially all of our gross income. In order for such rent to qualify as “rents from real property” for purposes of the gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, financing arrangements, joint ventures or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we will fail to qualify as a REIT.

If Hilton or any other future third-party hotel managers do not qualify as “eligible independent contractors,” or if our hotels are not “qualified lodging facilities,” we will fail to qualify as a REIT.

Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. An exception is provided, however, for leases of “qualified lodging facilities” to a TRS so long as the hotels are managed by an “eligible independent contractor” and certain other requirements are satisfied. We expect to lease all or substantially all of our hotels to our TRS lessees and to engage third-party hotel managers (including Hilton, which manages nearly all of our hotels) that qualify as “eligible independent contractors.” Among other requirements, to qualify as an eligible independent contractor (i) the hotel manager and/or one or more actual or constructive owners of 10% or more of the hotel manager cannot own, actually or constructively, more than 35% of our outstanding shares, and (ii) one or more actual or constructive owners of more than 35% of the hotel manager cannot own 35% or more of our outstanding shares (determined by taking into account only the shares held by persons owning, actually or constructively, more than 5% of our outstanding shares because our shares will be regularly traded on an established securities market and, if the stock of the hotel manager is regularly traded on an established securities market, determined by taking into

 

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account only shares held by persons owning, actually or constructively, more than 5% of the publicly traded stock of the hotel manager). The ownership attribution rules that apply for purposes of these 35% thresholds are complex, and monitoring actual and constructive ownership of our shares by our hotel managers and their owners may not be practical. Accordingly, there can be no assurance that these ownership levels will not be exceeded, in particular, with respect to Hilton.

In addition, for a hotel management company to qualify as an eligible independent contractor, such company or a related person must be actively engaged in the trade or business of operating “qualified lodging facilities” (as defined below) for one or more persons not related to the REIT or its TRSs at each time that such company enters into a hotel management contract with a TRS or its TRS lessee. As of the date hereof, we believe Hilton operates qualified lodging facilities for certain persons who are not related to us or our TRSs. However, no assurances can be provided that any of our current and future hotel managers will in fact comply with this requirement. Failure to comply with this requirement would require us to find other hotel managers for future contracts, and, if we hired a management company without knowledge of the failure, it could jeopardize our status as a REIT.

Finally, each property with respect to which our TRS lessees pay rent must be a “qualified lodging facility.” A “qualified lodging facility” is a hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. As of the date hereof, we believe that the properties that are leased to our TRS lessees are qualified lodging facilities. Although we intend to monitor future acquisitions and improvements of properties, REIT provisions of the Code provide no or only limited guidance for making determinations under the requirements for qualified lodging facilities, and there can be no assurance that these requirements will be satisfied.

Our amended and restated certificate of incorporation will not permit any person to own more than 4.9% of our outstanding common stock or more than 4.9% of any outstanding class or series of our preferred stock, and attempts to acquire our common stock or any class or series of our preferred stock in excess of these 4.9% limits would not be effective without an exemption from these limits by our board of directors.

For us to qualify as a REIT under the Code, not more than 50% of the value of our outstanding stock may be owned directly or indirectly, by five or fewer individuals (including certain entities treated as individuals for this purpose) during the last half of a taxable year. In addition, for the rental income we receive on the hotels leased to our TRS lessees and managed by Hilton (or another hotel manager) to be qualifying REIT income, Hilton (or the other hotel manager) must qualify as an “eligible independent contractor.” For Hilton (or another hotel manager) to qualify as an “eligible independent contractor,” there cannot be 35% or more overlapping ownership between our stock and Hilton Parent stock (or the other hotel manager’s stock), counting, for this purpose, only persons owning more than 5% of our outstanding stock and more than 5% of the outstanding Hilton Parent stock (or other hotel manager’s stock), provided our stock and Hilton Parent stock (or other hotel manager’s stock) is regularly traded on an established securities market. For the purpose of assisting our qualification as a REIT for U.S. federal income tax purposes, among other purposes, our amended and restated certificate of incorporation will prohibit beneficial or constructive ownership by any person (other than certain existing holders and certain transferees) of more than 4.9%, in value or by number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 4.9%, in value or by number of shares, whichever is more restrictive, of any outstanding class or series of our preferred stock, which we refer to as the “ownership limit.” Our board of directors has granted exemptions from the ownership limit to certain entities affiliated with Blackstone and to HNA. See “Certain Relationships and Related Party Transactions—Blackstone Waiver Letter Agreement” and “—HNA Waiver Letter Agreement.” The constructive ownership rules under the Code and our amended and restated certificate of incorporation are complex and may cause shares of the outstanding common stock or preferred stock owned by a group of related persons to be deemed to be constructively owned by one person. As a result, the acquisition of less than 4.9% of our outstanding common stock or any class or series of our preferred stock by a person could cause a person to own constructively

 

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in excess of 4.9% of our outstanding common stock or any class or series of our preferred stock, respectively, and thus violate the ownership limit. There can be no assurance that our board of directors, as permitted in the amended and restated certificate of incorporation, will not decrease this ownership limit in the future. Any attempt to own or transfer shares of our common stock or preferred stock in excess of the ownership limit without the consent of our board of directors will result either in the shares in excess of the limit being transferred by operation of the amended and restated certificate of incorporation to a charitable trust, and the person who attempted to acquire such excess shares will not have any rights in such excess shares, or in the transfer being void. In connection with granting an exemption from the ownership limit to HNA, we agreed that, if the transfer to the charitable trust is attributable to our common stock being aggregated with the members of the HNA group as a result of the ownership, directly or indirectly, by a person or entity that is not a member of the HNA group, the shares of our common stock to be transferred to the charitable trust will come first from all such persons or entities, and only then from a member of the HNA group.

The ownership limit may have the effect of precluding a change in control of us by a third party, even if such change in control would be in the best interests of our stockholders or would result in receipt of a premium to the price of our common stock (and even if such change in control would not reasonably jeopardize our REIT status). The exemptions to the ownership limit granted to date may limit our board of directors’ power to increase the ownership limit or grant further exemptions in the future.

Our amended and restated certificate of incorporation prohibits any person from owning shares of our stock to the extent such ownership would result in our failing to qualify as a “domestically controlled qualified investment entity,” and as a result of HNA’s ownership of 25% of our common stock, other foreign persons collectively will be prohibited from owning more than 24.9% of our common stock.

Our amended and restated certificate of incorporation prohibits any person from beneficially owning shares of our stock to the extent such ownership would result in our failing to qualify as a “domestically controlled qualified investment entity” within the meaning of Section 897(h) of the Code (a “Domestically Controlled REIT”). A Domestically Controlled REIT is a REIT in which less than 50% in value of the stock is held directly or indirectly by foreign persons. HNA is a foreign person and, upon the closing of the Sale, HNA will own approximately 25% of our outstanding common stock. As a result, other foreign persons collectively will be prohibited from owning more than 24.9% of our common stock. This restriction may have the effect of precluding certain transfers of our stock to a third party, even if such transfer would be in the best interests of our stockholders.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum U.S. federal income tax rate applicable to qualified dividend income payable to certain non-corporate U.S. stockholders has been reduced by legislation to 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause certain non-corporate investors to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the price of our common stock.

In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. We urge you to consult with your tax advisor with respect to the impact of recent legislation on your investment in our shares and the

 

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status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. Although REITs generally receive certain tax advantages compared to entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a corporation. As a result, our amended and restated certificate of incorporation provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the approval of our stockholders.

Even if we qualify to be subject to tax as a REIT, we could be subject to tax on any unrealized net built-in gains in our assets held before electing to be treated as a REIT.

Following our REIT election, we will own appreciated assets that were held by a C corporation and will be acquired by us in a transaction in which the adjusted tax basis of the assets in our hands will be determined by reference to the adjusted basis of the assets in the hands of the C corporation. If we dispose of any such appreciated assets during the ten-year period following our intended qualification as a REIT, we will be subject to tax at the highest corporate tax rates on any gain from such assets to the extent of the excess of the fair market value of the assets on the date that we became a REIT over the adjusted tax basis of such assets on such date, which are referred to as built-in gains. We would be subject to this tax liability even if we qualify and maintain our status as a REIT. Any recognized built-in gain will retain its character as ordinary income or capital gain and will be taken into account in determining REIT taxable income and our distribution requirement. Any tax on the recognized built-in gain will reduce REIT taxable income. We may choose not to sell in a taxable transaction appreciated assets we might otherwise sell during the ten-year period in which the built-in gain tax applies to avoid the built-in gain tax. However, there can be no assurances that such a taxable transaction will not occur. If we sell such assets in a taxable transaction, the amount of corporate tax that we will pay will vary depending on the actual amount of net built-in gain or loss present in those assets as of the time we became a REIT. The amount of tax could be significant.

There are uncertainties relating to the Purging Distribution.

Hilton Parent will allocate its accumulated earnings and profits (as determined for U.S. federal income tax purposes) for periods prior to the spin-off between Hilton Parent, Hilton Grand Vacations and us in a manner that, in its best judgment, is in accordance with the provisions of the Code. As a result of our intended election to be treated as a REIT for U.S. federal income tax purposes, to comply with certain REIT qualification requirements, we will declare a dividend to our stockholders to distribute our accumulated earnings and profits attributable to non-REIT years, including the earnings and profits allocated to us in connection with the spin-off and the earnings and profits generated by us in our taxable year ending on the date of the spin-off. Failure to declare the Purging Distribution before December 31, 2017 and pay it before January 31, 2018 could result in our disqualification as a REIT. The amount of earnings and profits to be distributed is a complex factual and legal determination. We currently believe and intend that our Purging Distribution will satisfy the requirements relating to the distribution of our pre-REIT accumulated earnings and profits. No assurance can be given, however, that the IRS will agree with our calculation or Hilton Parent’s allocation of earnings and profits to us. If the IRS is successful in asserting that we have additional amounts of pre-REIT earnings and profits, there are procedures generally available to cure any failure to distribute all of our pre-REIT earnings and profits, but there can be no assurance that we will be able to successfully implement such procedures.

We will pay the Purging Distribution in a combination of common stock and cash and may pay other dividends on our common stock in a combination of common stock and cash. Our stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

We will pay the Purging Distribution in a combination of cash and common stock. Each stockholder will be permitted to elect to receive the stockholder’s entire entitlement under the Purging Distribution in either cash or common stock, subject to the limitation on the amount of cash to be distributed in the aggregate to all of our

 

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stockholders (the “Cash Limitation”). The Cash Limitation will in no event be less than 20% of the Purging Distribution declaration (without regard to any cash that may be paid in lieu of fractional shares). If our stockholders elect to receive an amount of cash in excess of the Cash Limitation, each such electing stockholder will receive a pro rata amount of cash corresponding to the stockholder’s respective entitlement under the Purging Distribution declaration. In the Purging Distribution and any other distribution paid in a combination of cash and common stock, stockholders will be required to report dividend income as a result of such distribution even though we distributed no cash or only nominal amounts of cash to such stockholder.

In addition, in connection with our qualification as a REIT, we are required to annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with U.S. GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. To satisfy this requirement, we may make distributions that are payable in cash and/or shares of our common stock (which could account for a significant amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay income taxes with respect to such distributions in excess of the cash portion of the distribution received. Accordingly, U.S. holders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution to pay this tax, the sales proceeds may be less than the amount it must include in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. holders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our stockholders determine to sell shares of our common stock to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our common stock.

Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.

If the total cash payable to stockholders in the Purging Distribution is limited, the amount of cash received by each stockholder is dependent on the election of other stockholders.

The total amount of cash payable in the Purging Distribution will be limited to no less than 20% of the total value of the Purging Distribution (without regard to any cash that may be paid in lieu of fractional shares). The balance of the Purging Distribution will be in the form of shares of our common stock. Each stockholder will be permitted to elect to receive the stockholder’s entire entitlement under the Purging Distribution in either cash or our common stock, subject to the Cash Limitation. If our stockholders elect to receive an amount of cash in excess of the Cash Limitation, or less than 20% of the total value of the Purging Distribution, each such electing stockholder will receive a pro rata amount of cash corresponding to the stockholder’s respective entitlement under the Purging Distribution declaration. Therefore, stockholders may not receive exactly the dividend that they elect and may receive a pro rata amount of the Cash Limitation and shares of our common stock.

 

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Risks Related to Ownership of Our Common Stock

Upon consummation of the spin-off, approximately 40% of the voting power in Park Parent will be controlled by Blackstone and its affiliates and upon consummation of the Sale, 25% of the voting power in Park Parent will be controlled by HNA and approximately 15% will be controlled by Blackstone and their respective interests may conflict with ours or yours in the future.

Immediately following the spin-off, Blackstone and its affiliates will beneficially own approximately 40% of our common stock, although less than a majority of the total voting power and upon consummation of the Sale, 25% of the voting power in Park Parent will be controlled by HNA and approximately 15% will be controlled by Blackstone. We expect that two members of our initial board of directors will be Blackstone employees and upon consummation of the Sale our board of directors will include designees of HNA. Accordingly, for so long as Blackstone, HNA and their respective affiliates retain significant ownership of us, Blackstone and HNA will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, for so long as Blackstone, HNA and their respective affiliates continue to own a significant percentage of our stock, Blackstone or HNA may be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our company and ultimately might affect the market price of our common stock.

Blackstone, HNA and their respective affiliates engage in a broad spectrum of activities, including investments in real estate generally and in the hospitality industry in particular. In the ordinary course of their business activities, Blackstone, HNA and their respective affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. For example, all of the hotels that we own or lease as of the date of this information statement utilize brands licensed from Hilton, and each of these hotels, other than the Select Hotels, will be operated by Hilton under management agreements with Hilton. Blackstone and its affiliates own, and upon consummation of the Sale, HNA will own, a significant portion of the outstanding stock of Hilton Parent and have significant influence with respect to the management, business plans and policies of Hilton Parent. In addition, Blackstone and its affiliates own interests in Extended Stay America, Inc. and La Quinta Holdings Inc., and Blackstone, HNA and their respective affiliates own certain other investments in the hotel industry and may pursue ventures that compete directly or indirectly with us. Moreover, affiliates of Blackstone or HNA may directly and indirectly own interests in other third-party hotel management companies and franchisors with whom we may engage in the future, may compete with us for investment opportunities and may enter into other transactions with us, including hotel development projects, that could result in their having interests that could conflict with ours. Our amended and restated certificate of incorporation will provide that none of Blackstone, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Upon consummation of the Sale, we will amend and restate our charter to include a similar provision with respect to HNA. Blackstone or HNA also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may be unavailable to us. In addition, Blackstone or HNA may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their respective investments, even though such transactions might involve risks to you.

Our board of directors may change significant corporate policies without stockholder approval.

Our investment, financing, borrowing and dividend policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, will be determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of our board of directors without a vote of our stockholders. Our amended and restated certificate of incorporation also will provide that our board of directors may revoke or otherwise terminate our REIT election without approval of our stockholders, if it determines that it is no longer in our best interests to attempt to qualify, or to continue to

 

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qualify, as a REIT. In addition, our board of directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements. A change in these policies or the termination of our REIT election could have an adverse effect on our financial condition, our results of operations, our cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to pay dividends to our stockholders.

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and bylaws will contain provisions that may make the merger or acquisition of our company more difficult without the approval of our board of directors. Among other things:

 

    the restrictions on ownership and transfer of our stock discussed under the caption “Description of Capital Stock—Restrictions on Ownership and Transfer” prevent any person from acquiring more than 4.9% (in value or by number of shares, whichever is more restrictive) of our outstanding common stock or more than 4.9% (in value or by number of shares, whichever is more restrictive) of any outstanding class or series of our preferred stock without the approval of our board of directors;

 

    although we do not have a stockholder rights plan, and would either submit any such plan to stockholders for ratification or cause such plan to expire within a year, these provisions would allow us to authorize the issuance of undesignated preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

    these provisions prohibit stockholder action by written consent from and after the date on which Blackstone and its affiliates cease to beneficially own at least 40 percent of the total voting power of all then outstanding shares of our capital stock unless such action is recommended by all directors then in office;

 

    these provisions provide that our board of directors is expressly authorized to make, alter or repeal our bylaws and that our stockholders may only amend our bylaws with the approval of 80 percent or more of all the outstanding shares of our capital stock entitled to vote; and

 

    these provisions establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

There is no existing market for our common stock and a trading market that will provide you with adequate liquidity may not develop for our common stock. In addition, once our common stock begins trading, the market price and trading volume of our common stock may fluctuate widely.

There is no current trading market for our common stock. Our common stock distributed in the spin-off will be trading publicly for the first time. We expect that a limited trading market for Park Parent common stock, commonly known as a “when-issued” trading market, will develop at least two trading days prior to the record date for the distribution, and we expect “regular-way” trading of Park Parent common stock will begin the first trading day after the distribution date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the spin-off or be sustained in the future. The lack of an active trading market may make it more difficult for you to sell your shares and could lead to our share price being depressed or more volatile.

 

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For many reasons, including the risks identified in this information statement, the market price of our common stock following the spin-off may be more volatile than the market price of Hilton Parent common stock before the spin-off. These factors may result in short-term or long-term negative pressure on the value of our common stock.

We cannot predict the prices at which our common stock may trade after the spin-off. The market price of our common stock may fluctuate significantly, depending upon many factors, some of which may be beyond our control, including, but not limited to:

 

    a shift in our investor base;

 

    our quarterly or annual earnings, or those of comparable companies;

 

    actual or anticipated fluctuations in our operating results;

 

    our ability to obtain financing as needed;

 

    changes in laws and regulations affecting our business;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    announcements by us or our competitors of significant investments, acquisitions or dispositions;

 

    the failure of securities analysts to cover our common stock after the spin-off;

 

    changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

    the operating performance and stock price of comparable companies;

 

    overall market fluctuations;

 

    a decline in the real estate markets; and

 

    general economic conditions and other external factors.

Moreover, securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares without regard to our operating performance. For example, the trading prices of equity securities issued by REITs historically have been affected by changes in market interest rates. One of the factors that may influence the market price of our common stock is the annual yield from distributions on our common stock as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of shares of our common stock to demand a higher distribution rate or seek alternative investments. As a result, if interest rates rise, it is likely that the market price of our common stock will decrease as market rates on interest-bearing securities increase. In addition, our operating results could be below the expectations of public market analysts and investors, and in response the market price of our shares could decrease significantly. The market value of the equity securities of a REIT is also based upon the market’s perception of the REIT’s growth potential and its current and potential future cash distributions, whether from operations, sales or refinancings, and is secondarily based upon the real estate market value of the underlying assets. For that reason, our common stock may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our common stock and, in such instances, you may be unable to resell your shares at or above the initial public offering price.

 

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Future issuances of common stock by us, and the availability for resale of shares held by Blackstone and its affiliates, may cause the market price of our common stock to decline.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales could occur, could substantially decrease the market price of our common stock. Upon consummation of the spin-off, substantially all of the outstanding shares of our common stock will be available for resale in the public market. The market price of our common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. In addition, Blackstone will pledge substantially all of the shares of our common stock held by it pursuant to a margin loan agreement and any foreclosure upon those shares could result in sales of a substantial number of shares of our common stock in the public market, which could substantially decrease the market price of our common stock.

Pursuant to a registration rights agreement that we will enter into in connection with the spin-off as described under “Certain Relationships and Related Party Transactions—Registration Rights Agreements,” we will grant Blackstone an unlimited number of “demand” registrations and customary “piggyback” registration rights. In addition, in connection with the Sale, Park Parent entered into a registration rights agreement with HNA that will be effective upon the closing of the Sale. The HNA registration rights agreement provides that, beginning two years after the closing of the Sale, HNA will have customary “demand” and “piggyback” registration rights. See “Certain Relationships and Related Party Transactions—Registration Rights Agreements” for additional information. In addition, none of the shares outstanding upon consummation of the spin-off, including those held by Blackstone and its affiliates, will be “restricted securities” within the meaning of Rule 144 under the Securities Act, and will be freely tradable subject to certain restrictions in the case of shares held by persons deemed to be our affiliates. Accordingly, the market price of our stock could decline if Blackstone or its affiliates exercise their registration rights, sell their shares in the open market or otherwise or are perceived by the market as intending to sell them.

In connection with the spin-off, we expect to adopt an Omnibus Incentive Plan, under which an aggregate of 8,000,000 shares of common stock will be available for future issuance. Equity-based awards that are outstanding under the Hilton Parent Incentive Plan on the distribution date and held by Park Employees will be converted into awards that will be exercisable for or settleable in shares of Park Parent common stock, and the number of shares available for future issuance under the Omnibus Incentive Plan includes approximately 530,000 shares of Park Parent common stock which would be issuable under such converted awards. The number of shares subject to such converted awards is calculated based on adjustments to Hilton Parent equity-based awards using an assumed conversion ratio of 1:1 and assuming that all performance-vesting awards vest at target performance levels. The actual number of shares of Park Parent common stock subject to converted awards may differ from the assumed amounts presented herein. In addition, in connection with the spin-off, we expect to adopt a Non-Employee Director Stock Plan, under which an aggregate of 450,000 shares of Park Parent common stock will be available for future issuance. See “The Spin-Off—Treatment of Outstanding Equity Awards.” We will file a registration statement on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our Omnibus Incentive Plan and Non-Employee Director Stock Plan. Accordingly, shares registered under such registration statements will be available for sale in the open market.

In addition, we expect to declare and pay the Purging Distribution prior to the end of 2017, as described in “The Spin-Off—The Purging Distribution.” The Purging Distribution will be paid to our stockholders in a combination of cash and Park Parent common stock, with the cash portion constituting at least 20% of the total amount of the Purging Distribution. The Purging Distribution may result in dilution of your ownership of our common stock to the extent you elect and receive a greater portion of the Purging Distribution in cash than other participating stockholders.

 

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The cash available for distribution to stockholders may not be sufficient to pay dividends at expected levels, nor can we assure you of our ability to make distributions in the future. We may use borrowed funds to make distributions.

We intend to elect and qualify to be subject to tax as a REIT for U.S. federal income tax purposes beginning immediately after the distribution. The Code generally requires that a REIT annually distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain, and imposes tax on any taxable income retained by a REIT, including capital gains. We anticipate making quarterly distributions to our stockholders. We expect that the cash required to fund our dividends will be covered by cash generated by operations. However, our ability to make distributions to our stockholders will depend upon the performance of our asset portfolio. If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, borrow funds, raise additional equity capital, sell assets or reduce such distributions. If such cash available for distribution decreases in future periods from expected levels, our inability to make the expected distributions could result in a decrease in the market price of our common stock. In addition, our amended and restated certificate of incorporation allows us to issue preferred stock that could have a preference over our common stock as to distributions. See “Distribution Policy.” All distributions will be made at the sole discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT qualification and other factors as our board of directors may deem relevant from time to time. We may not be able to make distributions in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of capital for U.S. federal income tax purposes to the extent of the holder’s adjusted tax basis in their shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. To the extent that distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock. See “Material U.S. Federal Income Tax Considerations—Taxation of Taxable U.S. Stockholders—Distributions.” If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.

The stock ownership limits imposed by the Code for REITs and our amended and restated certificate of incorporation restrict stock transfers and/or business combination opportunities, particularly if our management and board of directors do not favor a combination proposal.

In order for us to qualify and maintain our qualification as a REIT under the Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year following our first year. Our amended and restated certificate of incorporation, with certain exceptions, authorizes our board of directors to take the actions that are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person or entity (other than a person or entity who has been granted an exception) may directly or indirectly, beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 4.9%, in value or by number of shares, whichever is more restrictive, of our outstanding common stock, or more than 4.9%, in value or by number of shares, whichever is more restrictive, of any outstanding class or series of our preferred stock.

Our board may, in its sole discretion, grant an exemption to the ownership limits, subject to certain conditions and the receipt by our board of certain representations and undertakings. In addition, our board of directors may change the share ownership limits. Our amended and restated certificate of incorporation also prohibits any person from: (1) beneficially or constructively owning, as determined by applying certain attribution rules of the Code, our stock if that would result in us being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT; (2) beneficially or constructively owning shares of our stock that would cause any person, including Hilton Parent, to fail to qualify as our eligible independent contractor; (3) transferring stock if such transfer would result in our stock being owned by fewer than 100

 

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persons; and (4) beneficially owning shares of our stock to the extent such ownership would result in our failing to qualify as a “domestically controlled qualified investment entity” within the meaning of Section 897(h) of the Code. The stock ownership limits contained in our amended and restated certificate of incorporation key off the ownership at any time by any “person,” which term includes entities, and take into account direct and indirect ownership as determined under various ownership attribution rules in the Code. The stock ownership limits also might delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

Our authorized but unissued shares of common stock and shares of preferred stock may prevent a change in our control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

Our amended and restated certificate of incorporation authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our board of directors may, without stockholder approval, amend our amended and restated certificate of incorporation to increase the aggregate number of our shares of common stock or the number of shares of any class or series of preferred stock that we have authority to issue and classify or reclassify any unissued shares of common stock or preferred stock and set the preferences, rights and other terms of the classified or reclassified stock. As a result, our board of directors may establish a series of common stock or preferred stock that could delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

 

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This information statement contains forward-looking statements including in the sections entitled “Summary,” “Risk Factors,” “The Spin-Off,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business and Properties,” that are based on our management’s beliefs and assumptions and on information currently available to our management. 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 benefits resulting from our separation from Hilton, 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 can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements in this information statement. We do not have any intention or obligation to update forward-looking statements after we distribute this information statement.

The risk factors discussed in “Risk Factors” could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Any such risks could cause our results to differ materially from those expressed in forward-looking statements.

 

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THE SPIN-OFF

Background

On February 26, 2016, Hilton Parent announced its intention to implement the spin-off of Park Hotels & Resorts and Hilton Grand Vacations from Hilton, following which Park Parent and HGV Parent will be independent, publicly traded companies. As part of the spin-off, Hilton will effect an internal reorganization to properly align the appropriate businesses within each of Park Hotels & Resorts, Hilton Grand Vacations and Hilton Parent. We refer to such reorganization as the “internal reorganization.”

To complete the spin-off, Hilton Parent will, following the internal reorganization, distribute to its stockholders all of the outstanding shares of our common stock and the common stock of HGV Parent. The distribution will occur on the distribution date, which is expected to be January 3, 2017. Each holder of Hilton Parent common stock will receive one share of our common stock for every five shares of Hilton Parent common stock held at 5:00 p.m., Eastern time, on December 15, 2016, the record date. After completion of the spin-off:

 

    we will be an independent, self-administered, publicly traded company (NYSE: PK), and will hold a portfolio of Hilton’s real estate assets and certain other assets and operations as described herein;

 

    HGV Parent will be an independent, publicly traded company (NYSE: HGV), and will own and operate Hilton’s timeshare business; and

 

    Hilton will continue to be an independent, publicly traded company (NYSE: HLT) and continue to own and operate its management and franchising business and will continue to hold certain real estate assets not transferred to Park Hotels & Resorts as part of the spin-off.

Each holder of Hilton Parent common stock will continue to hold his, her or its shares in Hilton Parent. No vote of Hilton Parent stockholders is required or is being sought in connection with the spin-off, including the internal reorganization, and Hilton Parent stockholders will not have any appraisal rights in connection with the spin-off.

The distribution of our common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. In addition, Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton Parent determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents or that it is not advisable for us to separate from Hilton at that time. See “—Conditions to the Spin-Off.”

We intend to elect and qualify to be subject to tax as a REIT for U.S. federal income tax purposes beginning immediately after the distribution.

As a result of our intended election to be subject to tax as a REIT for U.S. federal income tax purposes, to comply with certain REIT qualification requirements, we will make the Purging Distribution by declaring a dividend to our stockholders to distribute our accumulated earnings and profits attributable to our non-REIT years, including the earnings and profits allocated to us in connection with the spin-off and the earnings and profits generated by us in our taxable year ending on the date of the spin-off. The Purging Distribution will be paid to Park Parent stockholders in a combination of cash and Park Parent common stock, with the cash portion constituting at least 20% of the total amount of the Purging Distribution. We expect to pay the majority of the Purging Distribution in Park Parent common stock. Additionally, we expect to declare and pay the Purging Distribution prior to the end of 2017. We currently expect the aggregate amount of the Purging Distribution will be between $550 million and $650 million. See “—The Purging Distribution.”

 

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Reasons for the Spin-Off

Hilton Parent’s board of directors has determined that the spin-off is in the best interests of Hilton Parent and its stockholders because the spin-off will provide the following key benefits:

 

    Direct and Differentiated Access to Capital Resources to Pursue Tailored Growth Strategies. Following the spin-off, Park Parent will be free to allocate capital with a focus on optimizing the value of our portfolio without having to balance the countervailing economic imperatives of a capital-light management and franchising business. As a pure-play real estate company with direct access to capital and independent financial resources, we believe our enhanced ability to execute compelling return on investment initiatives within our portfolio represents a significant embedded growth opportunity. Moreover, the anticipated liquidity of our stock should enhance our ability to pursue single-asset and portfolio acquisition opportunities. Similarly, as a pure-play hotel management and franchising company, Hilton Parent expects to benefit from alignment with a dedicated investor base, resulting in enhanced and more efficient access to capital to pursue a growth strategy best suited for its core, capital-light fee business.

 

    Enhanced Investor Choices by Offering Investment Opportunities in Separate Entities. Hilton’s management and franchising and real estate businesses exhibit different financial and operating characteristics and appeal to different types of investors with different investment goals and risk profiles. Finding investors who want to invest in the businesses together is more challenging than finding investors for each business individually. After the spin-off, investors should be better able to evaluate the financial performance of each company, as well as its strategy within the context of its particular market, thereby enhancing the likelihood that each company will achieve an appropriate market valuation.

 

    Dedicated Management Team with Enhanced Strategic Focus. Following the spin-off, Hilton’s management and franchising and real estate businesses will no longer compete for the attention and resources of a single management team and will benefit from dedicated management teams focused on designing and implementing tailored strategies to achieve the distinct goals and opportunities of each business. Moreover, free from constraints that arise from being part of a larger hotel management business, Park Parent’s dedicated management team will be able to more effectively and independently oversee the management of our properties to ensure optimal results are achieved and will be able to pursue separate and optimal business strategies.

 

    Improved Management Incentive Tools. We expect to use equity-based and other incentive awards to compensate current and future employees. In multi-business companies such as Hilton, it is difficult to structure incentives that reward employees in a manner directly related to the performance of their respective business units. By granting awards linked to the performance of a pure-play business, the compensation arrangements of each company should provide enhanced incentives for employee performance and improve the ability of each company to attract, retain and motivate qualified personnel.

 

    Tax-Efficient Structure. The spin-off will allow Hilton Parent’s stockholders to hold their interest in the Park Hotels & Resorts portfolio, comprising most of Hilton Parent’s ownership segment, through an entity that will elect to be taxed as a REIT for U.S. federal income tax purposes. We believe this will result in Hilton Parent’s stockholders realizing significant tax savings on the earnings from the portfolio of Park Hotels & Resorts.

Manner of Effecting the Spin-Off

The general terms and conditions relating to the spin-off will be set forth in a Distribution Agreement among us, Hilton Parent and HGV Parent.

 

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Internal Reorganization

As part of the spin-off, Hilton will undergo an internal reorganization, which we refer to as the “internal reorganization,” pursuant to which, among other things and subject to limited exceptions: (i) all of the assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) associated with the Separated Real Estate business will be retained by or transferred to us or our subsidiaries; (ii) all of the assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) associated with the Timeshare business will be retained by or transferred to HGV Parent or its subsidiaries; (iii) all other assets and liabilities (including whether accrued, contingent or otherwise, and subject to certain exceptions) of Hilton will be retained by or transferred to Hilton Parent or its subsidiaries (other than us, HGV Parent and our respective subsidiaries); and (iv) Park Parent will distribute all of the stock of HGV Parent and Hilton Domestic Operating Company Inc. to Hilton Worldwide Finance LLC, a subsidiary of Hilton Parent, in distributions intended to qualify as tax-free under Section 355 of the Code.

Upon consummation of the internal reorganization, all of our assets will be held directly or indirectly, and our operations conducted, by Park Intermediate Holdings LLC, our “Operating Partnership.” Park Parent will initially own 100% of the interests in our Operating Partnership.

Distribution of Shares of Our Common Stock

Under the Distribution Agreement, the distribution will be effective as of 5:00 p.m., Eastern time, on January 3, 2017, the distribution date. As a result of the spin-off, on the distribution date, each holder of Hilton Parent common stock will receive one share of our common stock for every five shares of Hilton Parent common stock that he, she or it owns as of 5:00 p.m. Eastern time, on December 15, 2016, the record date. The actual number of shares to be distributed will be determined based on the number of shares of Hilton Parent common stock expected to be outstanding as of the record date and will be reduced to the extent that cash payments are to be made in lieu of the issuance of fractional shares of Park Parent. The actual number of shares of Park Parent common stock to be distributed will be calculated on the record date. The shares of Park Parent common stock to be distributed by Hilton Parent will constitute all of the issued and outstanding shares of Park Parent common stock immediately prior to the distribution.

On the distribution date, Hilton Parent will release the shares of our common stock to our distribution agent to distribute to Hilton Parent stockholders. For most Hilton Parent stockholders, our distribution agent will credit their shares of our common stock to book-entry accounts established to hold their shares of our common stock. Our distribution agent will send these stockholders a statement reflecting their ownership of our common stock. Book-entry refers to a method of recording stock ownership in our records in which no physical certificates are issued. For stockholders who own Hilton Parent common stock through a broker or other nominee, their shares of our common stock will be credited to these stockholders’ accounts by the broker or other nominee. It may take the distribution agent up to two weeks to issue shares of our common stock to Hilton Parent stockholders or to their bank or brokerage firm electronically by way of direct registration in book-entry form. Trading of our stock will not be affected by this delay in issuance by the distribution agent. As further discussed below, we will not issue fractional shares of our common stock in the distribution.

Hilton Parent stockholders will not be required to make any payment or surrender or exchange their shares of Hilton Parent common stock or take any other action to receive their shares of our common stock. No vote of Hilton Parent stockholders is required or sought in connection with the spin-off, including the internal reorganization, and Hilton Parent stockholders have no appraisal rights in connection with the spin-off.

Transaction Costs

One-time costs related to the spin-offs of Park Hotels & Resorts and Hilton Grand Vacations are expected to be approximately $450 million, consisting of approximately $250 million of estimated transaction costs, including debt issuance costs, legal, accounting and capital markets fees and expenses, certain tax and other costs relating to the internal reorganization, and approximately $140 million for the acceleration of taxes associated with certain cancellation of debt income related to the Financing Transactions. Pursuant to the Distribution Agreement, these costs and expenses are to be borne by Hilton.

 

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Organizational Structure

The simplified diagrams below (which omit certain wholly owned intermediate holding companies) depict the organizational structure of Hilton, Park Hotels & Resorts and Hilton Grand Vacations before and after giving effect to the spin-offs.

Current Hilton Organizational Structure

 

LOGO

Organizational Structure Following the Spin-Offs

 

LOGO

 

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Treatment of Outstanding Equity Awards

It is expected that, with respect to Hilton Parent equity-based awards outstanding under the Hilton Worldwide Holdings Inc. Omnibus Incentive Plan (the “Hilton Parent Incentive Plan”) on the distribution date held by current and former employees (the “Hilton Parent Employees”), non-employee directors of Hilton Parent or employees of ours who serve as General Managers at our properties outside of the United States (“Park GMs”) as of the separation, the number of Hilton Parent shares subject to such awards will be adjusted to reflect the distribution and any reverse stock split of shares of Hilton Parent effected in connection with the separation, but will otherwise remain outstanding and subject to the same general terms and conditions. Awards held by any individual who is employed by Park Hotels & Resorts as of the separation (each, a “Park Hotels Employee”), other than those Park Hotels Employees who are Park GMs, will be converted into awards that will settle in shares of Park Parent common stock and adjusted in a manner intended to preserve the intrinsic value of the award.

Stock Options. It is expected that each outstanding option to purchase shares of Hilton Parent common stock held by a Park Hotels Employee on the distribution date, whether vested or unvested, will be converted into an option to purchase shares of Park Parent common stock, on the same general terms and conditions as the Hilton Parent stock option, with appropriate adjustments to the number of shares subject to the option and the exercise price payable per share in order to preserve its intrinsic value immediately following the separation. Hilton Parent stock options held by Hilton Parent Employees will be adjusted with respect to the number of shares subject to each such option and the exercise price payable per share in order to preserve the intrinsic value immediately following the separation.

Time-Vesting Restricted Stock Units. It is expected that outstanding restricted stock units (“RSUs”) that will settle in shares of Hilton Parent common stock held by Park Hotels Employees, other than Park GMs, on the distribution date and that are subject to time-based vesting will be converted into RSUs that will settle in Park Parent common stock, on the same general terms and conditions of as the Hilton Parent RSUs, with appropriate adjustments to the number of shares subject to such RSUs in order to preserve their value immediately following the separation. As discussed above, it is not expected that any changes will be made with respect to RSUs held by Hilton Parent Employees other than appropriate adjustments to the number of Hilton Parent shares subject to the RSUs in order to preserve the value of the award immediately following the separation.

Performance-Vesting Restricted Stock Units and Restricted Shares. It is expected that outstanding performance-vesting restricted stock units (“PSUs”) granted in 2014 with respect to shares of Hilton Parent common stock and which are held by Park Employees on the distribution date will be converted into an award of PSUs that will settle in shares of Park Parent based on the actual performance level achieved by Hilton Parent during the performance period applicable to such awards, which will end on December 31, 2016. It is not expected that any changes will be made with respect to PSUs held by Hilton Parent Employees other than appropriate adjustments to the number of Hilton Parent shares subject to the PSUs in order to preserve the value of the award immediately following the separation. The Hilton Parent Compensation Committee will determine and certify the extent to which such awards have vested based on actual performance through such date. Such PSUs will then vest and be settled in shares of Hilton Parent common stock or Park Parent common stock, as applicable, following the separation.

It is expected that outstanding PSUs and performance-vesting restricted stock (“Performance Shares”) that will settle in shares of Hilton Parent common stock that were granted in 2015 and 2016 and are held by Hilton Parent Employees and Park Hotels Employees on the distribution date will be converted into time-vesting RSUs or restricted shares that will settle in shares of Hilton Parent common stock or Park Parent common stock, as applicable, assuming target-level performance levels. The number of shares of Hilton Parent common stock or Park Parent common stock, as applicable, subject to each award will be adjusted in order to preserve the value of the award immediately following the separation (the “Converted PSUs” or “Converted Performance Shares”). Subject to each such holder’s continued employment through the applicable vesting date, the Converted PSUs

 

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and Converted Performance Shares will vest on the date that the performance period applicable to the Converted PSUs or Converted Performance Shares, as applicable, prior to their conversion would have otherwise ended and settle in shares of either Hilton Parent common stock or Park Parent common stock, as applicable.

Director-Held Time-Vesting Restricted Stock Units. Outstanding unvested time-vesting RSUs that will settle in shares of Hilton Parent common stock that are held by non-employee directors will vest and be settled as of a date prior to the record date of the distribution in accordance with their terms, and such non-employee directors will receive shares of HGV Parent and Park Parent common stock in connection with the distribution on the same terms as other holders of Hilton Parent common stock.

Continued Vesting. It is expected that the service-vesting requirements in effect for each equity-based award will remain unchanged in connection with the separation, and Park Hotels Employees will be given credit for service prior to the separation with Hilton Parent and continued service with Park Parent after the separation.

Treatment of Fractional Shares

The distribution agent will not distribute any fractional shares of our common stock to Hilton Parent stockholders. Instead, as soon as practicable on or after the distribution date, the distribution agent will aggregate fractional shares of our common stock to which Hilton Parent stockholders of record would otherwise be entitled into whole shares, sell them in the open market at the prevailing market prices and then distribute the aggregate net sale proceeds ratably to Hilton Parent stockholders who would otherwise have been entitled to receive fractional shares of our common stock. The amount of this payment will depend on the prices at which the distribution agent sells the aggregated fractional shares of our common stock in the open market shortly after the distribution date and will be reduced by any amount required to be withheld for tax purposes and any brokerage fees and other expenses incurred in connection with these sales of fractional shares. Receipt of the proceeds from these sales generally will result in a taxable gain or loss to those Hilton Parent stockholders. Each stockholder entitled to receive cash proceeds from these shares should consult his, her or its own tax advisor as to the stockholder’s particular circumstances. The tax consequences of the distribution are described in more detail under “—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

The Purging Distribution

Hilton Parent will allocate its accumulated earnings and profits (as determined for U.S. federal income tax purposes) for periods prior to the spin-off between Hilton Parent, HGV Parent and Park Parent in a manner that, in its best judgment, is in accordance with the provisions of the Code. As a result of our intended election to be treated as a REIT for U.S. federal income tax purposes, and to comply with certain REIT qualification requirements, we intend to declare a dividend to our stockholders to distribute our accumulated earnings and profits attributable to our non-REIT years, including the earnings and profits allocated to us in connection with the spin-off and the earnings and profits generated by us in our taxable year ending on the date of the spin-off. The Purging Distribution will be paid to our stockholders in a combination of cash and our common stock, subject to a limitation on the amount of cash to be distributed in the aggregate to all of our stockholders (the “Cash Limitation”). The Cash Limitation will in no event be less than 20% of the Purging Distribution declaration (without regard to any cash that may be paid in lieu of fractional shares). We expect to pay the majority of the Purging Distribution in our common stock. Additionally, we expect to declare and pay the Purging Distribution prior to the end of 2017. We currently expect the amount of the Purging Distribution will be between approximately $550 million and $650 million. The expected Purging Distribution range was based upon an assumption of relative valuations and an accumulated earnings and profit analysis, using historic tax returns through the tax year ended 2015 and estimates for the tax year ended 2016. The amount of earnings and profits to be distributed is a complex factual and legal determination. See “Risk Factors—Risks Related to our REIT Status and Certain Other Tax Items—There are uncertainties relating to the Purging Distribution.”

 

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If our stockholders elect to receive an amount of cash in excess of the Cash Limitation, each such electing stockholder will receive a pro rata amount of cash corresponding to the stockholder’s respective entitlement under the Purging Distribution declaration. Hilton Parent has received the IRS Ruling, which, in addition to addressing issues relevant to the tax-free treatment of the spin-off, addresses certain issues related to our payment of the Purging Distribution in a combination of cash and our stock. In general, the IRS Ruling with respect to the Purging Distribution provides, subject to the terms and conditions contained therein, that (1) any and all of the cash and stock distributed by us to our stockholders as part of the Purging Distribution will be treated as a taxable distribution of property with respect to our stock and (2) the amount of any distribution of stock received by any of our stockholders as part of the Purging Distribution will be considered to equal the amount of the money which could have been received instead. In the Purging Distribution, a holder of our common stock will be required to report dividend income as a result of the Purging Distribution even if we distribute no cash or only nominal amounts of cash to such stockholder.

We urge you to consult with your tax advisor as to the particular tax consequences of the Purging Distribution to you, including the applicability of any U.S. federal, state and local and non-U.S. tax laws.

Material U.S. Federal Income Tax Consequences of the Spin-Off

The following is a summary of the material U.S. federal income tax consequences to the holders of shares of Hilton Parent common stock in connection with the spin-off. This summary is based on the Code, the Treasury regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect as of the date of this information statement and all of which are subject to differing interpretations and may change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below. This summary assumes that the spin-off will be consummated in accordance with the Distribution Agreement and as described in this information statement.

Except as specifically described below, this summary is limited to holders of shares of Hilton Parent common stock that are U.S. Holders, as defined immediately below. For purposes of this summary, a U.S. Holder is a beneficial owner of Hilton Parent common stock that is, for U.S. federal income tax purposes:

 

    an individual who is a citizen or a resident of the United States;

 

    a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States or any state thereof or the District of Columbia;

 

    an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

    a trust (1) with respect to which a court within the United States is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or (2) that has a valid election is in place under applicable Treasury regulations to be treated as a U.S. person.

This summary does not discuss all tax considerations that may be relevant to stockholders in light of their particular circumstances, nor does it address the consequences to stockholders subject to special treatment under the U.S. federal income tax laws, such as:

 

    persons acting as nominees or otherwise not as beneficial owners;

 

    dealers or traders in securities or currencies;

 

    broker-dealers

 

    traders in securities that elect to use the mark to market method of accounting;

 

    tax-exempt entities;

 

    cooperatives;

 

    banks, trusts, financial institutions or insurance companies;

 

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    persons who acquired shares of Hilton Parent common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

    stockholders who own, or are deemed to own, at least 10% or more, by voting power or value, of Hilton Parent equity;

 

    holders owning Hilton Parent common stock as part of a position in a straddle or as part of a hedging, conversion, constructive sale, synthetic security, integrated investment, or other risk reduction transaction for U.S. federal income tax purposes;

 

    regulated investment companies;

 

    REITs;

 

    former citizens or former long-term residents of the United States;

 

    holders who are subject to the alternative minimum tax;

 

    pass-through entities (such as entities treated as partnerships for U.S. federal income tax purposes); or

 

    persons that own Hilton Parent common stock through partnerships or other pass-through entities.

This summary does not address the U.S. federal income tax consequences to Hilton Parent stockholders who do not hold shares of Hilton Parent common stock as a capital asset. Moreover, this summary does not address any state, local, or foreign tax consequences or any estate or gift tax consequences or tax consequences other than U.S. federal income tax consequences.

If a partnership (or any other entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of Hilton Parent common stock, the tax treatment of a partner in that partnership generally will depend on the status of the partner and the activities of the partnership. Such a partner or partnership is urged to consult its tax advisor as to the tax consequences of the spin-off.

YOU ARE URGED TO CONSULT WITH YOUR TAX ADVISOR AS TO THE SPECIFIC U.S. FEDERAL, STATE AND LOCAL, AND NON-U.S. TAX CONSEQUENCES OF THE SPIN-OFF IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES AND THE EFFECT OF POSSIBLE CHANGES IN LAW THAT MIGHT AFFECT THE TAX CONSEQUENCES DESCRIBED IN THIS INFORMATION STATEMENT.

Treatment of the Spin-Off

Hilton has received the IRS Ruling on certain specific issues relevant to the qualification of the spin-off as tax-free under Section 355 of the Code, based on certain facts and representations set forth in its request for the IRS Ruling. The IRS Ruling does not address all of the requirements for tax-free treatment of the spin-off, and Hilton Parent expects to receive an opinion from Spin-off Tax Counsel to the effect that the distributions of Park Parent and HGV Parent common stock will qualify as tax-free distributions under Section 355 of the Code. An opinion from tax counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the spin-off that are different from the conclusions reached in the opinion. The opinion will be based on certain factual statements and representations, which, if incomplete or untrue in any material respect, could alter the Spin-off Tax Counsel’s conclusions.

Assuming the distributions of our common stock and HGV Parent common stock qualifies as tax-free under Section 355 of the Code, for U.S. federal income tax purposes:

 

    no gain or loss will be recognized by Hilton Parent as a result of the spin-off;

 

    no gain or loss will be recognized by, or be includible in the income of, a holder of Hilton Parent common stock solely as a result of the receipt of our common stock in the spin-off;

 

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    the aggregate tax basis of the shares of Hilton Parent common stock, shares of HGV Parent common stock and shares of our common stock, including any fractional share deemed received, in the hands of each Hilton Parent stockholder immediately after the spin-off will be the same as the aggregate tax basis of the shares of Hilton Parent common stock held by such holder immediately before the spin-off, allocated between the shares of Hilton Parent common stock, shares of HGV Parent common stock and shares of our common stock, including any fractional share deemed received, in proportion to their relative fair market values immediately following the spin-off;

 

    the holding period with respect to shares of our common stock received by Hilton Parent stockholders will include the holding period of their shares of Hilton Parent common stock, provided that such shares of Hilton Parent common stock are held as capital assets immediately following the spin-off; and

 

    a holder of Hilton Parent common stock who receives cash in lieu of a fractional share of our common stock in the spin-off will recognize capital gain or loss measured by the difference between the tax basis of the fractional share deemed to be received, as determined above, and the amount of cash received.

Hilton Parent stockholders that have acquired different blocks of Hilton Parent common stock at different times or at different prices are urged to consult their tax advisors regarding the allocation of their aggregate adjusted basis among, and their holding period of, our common stock, HGV Parent common stock and Hilton common stock.

Although a private letter ruling from the IRS is generally binding on the IRS, the IRS Ruling will be based on certain facts and representations and undertakings, from Hilton Parent, HGV Parent and us that certain necessary conditions to obtain tax-free treatment under the Code have been satisfied. Furthermore, as a result of the IRS’s general ruling policy with respect to distributions under Section 355 of the Code, the IRS will only rule on significant issues relevant to the tax-free treatment of such a distribution. Accordingly, the spin-off is conditioned upon the receipt by Hilton Parent of an opinion from Spin-off Tax Counsel, in which such Spin-off Tax Counsel is expected to conclude that the distributions of Park Parent and HGV Parent common stock will qualify as tax-free under Section 355 of the Code.

The opinion will rely on the IRS Ruling as to matters covered by such ruling. The opinion will be based on, among other things, current law and certain assumptions and representations as to factual matters made by Hilton Parent, HGV Parent and us. Any change in currently applicable law, which may or may not be retroactive, or the failure of any factual representation or assumption to be true, correct and complete in all material respects, could adversely affect the conclusions reached by Spin-off Tax Counsel in the opinion. The opinion will not be binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion. The opinion will be expressed as of the date issued and will not cover subsequent periods. As a result, the opinion is not expected to be issued until after the date of this information statement. The opinion will represent Spin-off Tax Counsel’s best legal judgment based on current law and is not binding on the IRS or any court. We cannot assure you that the IRS will agree with the conclusions expected to be set forth in the opinion, and it is possible that the IRS or another tax authority could adopt a position contrary to one or all of those conclusions and that a court could sustain that contrary position. If any of the facts, representations, assumptions, or undertakings described or made in connection with the IRS Ruling or the opinion are not correct, are incomplete or have been violated, the IRS Ruling could be revoked retroactively or modified by the IRS, and our ability to rely on the opinion could be jeopardized. We are not aware of any facts or circumstances, however, that would cause these facts, representations, or assumptions to be untrue or incomplete, or that would cause any of these undertakings to fail to be complied with, in any material respect.

Recently enacted legislation denies tax-free treatment to a spin-off in which either the distributing corporation or the spun-off corporation is a REIT and prevents a distributing corporation or a spun-off corporation from electing REIT status for a 10-year period following a tax-free spin-off. Moreover, recently

 

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promulgated U.S. Treasury temporary regulations would require the recognition of taxable gain in connection with the spin-off of an entity that is a REIT or elects REIT status. Under effective date provisions, the legislation and temporary regulations do not apply to distributions described in a ruling request initially submitted to the IRS before December 7, 2015. Because the initial request for the IRS Ruling was submitted before that date and because we believe the distribution will be considered to have been described in that initial request, we believe the legislation and temporary regulations will not apply to the spin-off. However, no ruling will be obtained on that issue and thus no assurance can be given in that regard. In particular, the IRS or a court could disagree with our view regarding the effective date provisions based on any differences that exist between the description in the ruling request and the actual facts relating to the spin-off. If the effective date provisions do not apply to the spin-off, either the spin-off would not qualify for tax-free treatment or we would not be eligible to elect REIT status for a 10-year period following the spin-off.

If, notwithstanding the conclusions included in the IRS Ruling and the opinion, it is ultimately determined that the distribution of Park Parent common stock, the distribution of HGV Parent common stock and/or certain internal reorganization transactions and distributions do not qualify as tax-free for U.S. federal income tax purposes, then we could recognize taxable gain or loss in an amount equal to the difference, if any, of the fair market value of the shares of HGV Parent common stock and/or shares of certain entities holding the management and franchising business, in each case held by us over our tax basis in such shares. Hilton Parent may recognize incremental gain, if any, equal to the excess of the fair market value of the shares of our common stock held by Hilton Parent over its tax basis in such shares. In addition, if the distribution of HGV Parent common stock and/or the distribution of Park Parent common stock do not qualify as tax-free under Section 355 of the Code, each Hilton Parent stockholder that receives shares of HGV Parent common stock and shares of our common stock in the spin-off would be treated as receiving a distribution in an amount equal to the fair market value of HGV Parent common stock and/or the fair market value of our common stock that was distributed to the stockholder, which would generally be taxed as a dividend to the extent of the stockholder’s pro rata share of Hilton Parent’s current and accumulated earnings and profits, including Hilton Parent’s taxable gain, if any, on the spin-off, then treated as a non-taxable return of capital to the extent of the stockholder’s basis in the Hilton Parent stock and thereafter treated as capital gain from the sale or exchange of Hilton Parent stock. Additionally, certain U.S. Holders that are individuals, estates or trusts would be required to pay an additional 3.8% tax on “net investment income,” (or, in the case of an estate or trust, on “undistributed net investment income”) which includes, among other things, any amounts treated as a dividend on or gain from the sale or exchange of Hilton Parent stock. U.S. Holders should consult their own tax advisors regarding this tax on net investment income

Even if the spin-off otherwise qualifies for tax-free treatment under Section 355 of the Code, the spin-off may result in corporate level taxable gain to us and/or to Hilton Parent under Section 355(e) of the Code if 50% or more, by vote or value, of Hilton Parent’s stock, HGV Parent’s stock or our stock is treated as acquired or issued as part of a plan or series of related transactions that includes the spin-off (including as a result of transactions occurring before the spin-off). If an acquisition or issuance of Hilton’s stock, HGV Parent’s stock or our stock triggers the application of Section 355(e) of the Code, we and/or Hilton Parent would recognize taxable gain as described above, but the distribution would generally be tax-free to each of Hilton Parent’s stockholders, as described above.

Treasury regulations require each U.S. Holder that owns at least 5% of the total outstanding common stock of Hilton Parent to attach to their U.S. federal income tax returns for the year in which the spin-off occurs a statement setting forth certain information with respect to the transaction. U.S. Holders are urged to consult their tax advisors to determine whether they are required to provide the foregoing statement and the contents thereof.

Cash in Lieu of Fractional Shares

No fractional shares of our common stock will be distributed to Hilton Parent stockholders in connection with the spin-off. All such fractional shares resulting from the spin-off will be aggregated and sold by the transfer agent, and the proceeds, if any, less any brokerage commissions or other fees, will be distributed to Hilton Parent stockholders in accordance with their fractional interest in the aggregate number of shares sold. A holder that

 

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receives cash in lieu of a fractional share of our common stock as a part of the spin-off generally will recognize capital gain or loss measured by the difference between the cash received for such fractional share and the holder’s tax basis in the fractional share determined as described above. Any such capital gain or loss will be long-term capital gain or loss if a Hilton Parent stockholder held such stock for more than one year at the completion of the spin-off. Long-term capital gains generally are subject to preferential rates of U.S. federal income tax for certain non-corporate U.S. Holders (including individuals). The deductibility of capital losses is subject to significant limitations.

Results of the Spin-Off

After the spin-off, we will be an independent, self-administered, publicly traded lodging REIT. Immediately following the spin-off, we expect to have 27 record holders of shares of our common stock and approximately 198 million shares of our common stock outstanding, based on the number of stockholders and outstanding shares of Hilton Parent common stock on November 8, 2016 and the distribution ratio. The figures exclude shares of Hilton Parent common stock held directly or indirectly by Hilton Parent, if any. The actual number of shares to be distributed will be determined on the record date and will reflect any repurchases of shares of Hilton Parent common stock and issuances of shares of Hilton Parent common stock in respect of awards under Hilton Parent equity-based incentive plans between the date the Hilton Parent board of directors declares the dividend for the distribution and the record date for the distribution.

For information regarding equity awards settleable in shares of our common stock that will be outstanding after the distribution, see “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent Related to the Spin-Off—Employee Matters Agreement” and “Management.”

Before the spin-off, we will enter into several agreements with Hilton Parent and HGV Parent to effect the spin-off and provide a framework for our relationship with Hilton and Hilton Grand Vacations after the spin-off. These agreements will govern the relationship among us, Hilton and Hilton Grand Vacations after completion of the spin-off and provide for the allocation among us, Hilton Grand Vacations and Hilton of the assets, liabilities, rights and obligations of Hilton. See “Certain Relationships and Related Party Transactions—Agreements with Hilton Parent Related to the Spin-Off.”

Trading Prior to the Distribution Date

It is anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be a “when-issued” market in our common stock. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The when-issued trading market will be a market for shares of our common stock that will be distributed to Hilton Parent stockholders on the distribution date. Any Hilton Parent stockholder who owns shares of Hilton Parent common stock at 5:00 p.m., Eastern time, on the record date will be entitled to shares of our common stock distributed in the spin-off. Hilton Parent stockholders may trade this entitlement to shares of our common stock, without the shares of Hilton Parent common stock they own, on the when-issued market. On the first trading day following the distribution date, we expect when-issued trading with respect to our common stock will end and “regular-way” trading will begin. See “Trading Market.”

Following the distribution date, we expect shares of our common stock to be listed on the New York Stock Exchange under the ticker symbol “PK”. We will announce the when-issued ticker symbol when and if it becomes available.

It is also anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be two markets in Hilton Parent common stock: a “regular-way” market; and an “ex-distribution” market. Shares of Hilton Parent common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock

 

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distributed pursuant to the distribution. Therefore, if shares of Hilton Parent common stock are sold in the regular-way market up to and including the distribution date, the selling stockholder’s right to receive shares of our common stock in the distribution will be sold as well. However, if Hilton Parent stockholders own shares of Hilton Parent common stock as of 5:00 p.m., Eastern time, on the record date and sell those shares on the ex-distribution market up to and including the distribution date, the selling stockholders will still receive the shares of our common stock that they would otherwise receive pursuant to the distribution. See “Trading Market.”

Financing Transactions

The following table summarizes the anticipated sources and expected uses of proceeds in connection with the Financing Transactions, as if they had occurred as of September 30, 2016. The actual amounts set forth in the table and in the accompanying footnotes are subject to adjustment and may differ at the time of the consummation of the Financing Transactions depending on several factors, including, among others, fluctuations in cash on hand or indebtedness between September 30, 2016 and the actual closing dates of the Financing Transactions, payments of accrued interest subsequent to September 30, 2016, and differences from our estimated fees and expenses. You should read the following together with the information included under the headings “Description of Certain Indebtedness” and “Unaudited Pro Forma Combined Consolidated Financial Statements” included elsewhere in this information statement.

 

Sources

   Amount
(in millions)
    

Uses

   Amount
(in millions)
 
     

Repayment of Existing CMBS Loan(5)

   $ 2,427   

Cash released from restrictions(1)

   $ 57      

Repayment of Bonnet Creek Loan(6)

     146   
     

Repayment of existing mortgage loan(4)

     104   

 

New CMBS loans(2)

     2,000      

Distribution of proceeds of new mortgage loan to noncontrolling interest(4)

     25   

 

New term loan facility(3)

     750      

Payment of accrued interest on repaid indebtedness

     2   

New mortgage loan(4)

     165      

Debt issuance costs

     28   
     

Transfers to Parent(7)

     240   
  

 

 

       

 

 

 

Total Sources

   $ 2,972      

Total Uses

   $ 2,972   
  

 

 

       

 

 

 

 

(1)  As of September 30, 2016, our consolidated balance sheet included $57 million of restricted cash and cash equivalents that upon completion of the Financing Transactions will be released from restrictions.
(2)  Prior to the completion of the spin-off, we expect to enter into (i) a seven-year commercial mortgage-backed securities loan financing in an aggregate principal amount of $725 million secured by the Hilton San Francisco Union Square and the Parc 55 Hotel San Francisco; and (ii) a ten-year commercial mortgage-backed securities loan financing in an aggregate principal amount of $1.275 billion secured by the Hilton Hawaiian Village. See “Description of Certain Indebtedness” for additional information.
(3)  At or prior to the completion of the spin-off, we expect to enter into new senior unsecured credit facilities, which will consist of (i) a $1 billion senior unsecured revolving credit facility with a four-year maturity, with two six-month extension options and (ii) a $750 million senior unsecured term loan facility with a five-year maturity. As of September 30, 2016, on a pro forma basis, we would not have had any borrowings outstanding under the revolving credit facility.
(4) 

As of September 30, 2016, our consolidated balance sheet included mortgage loan indebtedness of $104 million of a consolidated joint venture in which we own a 50% controlling financial interest. As part of the Financing Transactions, this consolidated joint venture will repay such existing mortgage loan indebtedness with the proceeds of a new $165 million mortgage loan secured by the same property.

 

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  Proceeds in excess of the amount required to repay such existing mortgage loan, and related transaction costs, will be distributed ratably to us and our joint venture partner.
(5)  As of September 30, 2016, our consolidated balance sheet included $2,427 million of indebtedness under our existing commercial mortgage-backed securities loan (the “Existing CMBS Loan”). As part of the Financing Transactions, we expect to repay in full all amounts outstanding under the Existing CMBS Loan.
(6)  This amount does not include the value of $300 million aggregate principal amount of senior notes to be issued by Hilton Grand Vacations, which we expect to acquire as part of the internal reorganization. Pursuant to a cashless debt exchange, we intend to exchange such senior notes with certain holders of indebtedness under our $450 million mortgage loan secured by the Bonnet Creek Resort (the “Bonnet Creek Loan”) to acquire and cancel a like amount of indebtedness under the Bonnet Creek Loan. All remaining amounts outstanding under the Bonnet Creek Loan are expected to be repaid with proceeds from the Financing Transactions.
(7)  We currently expect to enter into one or more transactions with Parent prior to the consummation of the spin-off such that we will have approximately $360 million of cash and cash equivalents, including restricted cash, as of the distribution date. Our cash and cash equivalents immediately prior to the distribution date will depend on the timing of the closings of the various Financing Transactions, the timing of the distribution date and our net cash generation between September 30, 2016 and the distribution date. To the extent that our cash and cash equivalents immediately prior to the distribution would exceed $360 million, we expect to effect distributions or other transactions that would result in a net transfer from us to Parent of such excess amount. To the extent that our cash and cash equivalents immediately prior to the distribution would be less than $360 million, we expect that Parent would make an equity contribution to us in the amount of such shortfall.

See “Description of Certain Indebtedness.”

Conditions to the Spin-Off

We expect that the spin-off will be effective as of 5:00 p.m., Eastern time, on January 3, 2017, the distribution date, provided that the following conditions shall have been satisfied or waived by Hilton:

 

    the final approval by the board of directors of Hilton Parent of the spin-off and all related transactions and the determination of the record date, which approval may be given or withheld at its absolute and sole discretion;

 

    our Registration Statement on Form 10, of which this information statement forms a part, shall have been declared effective by the SEC, no stop order suspending the effectiveness thereof shall be in effect, no proceedings for such purpose shall be pending before or threatened by the SEC, and this information statement, or a notice of internet availability thereof, shall have been mailed to the Hilton Parent stockholders;

 

    Park Parent common stock shall have been approved for listing on the New York Stock Exchange, subject to official notice of distribution;

 

    Hilton Parent shall have obtained an opinion from Spin-off Tax Counsel, in form and substance satisfactory to Hilton Parent, to the effect that the distributions of Park Parent common stock and HGV Parent common stock will qualify as a tax-free distribution under Section 355 of the Code;

 

    the IRS Ruling shall not have been revoked or modified in any material respect;

 

    the receipt by Park Parent of a tax opinion, in form and substance reasonably satisfactory to Park Parent, to the effect that, commencing with Park Parent’s taxable year ending on December 31, 2017, Park Parent should be considered to be organized in conformity with the requirements for qualification as a REIT under the Code, and its proposed method of operation should enable it to meet the requirements for qualification and taxation as a REIT;

 

    prior to the distribution date, the Hilton Parent board of directors shall have obtained opinions from a nationally recognized valuation firm, in form and substance satisfactory to Hilton, with respect to the capital adequacy and solvency of each of Hilton, Park Hotels & Resorts and Hilton Grand Vacations after giving effect to the spin-off;

 

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    any material governmental approvals and other consents necessary to consummate the spin-off shall have been received;

 

    no order, injunction or decree issued by any governmental entity of competent jurisdiction or other legal restraint or prohibition preventing the consummation of all or any portion of the spin-off shall be pending, threatened, issued or in effect, and no other event shall have occurred or failed to occur that prevents the consummation of all or any portion of the spin-off;

 

    no other events or developments shall have occurred or failed to occur that, in the judgment of the board of directors of Hilton Parent, would result in the distribution having a material adverse effect on Hilton or its stockholders;

 

    the internal reorganization shall have been completed, except for such steps as Hilton Parent in its sole discretion shall have determined may be completed after the distribution date;

 

    all necessary actions shall have been taken to cause the board of directors of Park Parent to consist of the individuals identified in this information statement as directors of Park Parent;

 

    all necessary actions shall have been taken to cause the officers of Park Parent to be the individuals identified as such in this information statement;

 

    all necessary actions shall have been taken to adopt the form of amended and restated certificate of incorporation and by-laws filed by Park Parent with the SEC as exhibits to the Registration Statement on Form 10, of which this information statement forms a part; and

 

    each of the Distribution Agreement, the Tax Matters Agreement, the Employee Matters Agreement and the Transition Services Agreement shall have been executed by each party.

Completion of the spin-off of Hilton Grand Vacations will be subject to similar conditions as those listed above. The fulfillment of the foregoing conditions will not create any obligation on the part of Hilton to effect the spin-off. We are not aware of any material federal, foreign or state regulatory requirements that must be complied with or any material approvals that must be obtained, other than compliance with SEC rules and regulations, approval for listing on the New York Stock Exchange and the declaration of effectiveness of the Registration Statement on Form 10, of which this information statement forms a part, by the SEC, in connection with the distribution. Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton Parent determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents or that it is not advisable for Park Hotels & Resorts to separate from Hilton at that time.

Reasons for Furnishing this Information Statement

This information statement is being furnished solely to provide information to Hilton Parent stockholders that are entitled to receive shares of our common stock in the spin-off. This information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities or any securities of Hilton. We believe that the information in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither Hilton nor we undertake any obligation to update the information except in the normal course of our respective public disclosure obligations.

 

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TRADING MARKET

Market for Our Common Stock

There is currently no public market for our common stock, and an active trading market may not develop or may not be sustained. We anticipate that trading of our common stock will commence on a “when-issued” basis at least two trading days prior to the record date and continue through the distribution date. When-issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. When-issued trades generally settle within four trading days after the distribution date. If you own shares of Hilton Parent common stock as of 5:00 p.m., Eastern time on the record date, you will be entitled to shares of our common stock distributed pursuant to the spin-off. You may trade this entitlement to shares of our common stock, without the shares of Hilton Parent common stock you own, on the when-issued market. On the first trading day following the distribution date, any when-issued trading with respect to our common stock will end and “regular-way” trading will begin. We intend to list our common stock on the New York Stock Exchange under the ticker symbol “PK”. We will announce our when-issued trading symbol when and if it becomes available.

It is also anticipated that, at least two trading days prior to the record date and continuing up to and including the distribution date, there will be two markets in Hilton Parent common stock: (i) a “regular-way” market; and (ii) an “ex-distribution” market. Shares of Hilton Parent common stock that trade on the regular-way market will trade with an entitlement to shares of our common stock distributed pursuant to the distribution. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if you sell shares of Hilton Parent common stock in the regular-way market up to and including the distribution date, you will be selling your right to receive shares of our common stock in the distribution. However, if you own shares of Hilton Parent common stock as of 5:00 p.m., Eastern time, on the record date and sell those shares on the ex-distribution market up to and including the distribution date, you will still receive the shares of our common stock that you would otherwise receive pursuant to the distribution.

We cannot predict the prices at which our common stock may trade before the spin-off on a “when-issued” basis or after the spin-off. Those prices will be determined by the marketplace. Prices at which trading in our common stock occurs may fluctuate significantly. Those prices may be influenced by many factors, including anticipated or actual fluctuations in our operating results or those of other companies in our industry, investor perception of our company and the lodging industry, market fluctuations and general economic conditions. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the performance of many stocks and that have often been unrelated or disproportionate to the operating performance of these companies. These are just some factors that may adversely affect the market price of our common stock. See “Risk Factors—Risks Related to Ownership of Our Common Stock” for further discussion of risks relating to the trading prices of our common stock.

Transferability of Shares of Our Common Stock

On November 8, 2016, Hilton Parent had approximately 990 million shares of its common stock issued and outstanding. Based on this number, we expect that upon completion of the spin-off, we will have approximately 198 million shares of common stock issued and outstanding. Subject to the ownership limits set forth in our amended and restated certificate of incorporation and described under “Description of Capital Stock—Restrictions on Ownership and Transfer,” the shares of our common stock that you will receive in the distribution will be freely transferable, unless you are considered an “affiliate” of ours under Rule 144 under the Securities Act. Persons who can be considered our affiliates after the spin-off generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with, us, and may include certain of our officers and directors. As of the distribution date, we estimate that our directors and officers will beneficially own in the aggregate less than one percent of our shares. In

 

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addition, individuals who are affiliates of Hilton Parent on the distribution date may be deemed to be affiliates of ours. Our affiliates may sell shares of our common stock received in the distribution only:

 

    under a registration statement that the SEC has declared effective under the Securities Act; or

 

    under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144.

In general, under Rule 144 as currently in effect, an affiliate will be entitled to sell, within any three-month period commencing 90 days after the date that the registration statement of which this information statement is a part is declared effective, a number of shares of our common stock that does not exceed the greater of:

 

    1.0% of our common stock then outstanding; or

 

    the average weekly trading volume of our common stock on the New York Stock Exchange during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

In connection with the Sale, Park Parent entered into a registration rights agreement with HNA, which will become effective upon the later to occur of (i) the closing of the Sale and (ii) the consummation of the spin-off. Park Parent also entered into a registration rights agreement with Blackstone. See “Certain Relationships and Related Party Transactions—Registration Rights Agreements” for additional information.

Sales under Rule 144 are also subject to restrictions relating to manner of sale and the availability of current public information about us.

In the future, we may adopt new equity-based compensation plans and issue stock-based awards. We currently expect to file a registration statement under the Securities Act to register shares to be issued under these equity plans. Shares issued pursuant to awards after the effective date of that registration statement, other than shares issued to affiliates, generally will be freely tradable without further registration under the Securities Act.

Except for our common stock distributed in the distribution and employee-based equity awards, none of our equity securities will be outstanding immediately after the spin-off.

As of the date of this information statement, Blackstone entities have pledged, hypothecated or granted security interests in substantially all of the shares of Hilton Parent common stock held by them pursuant to a margin loan agreement with customary default provisions. We anticipate that shares of our common stock received by Blackstone in the spin-off in respect of such pledged Hilton Parent shares would similarly be subject to the lien of such margin loan agreement. Accordingly, in the event of a default under the margin loan agreement, the secured parties may foreclose upon any and all shares of common stock pledged to them and may seek recourse against the borrower.

 

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DISTRIBUTION POLICY

We intend to elect and qualify to be subject to tax as a REIT for U.S. federal income tax purposes beginning immediately after the distribution. The Code generally requires that a REIT annually distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain, and imposes tax on any taxable income retained by a REIT, including capital gains. To satisfy the requirements to qualify as a REIT and to avoid paying tax on our income, we intend to make quarterly distributions of all, or substantially all, of our REIT taxable income (excluding net capital gains) to our stockholders.

In addition, as a result of our intended election to be treated as a REIT for U.S. federal income tax purposes, and to comply with certain REIT qualification requirements, we intend to declare the Purging Distribution as described under “The Spin-Off—The Purging Distribution.” The Purging Distribution will be paid to our stockholders in a combination of cash and our common stock, with the cash portion constituting at least 20% of the total amount of the Purging Distribution. We expect to pay the majority of the Purging Distribution in our common stock. Additionally, we expect to declare and pay the Purging Distribution prior to the end of 2017. We currently expect the aggregate amount of the Purging Distribution will be between approximately $550 million and $650 million. See “The Spin-Off—The Purging Distribution.”

Our future distributions will be at the sole discretion of our board of directors. When determining the amount of future distributions, we expect that our board of directors will consider, among other factors, (1) the amount required to be distributed to qualify and maintain our status as a REIT and to reduce any income and excise taxes that we otherwise would be required to pay, (2) the amount of cash generated from our operating activities, (3) our expectations of future cash flows, (4) our determination of near-term cash needs for debt repayments, existing or future share repurchases, and selective acquisitions of new properties, (5) the timing of significant capital investments and expenditures and the establishment of any cash reserves, (6) our ability to continue to access additional sources of capital, (7) any limitations on our distributions contained in our debt agreements, including, without limitation, in our anticipated senior unsecured credit facilities, and (8) the sufficiency of legally available assets.

We expect that the cash required to fund our dividends will be covered by cash generated by operations. However, our ability to make distributions to our stockholders will depend upon the performance of our asset portfolio. To the extent we are prevented by provisions of our financing arrangements or otherwise from distributing 100% of our REIT taxable income or otherwise do not distribute 100% of our REIT taxable income, we will be subject to income tax, and potentially excise tax, on the retained amounts. If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, borrow funds, raise additional equity capital, sell assets or reduce such distributions. In addition, our amended and restated certificate of incorporation allows us to issue preferred stock that could have a preference over our common stock as to distributions. The distribution preference on any preferred stock that we may issue in the future could limit our ability to make distributions to the holders of our common stock. In addition, our board of directors could change our distribution policy in the future. See “Risk Factors.”

Distributions to our stockholders will be generally taxable to them as ordinary income, although a portion of our distributions may be designated by us as capital gain or qualified dividend income or may constitute a return of capital or taxable gain. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain. See “Material U.S. Federal Income Tax Considerations.”

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of September 30, 2016 on a historical basis and on a pro forma basis to give effect to the Spin-Off and the related transactions, as if they occurred on September 30, 2016. Explanation of the pro forma adjustments made to the historical combined consolidated financial statements can be found under “Unaudited Pro Forma Combined Consolidated Financial Statements.” The following table should be reviewed in conjunction with “Unaudited Pro Forma Combined Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited condensed combined consolidated financial statements and accompanying notes included elsewhere in this information statement.

 

    As of September 30, 2016  
        Actual           Pro Forma(1)  
    (in millions)  

Cash and cash equivalents

     $              346          $              338    

Restricted cash

    79         22    
 

 

 

   

 

 

 

Total

     $              425          $              360    
 

 

 

   

 

 

 

Total Debt

     $           3,073          $           3,007    

Equity

   

Common stock, $0.01 par value; 6,000,000,000 shares authorized, 197,956,409 shares issued and outstanding, pro forma

     $                —          $                2    

Additional paid-in capital

    —         6,343    

Net Parent investment

    4,145         —    

Accumulated other comprehensive loss

    (51)        (51)   
 

 

 

   

 

 

 

Equity attributable to the Company

    4,094         6,294    

Noncontrolling interests

    (23)        (48)   
 

 

 

   

 

 

 

Total equity

    4,071         6,246    
 

 

 

   

 

 

 

Total capitalization

     $           7,144          $         9,253    
 

 

 

   

 

 

 

 

(1)  See “Unaudited Pro Forma Combined Consolidated Financial Statements.”

 

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SELECTED HISTORICAL COMBINED CONSOLIDATED FINANCIAL DATA

The following selected historical combined consolidated statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the selected historical combined consolidated balance sheet data as of December 31, 2015 and 2014 are derived from our audited combined consolidated financial statements included elsewhere in this information statement. The selected historical combined consolidated statement of operations data for the years ended December 31, 2012 and 2011 and the selected historical combined consolidated balance sheet data as of December 31, 2013, 2012 and 2011 are derived from our unaudited combined consolidated financial statements which are not included in this information statement. We derived the selected historical combined consolidated statement of operations data for the nine months ended September 30, 2016 and 2015 and the selected historical combined consolidated balance sheet data as of September 30, 2016 from our unaudited condensed combined consolidated financial statements included elsewhere in this information statement.

This selected financial data is not necessarily indicative of our future performance and does not necessarily reflect what our financial position and results of operations would have been had we been operating as an independent, publicly traded company during the periods presented, including changes that will occur in our operations and capitalization as a result of the spin-off from Hilton. For example, our historical combined consolidated financial statements include allocations of certain expenses from Hilton, including expenses for costs related to functions such as information technology support, systems maintenance, financial services, human resources and other shared services. These costs may not be representative of the future costs we will incur, either positively or negatively, as an independent, public company. Our historical combined consolidated financial statements also include allocations of debt and related amounts as of December 31, 2012 and 2011 and for the years ended December 31, 2013, 2012 and 2011 related to debt entered into by Hilton, which was secured by our assets.

The selected combined consolidated financial data below should be read together with the audited combined consolidated financial statements and unaudited condensed combined consolidated financial statements, including the related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement.

 

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    Nine Months Ended
September 30,
    Year Ended December 31,  
         2016               2015               2015               2014               2013               2012               2011       
    (in millions)  

Statement of Operations Data:

             

Revenues

             

Rooms

  $ 1,361       $ 1,340       $ 1,783       $ 1,679       $ 1,556       $ 1,467       $ 1,385    

Food and beverage

    536         512         691         644         607         577         578    

Other

    160         161         214         190         170         146         138    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    2,057         2,013         2,688         2,513         2,333         2,190         2,101    

Expenses

             

Rooms

    352         343         456         457         422         406         392    

Food and beverage

    375         362         487         454         437         432         437    

Other departmental and support

    500         487         650         592         556         554         543    

Other property-level

    135         135         180         178         178         174         161    

Management fees

    73         69         89         77         61         56         53    

Impairment losses

    15         —         —         —         —         23           

Depreciation and amortization

    220         212         287         248         246         228         239    

Corporate and other

    56         80         96         67         103         64         54    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,726         1,688         2,245         2,073         2,003         1,937         1,884    

Operating income

    332         468         586         440         330         253         217    

Net income (loss) attributable to Parent

    116         224         292         176         144         56         (46)    

 

    September 30,     December 31,  
         2016               2015               2014               2013               2012               2011       
    (in millions)  

Selected Balance Sheet Data:

           

Total assets

  $ 9,969      $ 9,787      $ 9,714      $ 9,792      $ 9,815      $ 9,732   

Debt

    3,073        4,057        4,246        4,174        4,762        4,807   

Total equity

    4,071        2,797        2,593        2,868        2,331        2,108   

 

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UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma combined consolidated balance sheet as of September 30, 2016 and unaudited pro forma combined consolidated statements of operations for the nine months ended September 30, 2016 and year ended December 31, 2015 have been prepared to reflect the spin-off and related transactions if they had occurred on September 30, 2016 for the unaudited pro forma combined consolidated balance sheet and January 1, 2015 for the unaudited pro forma combined consolidated statements of operations.

The unaudited pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The unaudited pro forma combined consolidated financial statements should be read in conjunction with the sections entitled “Business and Properties,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined consolidated financial statements, which are included elsewhere in this information statement.

Our historical combined consolidated financial statements include allocations of certain expenses from Hilton, including expenses for costs related to functions such as information technology support, systems maintenance, financial services, human resources, and other shared services. These costs may not be representative, either positively or negatively, of the future costs we will incur as an independent, public company. Effective with the spin-off, we will assume responsibility for all of these functions and related costs. Certain of these activities will continue to be performed by Hilton under transition service agreements for a limited period of time. We will incur incremental costs as an independent public company, including costs to replace services previously provided by Hilton, as well as other stand-alone costs. Due to the scope and complexity of these activities, the amount and timing of these incremental costs could vary and, therefore, are not included as adjustments within the unaudited pro forma combined consolidated financial statements.

We currently estimate that the separation costs we will incur during our transition to being a stand-alone public company will range from approximately $20 million to $25 million. We have not adjusted the accompanying unaudited pro forma combined consolidated statement of operations for these estimated separation costs as the costs are not expected to have an ongoing effect on our operating results. We anticipate that substantially all of these costs will be incurred within 24 months of the distribution. These costs relate to the following:

 

    accounting, tax and other professional costs pertaining to the spin-off and establishing us as a stand-alone public company;

 

    compensation, such as modifications to certain bonus awards, upon completion of the spin-off;

 

    recruiting and relocation costs associated with hiring key senior management personnel new to our company;

 

    costs related to establishing our new brand in the marketplace;

 

    costs to separate our information systems from Hilton; and

 

    other separation costs.

Due to the scope and complexity of these activities, the amount of these costs could increase or decrease materially and the timing of incurrence could change.

We intend to elect and qualify to be subject to tax as a REIT for U.S. federal income tax purposes beginning immediately after the distribution. As a result of our intended election to be treated as a REIT, and in order to comply with certain REIT qualification requirements, we intend to declare the Purging Distribution to distribute our accumulated earnings and profits attributable to our non-REIT years, including any earnings and profits allocated to us in connection with the spin-off and the earnings and profits generated by us in our taxable year

 

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ending on the date of the spin-off. The Purging Distribution is not reflected as a pro forma adjustment in the unaudited pro forma combined consolidated financial statements. The Purging Distribution will be paid to our stockholders in a combination of cash and Park Parent common stock, with the cash portion constituting at least 20% of the total amount of the Purging Distribution. We expect to pay the majority of the Purging Distribution in Park Parent common stock. We expect to declare and pay the Purging Distribution prior to the end of 2017. We currently expect the amount of the Purging Distribution will be between approximately $550 million and $650 million. See “The Spin-Off—The Purging Distribution.”

The pro forma financial results assume that 100% of taxable income has been distributed and that all relevant REIT qualification requirements were met for the entire periods presented herein.

The unaudited pro forma combined consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of our financial position or results of operations had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such unaudited pro forma financial information indicative of the results to be expected for any future period. A number of factors may affect our results. See “Risk Factors” and “Special Note About Forward-Looking Statements”.

 

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UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET

As of September 30, 2016

(in millions)

 

                  Pro Forma Adjustments(1)                       
        Historical         Financing
   Transactions   
          Spin-Off
   Adjustments   
          Pro Forma  

ASSETS

           

Property and equipment, net

   $ 8,573       $          $          $ 8,573    

Investments in affiliates

    100                 100    

Goodwill

    605                 605    

Intangibles, net

    45                 45    

Cash and cash equivalents

    346             (8)        (i)        338    

Restricted cash

    79         (57)        (a)            22    

Accounts receivable, net

    156                 156    

Prepaid expenses

    43                 43    

Other assets

    22                (a)               (e)        32    
 

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL ASSETS

   $ 9,969        $ (49)          $ (6)         $ 9,914    
 

 

 

   

 

 

     

 

 

     

 

 

 

LIABILITIES AND EQUITY

           

Liabilities

           

Debt

   $ 3,073        $ (66)        (a)       $           $ 3,007    

Accounts payable and accrued     expenses

    177         (2)        (a)            175    

Due to hotel manager

    93                 93    

Due to Hilton affiliates

               189         (h)        196    

Deferred income tax liabilities

    2,448             (2,351)        (e)        97    

Other liabilities

    100                 100    
 

 

 

   

 

 

     

 

 

     

 

 

 

Total liabilities

    5,898         (68)          (2,162)          3,668    

Equity

           

Common stock, $0.01 par value

    —                    (d)          

Additional paid-in capital

    —             6,343         (d)        6,343    

Net Parent investment

    4,145         44         (a)        (6,345)        (d)        —    
          2,353         (e)     
          (189)        (h)     
          (8)        (i)     

Accumulated other comprehensive loss

    (51)                (51)   
 

 

 

   

 

 

     

 

 

     

 

 

 

Equity attributable to the Company

    4,094         44           2,156           6,294    

Noncontrolling interests

    (23)        (25)        (a)            (48)   
 

 

 

   

 

 

     

 

 

     

 

 

 

Total equity

    4,071         19           2,156           6,246    
 

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 9,969        $ (49)         $ (6)         $ 9,914    
 

 

 

   

 

 

     

 

 

     

 

 

 

 

(1)  For details of the adjustments referenced, see Note 4: “Pro Forma Adjustments.”

See notes to unaudited pro forma combined consolidated financial statements.

 

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UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2016

(in millions, except per share data)

 

                  Pro Forma Adjustments(1)                    
        Historical         Financing
   Transactions   
        Spin-Off
   Adjustments   
             Pro Forma       

Revenues

           

Rooms

   $ 1,361        $           $           $ 1,361    

Food and beverage

    536                 536    

Other

    160                 160    
 

 

 

   

 

 

     

 

 

     

 

 

 

Total revenues

    2,057                 2,057    

Expenses

           

Rooms

    352                 352    

Food and beverage

    375                 375    

Other departmental and support

    500             (2)      (b)     498    

Other property-level

    135                 135    

Management fees

    73             33       (b)     106    

Impairment loss

    15                 15    

Depreciation and amortization

    220                 220    

Corporate and other

    56             (5)      (c)     51    
 

 

 

   

 

 

     

 

 

     

 

 

 

Total expenses

    1,726             26           1,752    

Gain on sale of assets, net

                     

Operating income

    332             (26)          306    

Interest income

                     

Interest expense

    (141)        52       (a)         (89)   

Equity in earnings from investments in affiliates

    16                 16    

Other loss, net

    (7)                (7)   
 

 

 

   

 

 

     

 

 

     

 

 

 

Income before income taxes

    201         52           (26)          227    

Income tax expense

    (79)        (20)      (a)     77       (f)     (22)   

Net income

    122         32           51           205    

Net income attributable to noncontrolling interests

    (6)                (6)   
 

 

 

   

 

 

     

 

 

     

 

 

 

Net income attributable to Parent

   $ 116        $ 32          $ 51          $ 199    
 

 

 

   

 

 

     

 

 

     

 

 

 

Pro forma earnings per share:

           

Basic and diluted

          (g)    $ 1.01    
           

 

 

 

Pro forma weighted-average shares outstanding:

           

Basic and diluted

          (g)     198    
           

 

 

 

 

(1)  For details of the adjustments referenced, see Note 4: “Pro Forma Adjustments.”

See notes to unaudited pro forma combined consolidated financial statements.

 

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UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2015

(in millions, except per share data)

 

                   Pro Forma Adjustments(1)                     
       Historical        Financing
  Transactions   
        Spin-Off
   Adjustments   
           Pro Forma     

Revenues

           

Rooms

   $ 1,783        $                      $                      $ 1,783    

Food and beverage

    691                 691    

Other

    214                 214    
 

 

 

   

 

 

     

 

 

     

 

 

 

Total revenues

    2,688                 2,688    

Expenses

           

Rooms

    456                 456    

Food and beverage

    487                 487    

Other departmental and support

    650             (3)      (b)     647    

Other property-level

    180                 180    

Management fees

    89             49       (b)     138    

Depreciation and amortization

    287                 287    

Corporate and other

    96             (7)      (c)     89    
 

 

 

   

 

 

     

 

 

     

 

 

 

Total expenses

    2,245             39           2,284    

Gain on sale of assets, net

    143                 143    

Operating income

    586             (39)          547    

Interest income

                     

Interest expense

    (186)        66       (a)         (120)   

Equity in earnings from investments in affiliates

    22                 22    

Other loss, net

    (6)                (6)   
 

 

 

   

 

 

     

 

 

     

 

 

 

Income before income taxes

    417         66           (39)          444    

Income tax expense

    (118)        (26)      (a)     115       (f)     (29)   

Net income

    299         40           76           415    

Net income attributable to noncontrolling interests

    (7)                (7)   
 

 

 

   

 

 

     

 

 

     

 

 

 

Net income attributable to Parent

   $ 292        $ 40          $ 76          $ 408    
 

 

 

   

 

 

     

 

 

     

 

 

 

Pro forma earnings per share:

           

Basic and diluted

          (g)    $ 2.06    
           

 

 

 

Pro forma weighted-average shares outstanding:

           

Basic and diluted

          (g)     198    
           

 

 

 

 

(1)  For details of the adjustments referenced, see Note 4: “Pro Forma Adjustments.”

See notes to unaudited pro forma combined consolidated financial statements.

 

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NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Basis of Pro Forma Presentation

On February 26, 2016, Hilton Worldwide Holdings Inc. (“Parent,” together with its consolidated subsidiaries, “Hilton”) announced a plan to spin-off a substantial portion of Hilton’s ownership business to stockholders as a separate, publicly traded company, Park Hotels & Resorts Inc. The spin-off transaction, which is expected to be tax-free to Hilton stockholders, will be effected through a pro rata distribution of our stock to existing Hilton stockholders. Immediately following completion of the spin-off, Hilton stockholders will own 100 percent of the outstanding shares of our common stock. After the spin-off, Park Hotels & Resorts Inc. will operate as an independent, publicly traded company. Unless otherwise indicated or except where the context otherwise requires, references to “we,” “us,” or “our” refer to Park Hotels & Resorts Inc. after giving effect to the transfer of the assets and liabilities from Hilton.

The unaudited pro forma financial statements are based on our historical combined consolidated financial statements, which are included elsewhere in this information statement, and have been prepared to reflect the spin-off and related transactions.

The unaudited pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. These adjustments are included only to the extent they are directly attributable to the spin-off and related transactions and the appropriate information is known and factually supportable. Pro forma adjustments reflected in the unaudited pro forma combined consolidated statement of operations are expected to have a continuing effect on us. As a result, the unaudited pro forma combined consolidated statement of operations excludes gains and losses related to the transactions described in Note 2: “Financing Transactions” below that will not have a continuing effect on us, although these items are reflected in the unaudited pro forma combined consolidated balance sheet.

Note 2: Financing Transactions

Subject to market conditions, Park Hotels & Resorts expects to complete one or more financing transactions on or prior to the completion of the spin-off, including the repayment of certain of its existing indebtedness (the “Financing Transactions”).

 

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The following table summarizes the anticipated sources and expected uses of proceeds in connection with the Financing Transactions, as if they had occurred as of September 30, 2016. The actual amounts set forth in the table and in the accompanying footnotes are subject to adjustment and may differ at the time of the consummation of the Financing Transactions depending on several factors, including, among others, fluctuations in cash on hand or indebtedness between September 30, 2016 and the actual closing dates of the Financing Transactions, payments of accrued interest subsequent to September 30, 2016, and differences from our estimated fees and expenses. You should read the following together with the information included under the heading “Description of Certain Indebtedness” included elsewhere in this information statement.

 

Sources

   Amount
(in millions)
    

Uses

   Amount
(in millions)
 
     

Repayment of Existing CMBS Loan(5)

   $ 2,427   

Cash released from restrictions(1)

   $ 57      

Repayment of Bonnet Creek Loan(6)

     146   
     

Repayment of existing mortgage loan(4)

     104   

New CMBS loans(2)

     2,000      

Distribution of proceeds of new mortgage loan to noncontrolling interest(4)

     25   

New term loan facility(3)

     750      

Payment of accrued interest on repaid indebtedness

     2   

New mortgage loan(4)

     165      

Debt issuance costs

     28   
  

 

 

       
     

Transfers to Parent(7)

     240   
        

 

 

 

Total Sources

   $ 2,972      

Total Uses

   $ 2,972   
  

 

 

       

 

 

 

 

(1)  As of September 30, 2016, our consolidated balance sheet included $57 million of restricted cash and cash equivalents that upon completion of the Financing Transactions will be released from restrictions.
(2)  Prior to the completion of the spin-off, we expect to enter into (i) a seven-year commercial mortgage-backed securities loan financing in an aggregate principal amount of $725 million secured by the Hilton San Francisco Union Square and the Parc 55 Hotel San Francisco; and (ii) a ten-year commercial mortgage-backed securities loan financing in an aggregate principal amount of $1.275 billion secured by the Hilton Hawaiian Village. See “Description of Certain Indebtedness” for additional information.
(3)  At or prior to the completion of the spin-off, we expect to enter into new senior unsecured credit facilities, which will consist of (i) a $1,000 million senior unsecured revolving credit facility with a four-year maturity, with two six-month extension options and (ii) a $750 million senior unsecured term loan facility with a five-year maturity. As of September 30, 2016, on a pro forma basis, we would not have had any borrowings outstanding under the revolving credit facility.
(4)  As of September 30, 2016, our consolidated balance sheet included mortgage loan indebtedness of $104 million of a consolidated joint venture in which we own a 50% controlling financial interest. As part of the Financing Transactions, this consolidated joint venture will repay such existing mortgage loan indebtedness with the proceeds of a new $165 million mortgage loan secured by the same property. Proceeds in excess of the amount required to repay such existing mortgage loan, and related transaction costs, will be distributed ratably to us and our joint venture partner.
(5)  As of September 30, 2016, our consolidated balance sheet included $2,427 million of indebtedness under the Existing CMBS Loan. As part of the Financing Transactions, we expect to repay in full all amounts outstanding under the Existing CMBS Loan.
(6) 

This amount does not include the value of $300 million aggregate principal amount of senior notes to be issued by Hilton Grand Vacations, which we expect to acquire as part of the internal reorganization. Pursuant to a cashless debt exchange, we intend to exchange such senior notes with certain holders of

 

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  indebtedness under the Bonnet Creek Loan to acquire and cancel a like amount of indebtedness under the Bonnet Creek Loan. All remaining amounts outstanding under the Bonnet Creek Loan are expected to be repaid with proceeds from the Financing Transactions.
(7)  We currently expect to enter into one or more transactions with Parent prior to the consummation of the spin-off such that we will have approximately $360 million of cash and cash equivalents, including restricted cash, as of the distribution date. Our cash and cash equivalents immediately prior to the distribution date will depend on the timing of the closings of the various Financing Transactions, the timing of the distribution date and our net cash generation between September 30, 2016 and the distribution date. To the extent that our cash and cash equivalents immediately prior to the distribution would exceed $360 million, we expect to effect distributions or other transactions that would result in a net transfer from us to Parent of such excess amount. To the extent that our cash and cash equivalents immediately prior to the distribution would be less than $360 million, we expect that Parent would make an equity contribution to us in the amount of such shortfall.

See “Description of Certain Indebtedness.”

Note 3: Spin-Off Adjustments

In order to qualify as a REIT, we will not directly or indirectly operate any of our hotels, other than the Select Hotels. Upon consummation of the spin-off, we will engage Hilton to manage our hotels, other than the Select Hotels, pursuant to management agreements. We will operate the Select Hotels pursuant to franchise agreements with Hilton. For more information regarding these agreements, see “Business and Properties—Our Principal Agreements—Management Agreements” and “—Franchise Agreements.”

We expect to qualify as a REIT and thereby generally be exempt from U.S. federal income taxes as a result of our eligibility for a deduction for dividends that we will pay, beginning with our short taxable year following the spin-off. As a standalone company, we expect to be subject to certain U.S. federal, state, local and foreign income and other taxes, as well as subject to tax on taxable income earned by our taxable REIT subsidiary. The tax provision as a standalone company has been estimated using statutory rates applied to forecasted pre-tax income generated by each tax-paying entity.

Note 4: Pro Forma Adjustments

Adjustments included under the heading “Pro Forma Adjustments—Financing Transactions” represent the following:

(a) Reflects the adjustment to our historical debt and related balances and interest expense to give net effect to the Financing Transactions further detailed in Note 2: Financing Transactions to these Unaudited Pro Forma Combined Consolidated Financial Statements. The adjustment to our historical debt balance was determined as follows:

 

Financing Event

   Amount
(in millions)
 

New CMBS loans

   $ 2,000   

New term loan facility

     750   

New mortgage loan

     165   

New debt issuance costs

     (20

Repayment of Existing CMBS Loan

     (2,427

Repayment of Bonnet Creek Loan

     (446

Repayment of existing mortgage loan

     (104

Removal of debt issuance costs related to extinguished debt

     16   
  

 

 

 

Total reduction in debt

   $ (66 ) 
  

 

 

 

The adjustment to net parent investment was determined based upon the net changes to our historical debt and related assets and liabilities resulting from the Financing Transactions.

 

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The adjustment to interest expense was made based on the expected terms of the debt using a weighted average interest rate of 3.66%. A 0.125% change in the weighted average interest rate on our total pro forma indebtedness would change our pro forma annual interest expense by approximately $4 million.

Also reflects the adjustment to historical income tax expense to give effect to the change in interest expense from the pro forma financing transactions that result in changes to income before income taxes. The provision for income taxes is based on the estimated statutory tax rate of 39.5%.

Adjustments included under the heading “Pro Forma Adjustments—Spin-Off Adjustments” represent the following:

(b) Reflects the change in fee expense related to the management and franchise agreements we will enter into with Hilton upon completion of the spin-off pursuant to which Hilton and its affiliates will provide to us for an agreed upon charge, various services to support the operations of our hotels, and which are anticipated to be on different terms from the existing management agreements reflected in our historical financial statements.

(c) Reflects the removal of non-recurring separation expenses included in our historical financial statements.

(d) Reflects the pro forma recapitalization of our equity. As of the distribution date, Net Parent investment will be redesignated as our stockholders’ equity and will be allocated between common stock and additional paid-in capital based on the number of shares of our common stock outstanding at the distribution date. Hilton stockholders will receive shares based on a distribution ratio of one share of our common stock for every five shares of Hilton common stock outstanding as of the record date for the distribution.

(e) Reflects adjustments to deferred tax assets and liabilities related to our election to be taxed as a REIT.

(f) Reflects adjustments to the income tax provision related to our election to be taxed as a REIT and giving effect to other pro forma adjustments with an effect on taxable income. The provision for income taxes related to taxable income associated with our taxable REIT subsidiaries is based on the estimated statutory tax rate of 40.4%.

(g) The number of shares of our common stock used to compute basic and diluted earnings per share for the nine months ended September 30, 2016 and year ended December 31, 2015 is the number of shares assumed to be outstanding on the distribution date, based on the number of Hilton common shares outstanding on September 30, 2016, assuming a distribution ratio of one share of our common stock for every five shares of Hilton common stock outstanding. The number of Hilton shares used to determine the assumed distribution reflects Hilton shares outstanding as of the balance sheet date.

(h) In October 2016, we transferred the legal title associated with 25 rooms at the Hilton New York Midtown and 600 rooms at the Hilton Waikoloa Village to a wholly owned subsidiary of Parent in connection with timeshare projects. The net book value of the related assets was approximately $189 million. Pursuant to an arrangement representing a lease, we reserved exclusive rights to occupy and operate these rooms beginning on the date of transfer and continuing until the end of each respective lease term, which range from April 2017 through December 2019.

(i) We currently expect to enter into one or more transactions with Parent prior to the consummation of the spin-off such that we will have approximately $360 million of cash and cash equivalents, including restricted cash, as of the distribution date. Our cash and cash equivalents immediately prior to the distribution date will depend on the timing of the closings of the various Financing Transactions, the timing of the distribution date and our net cash generation between September 30, 2016 and the distribution date. To the extent that our cash and cash equivalents immediately prior to the distribution would exceed $360 million, we expect to effect distributions or other transactions that would result in a net transfer from us to Parent of such excess amount. To the extent that our cash and cash equivalents immediately prior to the distribution would be less than $360 million, we expect that Parent would make an equity contribution to us in the amount of such shortfall.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Summary-Summary Historical and Unaudited Pro Forma Combined Consolidated Financial Data,” “Selected Historical Combined Consolidated Financial Data,” “Unaudited Pro Forma Combined Consolidated Financial Statements” and our historical combined consolidated financial statements and related notes included elsewhere in this information statement. In addition to historical combined consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this information statement, particularly in “Risk Factors.”

Overview

We are a leading lodging real estate company with a diverse global portfolio of iconic and market-leading hotels and resorts with significant underlying real estate value. We hold investments in entities that have ownership or leasehold interests in 67 properties, consisting of premium-branded hotels and resorts with over 35,000 rooms, of which over 85% are luxury and upper upscale and nearly 90% are located in the U.S. Our high-quality portfolio includes hotels in major urban and convention areas, such as New York City, Washington, D.C., Chicago, San Francisco and London; premier resorts in key leisure destinations, including Hawaii, Orlando and Key West; and a number of properties adjacent to major gateway airports, such as Los Angeles International, Chicago O’Hare, Boston Logan and Miami Airport, and select suburban locations.

We operate our business through one operating segment, our ownership segment, which includes all of our consolidated hotel properties. Our segment revenues, also referred to as Total Hotel Revenue, includes rooms, food and beverage and other revenue, excluding revenue from our laundry business, from both our comparable and non-comparable consolidated hotels.

Spin-Off from Hilton Worldwide Holdings Inc.

On February 26, 2016, Hilton Worldwide Holdings Inc. (“Parent,” together with its consolidated subsidiaries, “Hilton”) announced a plan to spin-off a substantial portion of Hilton’s ownership business to stockholders as a separate, publicly traded company, Park Hotels & Resorts Inc.

Consummation of the spin-off is subject to the satisfaction or waiver of certain conditions. In addition, Hilton has the right not to complete the spin-off if, at any time prior to the distribution, the board of directors of Hilton determines, in its sole discretion, that the spin-off is not then in the best interests of Hilton or its stockholders or other constituents, that a sale or other alternative is in the best interests of Hilton or its stockholders or other constituents, or that market conditions or other circumstances are such that it is not advisable at that time to separate Park Hotels & Resorts Inc. from Hilton. See “The Spin-Off—Conditions to the Spin-Off.” Immediately following the distribution, Hilton will not own any shares of any class of our outstanding common stock, and we will have entered into a Distribution Agreement and will enter into several other agreements with Hilton. These agreements will set forth the principal transactions required to effect our separation from Hilton and provide for the allocation between us and Hilton of various assets, liabilities, rights and obligations (including employee benefits and tax-related assets and liabilities) and govern the relationship between us and Hilton after completion of the spin-off. These agreements will also include arrangements with respect to transitional services to be provided by Hilton to us.

In addition, in connection with the spin-off, we will enter into agreements, including long-term hotel management and franchise agreements, with Hilton and other third parties that have either not existed historically, or that may be on different terms than the terms of the arrangement or agreements that existed prior

 

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to the spin-off. The historical combined consolidated financial statements do not reflect the effect of these new or revised agreements and our historical expenses, including corporate and other expense and management fee expense, may not be reflective of our combined consolidated results of operations, financial position and cash flows had we been a stand-alone company during the periods discussed in our “Results of Operations” section.

We intend to make a tax election to be treated as a REIT for U.S. federal income tax purposes beginning immediately after the distribution, and expect to continue to operate so as to qualify as a REIT. So long as we qualify as a REIT, except as it relates to our U.S. taxable REIT subsidiaries, we generally will not be subject to U.S. federal income tax on net taxable income that we distribute annually to our stockholders. In order to qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the real estate qualification of sources of our income, the composition and values of our assets, the amounts we distribute to our stockholders and the diversity of ownership of our stock. In order to comply with REIT requirements, we may need to forego otherwise attractive opportunities and limit our expansion opportunities and the manner in which we conduct our operations.

Following the spin-off, we expect to make quarterly distributions to our stockholders in amounts that meet or exceed the requirements to qualify and maintain our qualification as a REIT and to avoid corporate level taxation. Prior to making any distributions for U.S. federal tax purposes or otherwise, we must first satisfy our operating and debt service obligations. Although we currently anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs to avoid corporate level taxation, it is possible that it would be necessary to utilize cash reserves, liquidate assets at unfavorable prices or incur additional indebtedness in order to make required distributions.

Basis of Presentation

The discussion below relates to the financial position and results of operations of a combination of entities under common control that have been “carved out” of Hilton’s consolidated financial statements and reflect significant assumptions and allocations. The historical combined consolidated financial statements reflect our historical financial position, results of operations and cash flows, in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Refer to Note 2: “Basis of Presentation and Summary of Significant Accounting Policies” in our audited combined consolidated financial statements included elsewhere within this information statement for additional information.

The historical combined consolidated financial statements includes the financial position and results of operations of the DoubleTree Hotel Missoula/Edgewater and the Hilton Templepatrick Hotel & Country Club in each of the periods discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In September 2016, we distributed interests in entities with ownership interests in these two hotels as they will not be retained by us after the spin-off. Accordingly, these properties will not be reflected in our combined consolidated financial statements from and after such distribution. These properties did not have a material impact on our financial position or results of operations in any of the periods reflected in the historical combined consolidated financial statements included in this information statement. See Note 10: “Transactions with Parent” in our unaudited condensed combined consolidated financial statements included elsewhere in this information statement.

Principal Components of and Factors Affecting Our Results of Operations

Revenues

Revenues from our properties are primarily derived from two categories of customers: transient and group, which account 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,

 

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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 properties. As a result, occupancy affects all components of revenues from our properties.

Principal Components

Rooms. Represents the sale of room rentals at our properties 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 properties.

Other. Represents ancillary revenue for guest services provided at our properties, including parking, telecommunications, golf course and spa. Also includes tenant leases and other rental revenue, as well as revenue from our laundry business.

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 and adverse political conditions can lower the revenues and profitability of our properties. Further, competition for guests and the supply of services at our properties affect our ability to sustain or increase rates charged to customers at our properties. 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 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 properties 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, telephone and other guest services, tenant leases, and other rental revenue, as well as labor and other costs associated with administrative departments, sales and marketing, repairs and minor maintenance and utility costs.

Other property-level. These costs consist primarily of real and personal property 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. See “Unaudited

 

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Pro Forma Combined Consolidated Financial Statements” and the accompanying notes for discussion of the change in expenses related to the management and franchise agreements we will enter into with Hilton upon completion of the spin-off.

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 properties and certain assets from our laundry facilities, as well as amortization of finite lived intangible assets.

Corporate and other. These costs includes general and administrative expenses, expenses for our laundry business and transaction costs arising from acquisitions of properties. 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. Hilton allocated these general and administrative expenses to us on the basis of financial and operating metrics that were historically used by Hilton to allocate resources and evaluate performance against its strategic objectives. See “Unaudited Pro Forma Combined Consolidated Financial Statements” and the accompanying notes for discussion of the incremental expense related to general and administrative expenses we expect to incur upon completion of the spin-off.

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 and catering and outlet sales.

Fixed expenses. Many of the other expenses associated with our properties are relatively fixed. These expenses include portions of rent expense, property taxes, insurance and utilities. Since we generally are unable to decrease these costs significantly or rapidly when demand for our properties 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 properties are party to collective bargaining agreements 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 properties. 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 properties.

Changes in depreciation and amortization expense. Changes in depreciation expense are due to renovations of existing properties, acquisition or development of new properties, the disposition of existing properties 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.

Other items

Effect of foreign currency exchange rate fluctuations

Certain of our properties operations are conducted in functional currencies other than our reporting currency, which is the United States (“U.S.”) dollar (“USD”), and we have assets and liabilities denominated in a variety of foreign currencies. As a result, we are required to translate those results, assets and liabilities from the functional currency into USD at market based exchange rates for each reporting period. When comparing our results of operations between periods, there may be material portions of the changes in our revenues or expenses that are derived from fluctuations in exchange rates experienced between those periods.

 

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Seasonality

The lodging industry is seasonal in nature. However, the periods during which our properties experience higher or lower levels of demand vary from property to property and depend upon location, type of property and competitive mix within the specific location.

Key Business Metrics Used by Management

Comparable Hotels Data

We present certain data for our properties 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 system since January 1st of the previous year; and (ii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results are not available. We present comparable hotel results to help us and our investors evaluate the ongoing operating performance of our comparable hotels.

Of our 58 properties that we consolidated as of September 30, 2016, 50 properties have been classified as comparable hotels. Of our 59 and 54 properties that we consolidated as of December 31, 2015 and 2014, respectively, 48 and 46 properties, respectively, have been classified as comparable hotels. Our non-comparable hotels were removed from the comparable group in the periods above because they were acquired, sold or underwent large-scale capital projects during the current or prior year.

Occupancy

Occupancy represents the total number of room nights sold divided by the total number of room nights available at a property or group of properties. Occupancy measures the utilization of our properties’ available capacity. Management uses occupancy to gauge demand at a specific property or group of properties in a given period. Occupancy levels also help us determine achievable ADR levels as demand for rooms increases or decreases.

Average Daily Rate

Average Daily Rate (“ADR”) represents room revenue divided by total number of room nights sold in a given period. ADR measures average room price attained by a property and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a property or group of properties. ADR is a commonly used performance measure in the 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 Available Room

We calculate Revenue per Available Room (“RevPAR”) by dividing room revenue by total number of room nights available to guests for a given period. 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 property or group of properties: 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 comparable basis and references to RevPAR and ADR are presented on a currency neutral basis (all periods use the same exchange rates), unless otherwise noted.

Non-GAAP Financial Measures

We also evaluate the performance of our business through certain other financial measures that are not recognized under U.S. GAAP. Each of these non-GAAP financial measures should be considered by investors as supplemental measures to GAAP performance measures such as total revenues, operating profit and net income.

 

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EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin

EBITDA, presented herein, reflects net income excluding interest expense, a provision for income taxes and depreciation and amortization. We consider EBITDA to be a useful measure for investors in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results.

Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude gains, losses and expenses in connection with: (i) asset dispositions for both consolidated and unconsolidated investments; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) furniture, fixtures and equipment (“FF&E”) replacement reserves required by certain lease agreements; (vi) reorganization costs; (vii) share-based and certain other compensation expenses; (viii) severance, relocation and other expenses; and (ix) other items.

Consolidated Hotel Adjusted EBITDA (“Hotel Adjusted EBITDA”) measures property-level results before debt service, depreciation and corporate expenses for our consolidated properties, including both comparable and non-comparable hotels but excluding properties 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 properties.

Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenue.

EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin 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 Adjusted EBITDA Margin may not be comparable to similarly titled measures of other companies.

We believe that EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin 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 Adjusted EBITDA Margin 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 and Adjusted EBITDA do not reflect our interest expense;

 

    EBITDA and Adjusted EBITDA do not reflect our tax expense;

 

    EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations; and

 

    other companies in our industry may calculate EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin differently, limiting their usefulness as comparative measures.

We do not use or present EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin as measures of our liquidity or cash flow. These measures have limitations as analytical tools and should not be considered either in isolation or as a substitute for cash flow or other methods of analyzing our cash flows and liquidity as reported under U.S. GAAP. Some of these limitations are:

 

    EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

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    EBITDA and Adjusted EBITDA do not reflect the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

    EBITDA and Adjusted EBITDA do not reflect the cash requirements to pay our taxes;

 

    EBITDA and 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 and Adjusted EBITDA do not reflect any cash requirements for such replacements.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

The following table provides the components of Hotel Adjusted EBITDA:

 

    Nine Months Ended
September 30,
    Year Ended December 31,  
    2016(1)     2015(1)     2015(2)     2014(2)     2014(3)     2013(3)  
    (in millions)  

Comparable Hotel Adjusted EBITDA

  $         511       $         519       $         684       $         676       $         731       $         664    

Non-comparable Hotel Adjusted EBITDA

    104         92         131         71         16           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Hotel Adjusted EBITDA

  $             615       $             611       $             815       $             747       $             747       $             670    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Based on our 2016 comparable hotels as of September 30, 2016.
(2)  Based on our 2015 comparable hotels as of December 31, 2015.
(3)  Based on our 2014 comparable hotels as of December 31, 2014.

 

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The following table provides a reconciliation of Hotel Adjusted EBITDA to net income:

 

    Nine Months Ended
September 30,
    Year Ended December 31,  
    2016     2015     2015     2014     2013  
    (in millions)  

Hotel Adjusted EBITDA

    $            615         $            611         $            815         $            747         $            670    

Adjusted EBITDA from investments in affiliates

    34         36         47         49         50    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ownership segment Adjusted EBITDA

    649         647         862         796         720    

All other(1)

    (35)        (36)        (45)        (42)        (39)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    614         611         817         754         681    

  Gain on sales of assets, net

           143         143         —         —    

  Gain on foreign currency transactions

    —         —         —                —    

  FF&E replacement reserve

    (2)        (2)        (2)        (2)        (1)   

  Gain on debt extinguishment

    —         —         —         —         68   

  Impairment loss

    (15)        —         —         —         —    

  Other gain (loss), net

    (7)        (5)        (6)        25         —    

  Other adjustment items(2)

    (11)        (35)        (38)        (15)        (54)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    580         712         914         764         694    

  Interest income

                                  

  Interest expense

    (141)        (139)        (186)        (186)        (162)   

  Income tax expense

    (79)        (113)        (118)        (117)        (104)   

  Depreciation and amortization expense

    (220)        (212)        (287)        (248)        (246)   

Interest expense, income tax and depreciation and amortization included in equity in earnings from investments in affiliates

    (19)        (19)        (25)        (33)        (37)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    $              122         $            230         $            299         $            181         $            147    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Includes revenue from our laundry business of $10 million and $9 million for the nine months ended September 30, 2016 and 2015, respectively, and $13 million, $10 million, and $10 million for the years ended December 31, 2015, 2014 and 2013, respectively. In addition, includes corporate and other expense excluding certain other adjustment items.
(2)  For the year ended December 31, 2013, primarily relates to general and administrative expenses allocated to us in connection with our Parent’s initial public offering.

NAREIT FFO attributable to Parent and Adjusted FFO attributable to Parent

We present NAREIT FFO attributable to Parent as a non-GAAP measure of our performance. We calculate NAREIT FFO attributable to Parent (defined as set forth below) for a given operating period in accordance with NAREIT guidelines. NAREIT defines FFO as net income (loss) (calculated in accordance with U.S. GAAP), excluding gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, real estate-related depreciation, amortization and impairments and 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 April 2002 “White Paper on Funds From Operations,” 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

 

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insufficient by themselves. For these reasons, NAREIT adopted the FFO metric in order to promote an industry-wide measure of REIT operating performance.

We also present Adjusted FFO attributable to Parent when evaluating our performance because management believes 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, in our annual budget process and for our compensation programs. 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 Parent for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to Parent:

 

    Gain on debt extinguishment. We exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of the write off of deferred financing costs from the original issuance of the debt being redeemed or retired.

 

    Foreign currency (gain) loss. We exclude the effects of foreign currency (gain) loss as they are not reflective of our ongoing operations.

 

    Acquisition Costs. Under U.S. GAAP, costs associated with completed property acquisitions are expensed in the year incurred and affect our net income. We exclude the effect of these costs in presenting FFO because we believe they are not reflective of our ongoing performance.

 

    Litigation Gains and Losses. We exclude the effect of gains or losses associated with litigation recorded under U.S. GAAP that we consider outside the ordinary course of business. We believe that including these items is not consistent with our ongoing operating performance.

In unusual circumstances, we may also adjust NAREIT FFO attributable to Parent for additional gains or losses that management believes are not representative of our current operating performance.

The following table provides a reconciliation of net income attributable to Parent to NAREIT FFO attributable to Parent and Adjusted FFO attributable to Parent:

 

    Nine Months Ended
September 30,
    Year Ended December 31,  
    2016     2015     2015     2014     2013  
    (in millions)  

Net income attributable to Parent

  $               116       $             224       $             292       $             176       $             144    

Depreciation and amortization expense

    220         212         287         248         246    

Impairment loss

    15         —         —         —         —    

Gain on sales of assets, net

    (1)        (143)        (143)        —         —    

Gain on sale of investments in affiliates

    —         —         —         (24)        —    

Equity investment adjustments:

         

Equity in earnings from investments in affiliates

    (16)        (18)        (22)        (16)        (13)   

Pro rata FFO of equity investments

    29         31         40         40         39    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NAREIT FFO attributable to Parent

    363         306         454         424         416    

Gain on debt extinguishment

    —         —         —         —         (68)   

Gain on foreign currency transactions

    —         —         —         (2)        —    

Acquisition costs

    —         26         26                —    

Litigation losses

    —         —         —                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted FFO attributable to Parent

    $            363         $              332         $            480         $            427         $            349    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparable Hotel Data

Nine Months Ended September 30, 2016 Compared with Nine Months Ended September 30, 2015

The following table sets forth data for our 2016 comparable hotels by geographic market as of September 30, 2016 and 2015:

 

    As of September 30, 2016     Nine Months Ended September 30, 2016     Nine Months Ended September 30, 2015        

Market

  No. of
Properties
    No. of
Rooms
    ADR     Occupancy     RevPAR     ADR     Occupancy     RevPAR     Percent
Change in
RevPAR
 

New York (1)

           2,233         273.99         85.8%        235.03         282.64         87.0%        245.84         (4.4)%   

Washington, D.C.

           1,085         163.95         81.3%        133.26         157.18         79.1%        124.29         7.2%   

Florida

           1,322         149.19         85.0%        126.83         145.61         88.1%        128.32         (1.2)%   

New Orleans

           1,939         177.84         75.9%        134.97         168.31         79.4%        133.70         0.9%   

Chicago

           2,743         179.38         75.6%        135.53         181.19         80.7%        146.28         (7.3)%   

Northern California

           3,264         233.29         86.0%        200.73         221.18         86.0%        190.15         5.6%   

Southern California

           1,304         170.90         87.7%        149.93         168.54         86.4%        145.59         3.0%   

Hawaii

           4,101         244.24         88.2%        215.54         231.44         87.1%        201.56         6.9%   

Other

    15         5,499         156.01         80.1%        125.01         152.37         81.4%        124.10         0.7%