10-Q 1 pk-10q_20180331.htm 10-Q pk-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2018

OR

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

For the transition period from            to           

Commission File Number 001-37795

 

Park Hotels & Resorts Inc.

(Exact name of registrant as specified in its charter)

 

 Delaware

 

36-2058176

(State or Other jurisdiction of

incorporation or organization)

 

(I.R.S Employer

Identification Number)

 

1775 Tysons Blvd., 7th Floor, Tysons, VA

 

22102

(Address of Principal Executive Offices)

 

(Zip Code)

(571) 302-5757

(Registrant’s telephone number, including area code)

1600 Tysons Blvd., Suite 1000, McLean, VA 22102

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was required to file such reports) and (2) 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.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

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 April 27, 2018 was 201,129,172.

 

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Page

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

2

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

 

2

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017

 

3

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

 

4

 

Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2018 and 2017

 

5

 

Notes to Condensed 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

 

25

Item 4.

Controls and Procedures

 

25

 

 

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

26

Item 1A.

Risk Factors

 

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

Item 3.

Defaults Upon Senior Securities

 

27

Item 4.

Mine Safety Disclosures

 

27

Item 5.

Other Information

 

27

Item 6.

Exhibits

 

28

 

 

 

 

 

Signatures

 

29

 

1


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

PARK HOTELS & RESORTS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Property and equipment, net

 

$

8,051

 

 

$

8,311

 

Assets held for sale, net

 

 

 

 

 

37

 

Investments in affiliates

 

 

87

 

 

 

84

 

Goodwill

 

 

607

 

 

 

606

 

Intangibles, net

 

 

28

 

 

 

41

 

Cash and cash equivalents

 

 

172

 

 

 

364

 

Restricted cash

 

 

108

 

 

 

15

 

Accounts receivable, net of allowance for doubtful accounts of $1 and $1

 

 

138

 

 

 

125

 

Prepaid expenses

 

 

54

 

 

 

48

 

Other assets

 

 

91

 

 

 

83

 

TOTAL ASSETS (variable interest entities - $239 and $240)

 

$

9,336

 

 

$

9,714

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Debt

 

$

2,946

 

 

$

2,961

 

Accounts payable and accrued expenses

 

 

172

 

 

 

215

 

Due to hotel manager

 

 

108

 

 

 

141

 

Due to Hilton Grand Vacations

 

 

138

 

 

 

138

 

Deferred income tax liabilities

 

 

46

 

 

 

65

 

Other liabilities

 

 

211

 

 

 

232

 

Total liabilities (variable interest entities - $217 and $217)

 

 

3,621

 

 

 

3,752

 

Commitments and contingencies - refer to Note 12

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share, 6,000,000,000 shares authorized,

  201,168,293 shares issued and 201,095,915 shares outstanding as of

  March 31, 2018 and 214,873,778 shares issued and 214,845,244 shares outstanding as of December 31, 2017

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

3,578

 

 

 

3,825

 

Retained earnings

 

 

2,193

 

 

 

2,229

 

Accumulated other comprehensive loss

 

 

(8

)

 

 

(45

)

Total stockholders' equity

 

 

5,765

 

 

 

6,011

 

Noncontrolling interests

 

 

(50

)

 

 

(49

)

Total equity

 

 

5,715

 

 

 

5,962

 

TOTAL LIABILITIES AND EQUITY

 

$

9,336

 

 

$

9,714

 

 

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

 

2


PARK HOTELS & RESORTS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in millions, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

Rooms

 

$

418

 

 

$

432

 

Food and beverage

 

 

183

 

 

 

192

 

Ancillary hotel

 

 

50

 

 

 

47

 

Other

 

 

17

 

 

 

13

 

Total revenues

 

 

668

 

 

 

684

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Rooms

 

 

112

 

 

 

113

 

Food and beverage

 

 

126

 

 

 

131

 

Other departmental and support

 

 

156

 

 

 

164

 

Other property-level

 

 

53

 

 

 

51

 

Management and franchise fees

 

 

33

 

 

 

34

 

Depreciation and amortization

 

 

70

 

 

 

70

 

Corporate general and administrative

 

 

16

 

 

 

14

 

Other

 

 

17

 

 

 

13

 

Total expenses

 

 

583

 

 

 

590

 

 

 

 

 

 

 

 

 

 

Gain on sales of assets, net

 

 

89

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

174

 

 

 

94

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

 

 

Interest expense

 

 

(31

)

 

 

(30

)

Equity in earnings from investments in affiliates

 

 

4

 

 

 

4

 

Gain on foreign currency transactions

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

149

 

 

 

69

 

Income tax benefit

 

 

 

 

 

2,281

 

Net income

 

 

149

 

 

 

2,350

 

Net loss attributable to noncontrolling interests

 

 

1

 

 

 

 

Net income attributable to stockholders

 

$

150

 

 

$

2,350

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax benefit (expense):

 

 

 

 

 

 

 

 

Currency translation adjustment

 

 

37

 

 

 

7

 

Total other comprehensive income

 

 

37

 

 

 

7

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

186

 

 

$

2,357

 

Comprehensive loss attributable to noncontrolling interests

 

 

1

 

 

 

 

Comprehensive income attributable to stockholders

 

$

187

 

 

$

2,357

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Earnings per share - Basic

 

$

0.71

 

 

$

11.63

 

Earnings per share - Diluted

 

$

0.71

 

 

$

11.01

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - Basic

 

 

211

 

 

 

202

 

Weighted average shares outstanding - Diluted

 

 

212

 

 

 

213

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.43

 

 

$

0.43

 

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

3


PARK HOTELS & RESORTS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

149

 

 

$

2,350

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

70

 

 

 

70

 

Gain on sales of assets, net

 

 

(89

)

 

 

 

Equity in earnings from investments in affiliates

 

 

(4

)

 

 

(4

)

Gain on foreign currency transactions

 

 

(1

)

 

 

(1

)

Share-based compensation expense

 

 

4

 

 

 

 

Amortization of deferred financing costs

 

 

1

 

 

 

1

 

Distributions from unconsolidated affiliates

 

 

1

 

 

 

4

 

Deferred income taxes

 

 

(5

)

 

 

(2,288

)

Changes in operating assets and liabilities

 

 

(83

)

 

 

9

 

Net cash provided by operating activities

 

 

43

 

 

 

141

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(53

)

 

 

(37

)

Proceeds from asset dispositions, net

 

 

360

 

 

 

 

Insurance proceeds for property damage claims

 

 

18

 

 

 

 

Investments in affiliates

 

 

 

 

 

(1

)

Distributions from unconsolidated affiliates

 

 

 

 

 

1

 

Net cash provided by (used in) investing activities

 

 

325

 

 

 

(37

)

Financing Activities:

 

 

 

 

 

 

 

 

Dividends paid

 

 

(119

)

 

 

(110

)

Tax withholdings on share-based compensation

 

 

(1

)

 

 

 

Repurchase of common stock

 

 

(348

)

 

 

 

Net transfers to Parent

 

 

 

 

 

(9

)

Net cash used in financing activities

 

 

(468

)

 

 

(119

)

Effect of exchange rate changes on cash and cash equivalents and restricted cash

 

 

1

 

 

 

1

 

Net decrease in cash and cash equivalents and restricted cash

 

 

(99

)

 

 

(14

)

Cash and cash equivalents and restricted cash, beginning of period

 

 

379

 

 

 

350

 

Cash and cash equivalents and restricted cash, end of period

 

$

280

 

 

$

336

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

Dividends paid in stock

 

$

 

 

$

441

 

Dividends declared but unpaid

 

 

86

 

 

 

92

 

 

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

4


PARK HOTELS & RESORTS INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited, in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Non-

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Interests

 

 

Total

 

Balance as of December 31, 2017

 

 

215

 

 

$

2

 

 

$

3,825

 

 

$

2,229

 

 

$

(45

)

 

$

(49

)

 

$

5,962

 

Share-based compensation

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

150

 

 

 

 

 

 

(1

)

 

 

149

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

37

 

Dividends and dividend equivalents

 

 

 

 

 

 

 

 

 

 

 

(88

)

 

 

 

 

 

 

 

 

(88

)

Repurchase of common stock

 

 

(14

)

 

 

 

 

 

(250

)

 

 

(98

)

 

 

 

 

 

 

 

 

(348

)

Balance as of March 31, 2018

 

 

201

 

 

$

2

 

 

$

3,578

 

 

$

2,193

 

 

$

(8

)

 

$

(50

)

 

$

5,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,350

 

 

 

 

 

 

 

 

 

 

 

 

2,350

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Dividends

 

 

16

 

 

 

 

 

 

(110

)

 

 

(92

)

 

 

 

 

 

 

 

 

 

 

 

(202

)

Balance as of March 31, 2017

 

 

214

 

 

$

2

 

 

$

3,820

 

 

$

2,258

 

 

$

(60

)

 

$

 

 

$

(49

)

 

$

5,971

 

 

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

5


PARK HOTELS & RESORTS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1: Organization

Park Hotels & Resorts Inc. (“we,” “us,” “our” or the “Company”) is a Delaware corporation that owns a portfolio of premium-branded hotels and resorts primarily located in prime United States (“U.S.”) 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 was effected through a pro rata distribution of Park Hotels & Resorts Inc. stock to existing Hilton stockholders.

For U.S. federal income tax purposes, we intend to elect to be taxed as a real estate investment trust (“REIT”), effective for our first tax year ending December 31, 2017. We are currently, and expect to continue to be, organized and operate in a REIT qualified manner. From 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.

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

Principles of Consolidation

The unaudited condensed consolidated financial statements reflect our 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 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 consolidated financial statements and notes thereto for the year ended December 31, 2017 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018.

Use of Estimates

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

Reclassifications

Certain line items on the condensed consolidated statements of comprehensive income and condensed consolidated statements of cash flows for the three months ended March 31, 2017 have been reclassified to conform to the current period presentation.

Summary of Significant Accounting Policies

Our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 1, 2018, contains a discussion of the significant accounting policies. There have been no significant changes to our significant accounting policies since December 31, 2017.

Recently Issued Accounting Pronouncements

Adopted Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606), which 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 issued several related ASUs. We adopted the provisions of ASU 2014-09 and the related ASUs as of January 1, 2018 using a modified retrospective approach, which resulted in no cumulative effect adjustment to retained earnings as of January 1,

6


2018. The timing and amount of revenue recognition from rooms, food and beverage and other ancillary hotel goods and services will not change.  Revenue will continue to be recognized at the point in time or over the period of time when goods and services have been delivered or rendered to the customer.  Payment for room rentals is generally due on the last date of the hotel stay and the payment for goods and services are generally due at the time the goods and services are delivered or rendered to the customer.  

In January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”), Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in ASU 2016-01, among other things, eliminated the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that was previously required to be disclosed for financial instruments measured at amortized cost on the balance sheet. We adopted the provisions of ASU 2016-01 as of January 1, 2018. The adoption of this guidance did not have a significant effect on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01 (“ASU 2017-01”), Business combinations (Topic 805) – Clarifying the definition of a business, which adds guidance to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or business. ASU 2017-01 clarified that when the gross assets acquired (or disposed of) are concentrated in a single identifiable asset or a group of similar identifiable assets, the acquisition would not be considered a business. We adopted this ASU on a prospective basis on January 1, 2018. Transactions before January 1, 2018 were not affected.

 

Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), which supersedes existing guidance on accounting for leases in Leases (Topic 840) and generally requires all leases to be recognized in the statement of financial position. Subsequent to ASU 2016-02, the FASB issued a related ASU. Although early adoption is permitted, we expect to adopt these new ASUs on a modified retrospective basis when the requirements become effective January 1, 2019. We are currently evaluating the effect that these ASUs will have on our consolidated financial statements.

Note 3: Dispositions

 

During the three months ended March 31, 2018, we sold the 12 hotels listed in the table below for total gross proceeds of $379 million. We recognized a net gain of approximately $89 million, including the reclassification of a currency translation adjustment of $31 million from accumulated other comprehensive loss into earnings concurrent with the dispositions, which is included in gain on sales of assets, net in our condensed consolidated statements of comprehensive income.  

 

Hotel

 

Location

 

Month Sold

Hilton Rotterdam

 

Rotterdam, Netherlands

 

January 2018

 

 

 

 

 

Embassy Suites Portfolio(1)

 

 

 

February 2018

Embassy Suites by Hilton Kansas City Overland Park

 

Overland Park, Kansas

 

 

Embassy Suites by Hilton San Rafael Marin County

 

San Rafael, California

 

 

Embassy Suites by Hilton Atlanta Perimeter Center

 

Atlanta, Georgia

 

 

 

 

 

 

 

UK Portfolio(1)

 

 

 

February 2018

Hilton Blackpool

 

Blackpool, United Kingdom

 

 

Hilton Belfast

 

Belfast, United Kingdom

 

 

Hilton London Angel Islington

 

London, United Kingdom

 

 

Hilton Edinburgh

 

Grosvenor, United Kingdom

 

 

Hilton Coylumbridge

 

Aviemore, United Kingdom

 

 

Hilton Bath City

 

Bath, United Kingdom

 

 

Hilton Milton Keynes

 

Keynes, United Kingdom

 

 

 

 

 

 

 

Hilton Durban

 

Durban, South Africa

 

February 2018

 

(1)

Hotels were sold as a portfolio.

 

7


Note 4: Property and Equipment

Property and equipment were:

 

 

 

March 31, 2018

 

 

December 31, 2017(1)

 

 

 

(in millions)

 

Land

 

$

3,337

 

 

$

3,364

 

Buildings and leasehold improvements

 

 

5,668

 

 

 

5,911

 

Furniture and equipment

 

 

918

 

 

 

966

 

Construction-in-progress

 

 

159

 

 

 

117

 

 

 

 

10,082

 

 

 

10,358

 

Accumulated depreciation and amortization

 

 

(2,031

)

 

 

(2,047

)

 

 

$

8,051

 

 

$

8,311

 

 

(1)

Excludes $31 million of property and equipment, net classified as held for sale as of December 31, 2017.

 

Depreciation of property and equipment, including capital lease assets, was $69 million during each of the three months ended March 31, 2018 and 2017.

As of December 31, 2017, property and equipment included approximately $20 million of capital lease assets primarily consisting of buildings and leasehold improvements, net of $10 million of accumulated depreciation. Capital lease assets were disposed in connection with the sale of our UK portfolio in February 2018.

Hurricanes Irma and Maria

In September 2017, Hurricanes Irma and Maria caused damage and disruption at certain of our hotels in Florida and the Caribe Hilton. We incurred $20 million of expenses and recognized a loss of $54 million for property and equipment that was damaged during the hurricanes during the year ended December 31, 2017. During the three months ended March 31, 2018, we incurred an additional $7 million of expenses, and based upon additional information obtained during the period, we recognized an additional loss of $22 million for property and equipment that was damaged during the hurricanes; these amounts were offset by the recognition of an additional insurance receivable of $29 million.

Our insurance coverage provides us with reimbursement for the replacement cost for the damage to these hotels, which includes certain clean-up and repair costs, exceeding the applicable deductibles. During the three months ended March 31, 2018, we received $18 million of insurance proceeds and as of March 31, 2018 the insurance receivable, which is included within other assets in our condensed consolidated balance sheets, is $67 million. As of March 31, 2018, no amounts have been recognized related to business interruption insurance.

Note 5: Consolidated Variable Interest Entities ("VIEs") and Investments in Affiliates

Consolidated VIEs

We consolidate 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 consolidated balance sheets include the following assets and liabilities of these entities:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

(in millions)

 

Property and equipment, net

 

$

222

 

 

$

215

 

Cash and cash equivalents

 

 

9

 

 

 

14

 

Restricted cash

 

 

5

 

 

 

7

 

Accounts receivable, net

 

 

2

 

 

 

2

 

Prepaid expenses

 

 

1

 

 

 

2

 

Debt

 

 

207

 

 

 

207

 

Accounts payable and accrued expenses

 

 

8

 

 

 

8

 

Due to hotel manager

 

 

1

 

 

 

1

 

Other liabilities

 

 

1

 

 

 

1

 

 

During the three months ended March 31, 2018 and 2017, 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.

8


Unconsolidated Entities

Investments in affiliates were:

 

 

 

Ownership %

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

(in millions)

 

Hilton Berlin(1)

 

40%

 

 

$

35

 

 

$

33

 

Hilton San Diego Bayfront

 

25%

 

 

 

21

 

 

 

20

 

All others (7 hotels)

 

20% - 50%

 

 

 

31

 

 

 

31

 

 

 

 

 

 

 

$

87

 

 

$

84

 

 

(1)

In April 2018, we and the other owners of the entities that own the Hilton Berlin, entered into an agreement to sell the ownership interest in these entities for a gross sales price of 297 million euros, which is subject to customary pro rations and adjustments.  The buyers provided a cash deposit of 30 million euros, which is held in escrow as earnest money.

 

The affiliates in which we own investments accounted for under the equity method had total debt of approximately $962 million as of both March 31, 2018 and December 31, 2017, respectively. Substantially all the debt is secured solely by the affiliates’ assets or is guaranteed by other partners without recourse to us.

Note 6: Debt

Debt balances, including obligations for capital leases, and associated interest rates as of March 31, 2018, were:

 

 

 

 

 

 

 

Principal balance as of

 

 

 

Interest Rate

at March 31, 2018

 

Maturity Date

 

March 31, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

(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

4.13%

 

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)

 

 

 

 

 

 

Capital lease obligations(4)

 

N/A

 

N/A

 

 

 

 

 

16

 

 

 

 

 

 

 

 

2,957

 

 

 

2,973

 

Less: unamortized deferred financing costs and

   discount

 

 

 

 

 

 

(11

)

 

 

(12

)

 

 

 

 

 

 

$

2,946

 

 

$

2,961

 

 

(1)

In October 2016, we entered into a $725 million commercial mortgaged-back securities (“CMBS”) loan secured by the Hilton San Francisco Union Square and the Parc 55 Hotel San Francisco (“SF CMBS Loan”) and a $1.275 billion CMBS loan secured by the Hilton Hawaiian Village (“HHV CMBS Loan”).

(2)

Assumes the exercise of all extensions that are exercisable solely at our option.

(3)

$1 billion available.

(4)

Capital lease obligations were disposed in connection with the sale of our UK portfolio in February 2018.

Mortgage Loans

We are required to deposit with lenders certain cash reserves for restricted uses. As of both March 31, 2018 and December 31, 2017, our condensed consolidated balance sheets included $14 million of restricted cash related to our CMBS loans and mortgage loans.

9


Debt Maturities

The contractual maturities of our debt, assuming the exercise of all extensions that are exercisable solely at our option, as of March 31, 2018 were:

 

Year

 

(in millions)

 

2018

 

$

 

2019

 

 

 

2020

 

 

12

 

2021

 

 

750

 

2022

 

 

33

 

Thereafter

 

 

2,162

 

 

 

$

2,957

 

 

Note 7: Fair Value Measurements

We did not elect the fair value measurement option for any of our financial assets or liabilities. The fair values of financial instruments not included in the table below are estimated to be equal to their carrying amounts. The fair value of certain financial instruments and the hierarchy level we used to estimate fair values are shown below:

 

 

 

 

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

Hierarchy

Level

 

 

Carrying

Amount

 

 

Fair Value

 

 

Carrying

Amount

 

 

Fair Value

 

 

 

 

 

 

 

(in millions)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SF CMBS Loan

 

 

3

 

 

$

725

 

 

$

710

 

 

$

725

 

 

$

721

 

HHV CMBS Loan

 

 

3

 

 

 

1,275

 

 

 

1,231

 

 

 

1,275

 

 

 

1,256

 

Term Loan

 

 

3

 

 

 

750

 

 

 

750

 

 

 

750

 

 

 

749

 

Mortgage loans

 

 

3

 

 

 

207

 

 

 

199

 

 

 

207

 

 

 

204

 

 

Note 8: Income Taxes

We are organized in conformity with, and operate in a manner that will allow us to elect to be taxed as a REIT, for U.S. federal income tax purposes for our tax year ending December 31, 2017. We expect to continue to be organized and operate so as to qualify as a REIT. To qualify as a REIT, we must continually satisfy requirements related to, among other things, the real estate qualification of sources of our income, the real estate composition and values of our assets, the amounts we distribute to our stockholders annually and the diversity of ownership of our stock. To the extent we qualify as a REIT, we generally will not be subject to U.S. federal income tax on taxable income generated by our REIT activities that we distribute to our stockholders. Accordingly, no provision for U.S. federal income taxes has been included in our accompanying condensed consolidated financial statements for the three months ended March 31, 2018 and 2017 related to our REIT activities other than amounts associated with net built-in gains related to our asset sales and the derecognition of deferred tax liabilities discussed below.

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act, which amended the Internal Revenue Code of 1986, was the most significant tax legislative development in decades. Major elements of the Act from our perspective include reducing the corporate tax rate; restricting the eligibility for tax deferred like-kind exchange treatment solely to real property; limiting the deductibility of interest expense; and the one-time transition tax on foreign cash and unremitted earnings. At March 31, 2018, we have not completed the internal assessment for the tax effects of enactment of the Act; specifically, the analysis to determine the potential tax liability and deferred tax related to a potential sale of ancillary hotel furniture, fixtures, and equipment that may be sold in a like-kind exchange transaction was not able to be completed. Accordingly, Staff Accounting Bulletin 118, issued by the SEC, states that companies that are unable to calculate a reasonable estimate are able to record the adjustment to the tax provision as the information becomes available, but no later than one year from the enactment date. We intend to continue our analysis and record the effects of the provision through deferred taxes when the information is available and an assessment is made.

We are and will continue to be subject to U.S. federal income tax on taxable sales of built-in gain property (representing property with an excess of fair value over tax basis held by us on January 4, 2017) during the five-year period following our election to be taxed as a REIT. In addition, we are subject to non-U.S. income tax on foreign held REIT activities. Further, our taxable REIT subsidiaries are generally subject to U.S. federal, state and local, and foreign income taxes (as applicable).

10


During the three months ended March 31, 2018, we recognized a $5 million deferred tax benefit, which includes built-in losses recognized on assets sold during the period, for which a deferred tax asset was not previously recognized. We recognized an income tax benefit for the three months ended March 31, 2017 of $2,288 million as a result of the derecognition of deferred tax liabilities associated with our intention to be taxed as a REIT.

Note 9: Share-Based Compensation

We issue equity-based awards to our employees pursuant to the 2017 Omnibus Incentive Plan (“2017 Employee Plan”) and our non-employee directors pursuant to the 2017 Stock Plan for Non-Employee Directors (“2017 Director Plan”). The 2017 Employee Plan provides that a maximum of 8,000,000 shares of our common stock may be issued, and as of March 31, 2018, 6,140,940 shares of common stock remain available for future issuance. The 2017 Director Plan provides that a maximum of 450,000 shares of our common stock may be issued, and as of March 31, 2018, 390,154 shares of common stock remain available for future issuance. For the three months ended March 31, 2018 and 2017, we recognized $4 million and $3 million, respectively, of share-based compensation expense. As of March 31, 2018, unrecognized compensation expense was $27 million, which is expected to be recognized over a weighted-average period of 1.8 years.

 

Restricted Stock Awards

Restricted Stock Awards (“RSAs”) generally vest in annual installments between one and three years from each grant date. The following table provides a summary of RSAs for the three months ended March 31, 2018:

 

 

 

Number of Shares

 

 

Weighted-Average

Grant Date

Fair Value

 

Unvested at January 1, 2018

 

 

461,639