pk-10q_20170630.htm

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Indicate by check mark whether the registrant has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of common stock outstanding on July 28, 2017 was 214,840,599.

	June 30, 2017			December 31, 2016
	(unaudited)
ASSETS
Property and equipment, net	$	8,495		$	8,541
Investments in affiliates		87			81
Goodwill		605			604
Intangibles, net		43			44
Cash and cash equivalents		306			337
Restricted cash		18			13
Accounts receivable, net of allowance for doubtful accounts of $2 and $2		188			130
Prepaid expenses		53			58
Other assets		22			26
TOTAL ASSETS (variable interest entities - $244 and $239)	$	9,817		$	9,834
LIABILITIES AND EQUITY
Liabilities
Debt	$	3,014		$	3,012
Accounts payable and accrued expenses		178			167
Due to hotel manager		97			91
Due to Hilton Grand Vacations		210			210
Deferred income tax liabilities		123			2,437
Other liabilities		194			94
Total liabilities (variable interest entities - $215 and $262)		3,816			6,011
Commitments and contingencies - refer to Note 12
Stockholders' Equity
Common stock, par value $0.01 per share, 6,000,000,000 shares authorized, 214,835,403 shares issued and outstanding as of June 30, 2017		2			—
Additional paid-in capital		3,823			—
Retained earnings		2,277			—
Accumulated other comprehensive loss		(53	)		(67	)
Net Parent investment		—			3,939
Total stockholders' equity		6,049			3,872
Noncontrolling interests		(48	)		(49	)
Total equity		6,001			3,823
TOTAL LIABILITIES AND EQUITY	$	9,817		$	9,834

Refer to the notes to the unaudited condensed combined consolidated financial statements.

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues
Rooms	$	469		$	472		$	901		$	901
Food and beverage		200			200			392			380
Other		64			53			124			105
Total revenues		733			725			1,417			1,386

Operating expenses
Rooms		118			118			232			232
Food and beverage		132			131			263			258
Other departmental and support		181			170			358			335
Other property-level		48			47			94			92
Management and franchise fees		39			25			73			51
Impairment loss		—			—			—			15
Depreciation and amortization		73			74			143			147
Corporate and other		19			19			37			35
Total expenses		610			584			1,200			1,165

Gain on sale of assets, net		—			1			—			1

Operating income		123			142			217			222

Interest income		1			1			1			1
Interest expense		(31	)		(46	)		(61	)		(92	)
Equity in earnings from investments in affiliates		8			7			12			10
Loss on foreign currency transactions		(4	)		(1	)		(3	)		(1	)
Other loss, net		(1	)		(2	)		(1	)		(2	)

Income before income taxes		96			101			165			138
Income tax benefit (expense)		19			(39	)		2,300			(53	)
Net income		115			62			2,465			85
Net income attributable to noncontrolling interests		(3	)		(2	)		(3	)		(3	)
Net income attributable to stockholders	$	112		$	60		$	2,462		$	82

Other comprehensive income, net of tax benefit (expense):
Currency translation adjustment, net of tax of $0, $(2), $0, and $(3)		7			—			14			9
Total other comprehensive income		7			—			14			9

Comprehensive income	$	122		$	62		$	2,479		$	94
Comprehensive income attributable to noncontrolling interests		(3	)		(2	)		(3	)		(3	)
Comprehensive income attributable to stockholders	$	119		$	60		$	2,476		$	91

Earnings per share:
Earnings per share - Basic	$	0.52		$	0.30		$	11.79		$	0.41
Earnings per share - Diluted	$	0.52		$	0.30		$	11.48		$	0.41

Weighted average shares outstanding - Basic		214			198			208			198
Weighted average shares outstanding - Diluted		215			198			214			198

Dividends declared per common share	$	0.43		$	—		$	0.86		$	—

Refer to the notes to the unaudited condensed combined consolidated financial statements.

	Six Months Ended
	June 30,
	2017			2016
Operating Activities:
Net income	$	2,465		$	85
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		143			147
Impairment loss		—			15
Gain on sale of assets, net		—			(1	)
Equity in earnings from investments in affiliates		(12	)		(10	)
Loss on foreign currency transactions		3			1
Other loss, net		1			2
Share-based compensation expense		7			—
Amortization of deferred financing costs		2			5
Distributions from unconsolidated affiliates		7			9
Deferred income taxes		(2,312	)		(28	)
Changes in working capital and other		(30	)		(6	)
Net cash provided by operating activities		274			219
Investing Activities:
Capital expenditures for property and equipment		(86	)		(128	)
Investments in affiliates		(1	)		—
Change in restricted cash		—			14
Distributions from unconsolidated affiliates		1			2
Net cash used in investing activities		(86	)		(112	)
Financing Activities:
Repayment of debt		—			(2	)
Change in restricted cash		(5	)		(32	)
Net transfers (to) from Parent		(9	)		55
Dividends paid		(202	)		—
Distributions to noncontrolling interests		(2	)		(4	)
Tax withholdings on share-based compensation		(2	)		—
Net cash (used in) provided by financing activities		(220	)		17
Effect of exchange rate changes on cash and cash equivalents		1			2
Net (decrease) increase in cash and cash equivalents		(31	)		126
Cash and cash equivalents, beginning of period		337			72
Cash and cash equivalents, end of period	$	306		$	198

Supplemental Disclosures
Non-cash investing activities:
Transfer of property and equipment to Hilton Grand Vacations	$	—		$	40
Non-cash financing activities:
Dividends paid in stock	$	441		$	—
Dividends declared but unpaid		92			—
Distribution to Parent		—			(33	)

Refer to the notes to the unaudited condensed combined consolidated financial statements.

											Accumulated
					Additional						Other						Non-
	Common Stock				Paid-in			Retained			Comprehensive			Net Parent			controlling
	Shares		Amount		Capital			Earnings			Loss			Investment			Interests			Total
Balance as of December 31, 2016		—	$	—	$	—		$	—		$	(67	)	$	3,939		$	(49	)	$	3,823
Net transfers to Parent		—		—		—			—			—			(9	)		—			(9	)
Issuance of common stock and reclassification of former Parent investment		198		2		3,928			—			—			(3,930	)		—			—
Share-based compensation		1		—		5			—			—			—			—			5
Net income		—		—		—			2,462			—			—			3			2,465
Other comprehensive income		—		—		—			—			14			—			—			14
Dividends and dividend equivalents		16		—		(110	)		(185	)		—			—			—			(295	)
Distributions to noncontrolling interests		—		—		—			—			—			—			(2	)		(2	)
Balance as of June 30, 2017		215	$	2	$	3,823		$	2,277		$	(53	)	$	—		$	(48	)	$	6,001

Refer to the notes to the unaudited condensed combined consolidated financial statements.

Park Hotels & Resorts Inc. (“we,” “us,” “our” or the “Company”) is a Delaware corporation that owns a portfolio of premium-branded hotels and resorts located in prime United States (“U.S.”) and international markets. On January 3, 2017, Hilton Worldwide Holdings Inc. (“Hilton” or “Parent”) completed the spin-off of a portfolio of hotels and resorts that established Park Hotels & Resorts Inc. as an independent, publicly traded company. The spin-off transaction, which was effected through a pro rata distribution of Park Hotels & Resorts Inc. stock to existing Hilton stockholders, was intended to be tax-free to both Hilton and Hilton’s stockholders. As a result of the spin-off, each holder of Hilton common stock on the record date of December 15, 2016 received one share of our common stock for every five shares of Hilton common stock owned.

For U.S. federal income tax purposes, we intend to elect to be taxed as a real estate investment trust (“REIT”), effective January 4, 2017. We are currently, and expect to continue to be, organized and operate in a REIT qualified manner.

As of the spin-off date, Park Intermediate Holdings LLC (our “Operating Company”), directly or indirectly, holds all of our assets and conducts all of our operations. We own 100% of the interests in our Operating Company.

Subsequent to January 3, 2017, the unaudited condensed combined consolidated financial statements include the accounts of the Company, our wholly owned subsidiaries and entities in which we have a controlling financial interest, including variable interest entities (“VIEs”) where we are the primary beneficiary. The historical unaudited condensed combined consolidated financial statements through January 3, 2017 represent the financial position and results of operations of entities held by us after the spin-off that had historically been under common control of the Parent. The historical unaudited condensed combined consolidated financial statements were prepared on a carve-out basis and reflect significant assumptions and allocations. The unaudited condensed 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”).

We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP. In our opinion, the accompanying unaudited condensed combined consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All significant intercompany transactions and balances within the financial statements have been eliminated.

These financial statements should be read in conjunction with the audited combined consolidated financial statements and notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K and “Financial Statements and Supplementary Data,” included in Exhibit 99.2 to our Current Report on Form 8-K filed May 5, 2017.

Through January 3, 2017, the historical condensed combined consolidated statements of comprehensive income included allocations of corporate general and administrative expenses from Hilton on the basis of financial and operating metrics that Hilton historically used to allocate resources and evaluate performance against its strategic objectives. We considered the basis on which expenses were allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us during the historical periods presented. However, the allocations may not include all of the actual expenses that would have been incurred by us and may not reflect our condensed combined consolidated results of operations, financial position and cash flows had we been a stand-alone company during the historical periods presented. Actual costs that might have been incurred had we been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions we might have performed ourselves or outsourced and strategic decisions we might have made in areas such as information technology and infrastructure. Following the spin-off, we performed these functions using our own resources or purchased services. For an interim period, some of these functions will continue to be provided by Hilton under our transition services agreement (“TSA”).

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial

statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Interim results are not necessarily indicative of full year performance.

Certain line items on the condensed combined consolidated balance sheets as of December 31, 2016 have been reclassified to conform to the current period presentation.

The Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and Exhibit 99.2 to our Current Report on Form 8-K filed May 5, 2017 contain discussion of the significant accounting policies. There have been no significant changes to the Company’s significant accounting policies since December 31, 2016.

In May 2017, the FASB issued ASU No. 2017-09 (“ASU 2017-09”), Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU modifies stock compensation guidance by clarifying the types of changes to terms or conditions of a share-based payment award that require an entity to apply the modification accounting in ASC 718, Stock Compensation. We have elected to early adopt this guidance, as permitted by the ASU, on a prospective basis as of April 1, 2017. The adoption did not have an effect on our condensed combined consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequent to ASU 2014-09, the FASB has issued several related ASUs. The provisions of ASU 2014-09 and the related ASUs are effective January 2018 and are to be applied retrospectively or using a modified retrospective approach; early adoption is permitted. Based on our assessment to-date, we do not expect the timing of recognition and amount of revenues from room, food and beverage, and other revenue to change. We also do not expect sales of real estate that involve cash with few contingencies to be materially affected; however, the new standard may allow for earlier revenue recognition for sales of real estate where we have continuing involvement. The Company expects to adopt the new ASUs using the modified retrospective approach and does not anticipate that this will result in a material cumulative effect adjustment to retained earnings as of January 1, 2018.

Depreciation of property and equipment, including capital lease assets, was $72 million and $73 million during the three months ended June 30, 2017 and 2016, respectively, and $141 million and $145 million during the six months ended June 30, 2017 and 2016, respectively.

As of June 30, 2017 and December 31, 2016, property and equipment included approximately $20 million and $19 million, respectively, of capital lease assets primarily consisting of buildings and leasehold improvements, net of $9 million and $8 million, respectively, of accumulated depreciation.

As of June 30, 2017 and December 31, 2016, we consolidated three VIEs that own hotels in the U.S. We are the primary beneficiary of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our VIEs are only available to settle the obligations of these entities. Our condensed combined consolidated balance sheets include the following assets and liabilities of these entities:

During the six months ended June 30, 2017 and 2016, we did not provide any financial or other support to these VIEs that we were not previously contractually required to provide, nor do we intend to provide any such support in the future.

The affiliates in which we own investments accounted for under the equity method had total debt of approximately $863 million and $861 million as of June 30, 2017 and December 31, 2016, respectively. Substantially all of the debt is secured solely by the affiliates’ assets or is guaranteed by other partners without recourse to us.

Debt balances, including obligations for capital leases, and associated interest rates as of June 30, 2017, were:

Delaware		36-2058176
(State or Other jurisdiction of incorporation or organization)		(I.R.S Employer Identification Number)
1600 Tysons Blvd., Suite 1000, McLean, VA		22102
(Address of Principal Executive Offices)		(Zip Code)

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☒	(Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☐

PART I. FINANCIAL INFORMATION		Page

Item 1.	Financial Statements (unaudited)	2
	Condensed Combined Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	2
	Condensed Combined Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016	3
	Condensed Combined Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016	4
	Condensed Combined Consolidated Statements of Equity for the Six Months Ended June 30, 2017 and 2016	5
	Notes to Condensed Combined Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28

	Signatures	29

	June 30, 2017			December 31, 2016
	(in millions)
Land	$	3,398		$	3,397
Buildings and leasehold improvements		6,044			6,015
Furniture and equipment		949			922
Construction-in-progress		121			79
		10,512			10,413
Accumulated depreciation and amortization		(2,017	)		(1,872	)
	$	8,495		$	8,541

			Principal balance as of
	Interest Rate at June 30, 2017	Maturity Date	June 30, 2017		December 31, 2016
			(in millions)
SF CMBS Loan⁽¹⁾	4.11%	November 2023	$	725	$	725
HHV CMBS Loan⁽¹⁾	4.20%	November 2026		1,275		1,275
Mortgage loans	Average rate of 4.03%	2020 to 2026⁽²⁾		207		207
Term loan	L + 1.45%	December 2021		750		750
Revolving credit facility⁽³⁾	L + 1.50%	December 2021⁽²⁾		—		—
Unsecured notes	7.50%	December 2017		55		55
Capital lease obligations	Average rate of 7.00%	2019 to 2094		15		14
				3,027		3,026

	Accumulated Other Comprehensive Loss			Net Parent Investment			Non- controlling Interests			Total
Balance as of December 31, 2015	$	(63	)	$	2,884		$	(24	)	$	2,797
Net income		—			82			3			85
Other comprehensive income		9			—			—			9
Net transfers from Parent		—			55			—			55
Distribution to Parent		—			(33	)		—			(33	)
Distributions to noncontrolling interests		—			—			(4	)		(4	)
Cumulative effect of the adoption of ASU 2015-02		—			(3	)		1			(2	)
Balance as of June 30, 2016	$	(54	)	$	2,985		$	(24	)	$	2,907

	Ownership %		June 30, 2017		December 31, 2016
			(in millions)
Hilton Berlin		40%	$	32	$	31
Hilton San Diego Bayfront		25%		21		20
All others (7 hotels)	20% - 50%			34		30
			$	87	$	81