Acquisitions and Dispositions

9 Months Ended

Sep. 30, 2020

Note 3: Acquisitions and Dispositions

Acquisitions

Merger with Chesapeake

As a result of the Merger, we acquired a 100% ownership interest in the following 18 hotels:

Hotel	Location	Rooms
Hilton Denver City Center	Denver, CO		613
W Chicago – Lakeshore	Chicago, IL		520
Hyatt Regency Boston	Boston, MA		502
Hyatt Regency Mission Bay Spa and Marina	San Diego, CA		438
Boston Marriott Newton	Newton, MA		430
Le Meridien New Orleans⁽¹⁾	New Orleans, LA		410
W Chicago – City Center	Chicago, IL		403
Royal Palm South Beach Miami, a Tribute Portfolio Resort	Miami Beach, FL		393
Le Meridien San Francisco	San Francisco, CA		360
JW Marriott San Francisco Union Square	San Francisco, CA		344
Hyatt Centric Fisherman’s Wharf	San Francisco, CA		316
Hotel Indigo San Diego Gaslamp Quarter	San Diego, CA		210
Courtyard Washington Capitol Hill/Navy Yard	Washington, DC		204
Homewood Suites by Hilton Seattle Convention Center Pike Street	Seattle, WA		195
Hilton Checkers Los Angeles	Los Angeles, CA		193
Ace Hotel Downtown Los Angeles⁽¹⁾	Los Angeles, CA		182
Hotel Adagio, Autograph Collection	San Francisco, CA		171
W New Orleans – French Quarter	New Orleans, LA		97
			5,981

⁽¹⁾	Hotels were subsequently sold in December 2019.

The total consideration for the Merger was approximately $2 billion, which included the issuance of approximately 37.8 million shares of common stock valued at $25.88 per share to Chesapeake common shareholders based on the closing price of our common stock on September 17, 2019. We accounted for the Merger using the acquisition method of accounting.

We allocated the purchase price, consisting of $978 million of common stock issued and cash of $1,013 million, as follows:

	(in millions)
Investment in hotel properties, net	$	2,220
Intangibles, net		45
Cash and cash equivalents		62
Restricted cash		38
Accounts receivable, net		26
Prepaid expenses		9
Other assets		2
Operating lease right-of-use asset		65
Debt		(311	)
Accounts payable and accrued expenses		(47	)
Due to hotel managers		(15	)
Other liabilities		(15	)
Operating lease liability		(88	)
Total consideration	$	1,991

We used the following valuation methodologies, inputs and assumptions to estimate the fair value of the assets acquired and liabilities assumed:

•

Investment in hotel properties – The fair values of the land and improvements, buildings and improvements, and furniture, fixtures and equipment at the hotel properties were determined using a combination of the market, cost and income approaches. These valuation methodologies are based on significant Level 3 inputs in the fair value hierarchy, such as estimates of future income growth, capitalization rates, discount rates, capital expenditures and cash flow projections at the respective hotel properties.

•

Intangible assets – The fair value of the air rights contract acquired as part of the Hyatt Regency Boston were determined using the present value of the difference between the contractual rental amounts according to the contract and the market rental rates for similar contracts, measured over a period equal to the remaining non-cancellable term of the contract. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. The intangible asset is amortized using the straight-line method over the remaining term of the contract.

•

Above and below market lease liabilities – The fair value of our above and below market lease liabilities were determined using the present value of the difference between the contractual rental amounts paid according to the in-place lease agreements and the market rental rates for similar leased space, measured over a period equal to the remaining non-cancellable terms of the leases. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. The above and below market lease liabilities are included as adjustments to the right-of-use asset in the accompanying condensed consolidated balance sheet. The above and below market lease liabilities are amortized as adjustments to ground rent expense over the remaining terms of the respective leases.

•

Operating lease right-of-use-asset and Operating lease liability – The fair value of the operating lease right-of-use asset and operating lease liability were determined using the present value of the fixed contractual rental amounts due over a period equal to the remaining non-cancellable terms of the leases. This valuation methodology is based on Level 3 inputs in the fair value hierarchy.

•

Debt – The fair value of the mortgage loans were determined using the present value of the remaining loan payments due over the term of the loans. This valuation methodology is based on Level 3 inputs in the fair value hierarchy.

•

Restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses, due to hotel managers and other liabilities – The amounts constitute the carrying amounts of the assets acquired and the liabilities assumed, which we believe approximate fair value because of their short-term nature.

For the three months ended September 30, 2020, we incurred an additional $9 million in acquisition costs in connection with the Merger, primarily related to transfer taxes based on new information received during the period. For the three and nine months ended September 30, 2019, we incurred $59 million and $65 million, respectively, in acquisition costs in connection with the Merger primarily related to severance, transfer tax and fees for financial advisors, legal, accounting, tax and other professional services. The Merger-related costs noted above are included in acquisition costs in our condensed consolidated statements of comprehensive (loss) income.

The following unaudited condensed pro-forma financial information presents the results of operations as if the Merger had taken place on January 1, 2019. The unaudited condensed pro-forma financial information is not necessarily indicative of what our actual results of operations would have been assuming the Merger had taken place on January 1, 2019, nor is it indicative of the results of operations for future periods. The unaudited condensed pro-forma financial information is as follows:

	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
(unaudited)	(in millions)
Total revenues	$	797	$	2,440
Operating income		63		350
Net income		23		227

From the date of the Merger through September 30, 2019, we recognized $23 million of total revenues, $5 million of operating income and $4 million of net income related to the hotels acquired in connection with the Merger.

Dispositions

During the nine months ended September 30, 2020, we sold the Embassy Suites Washington DC Georgetown and our interests in the entity that owns the Hilton São Paulo Morumbi for total gross proceeds of $208 million and recognized a gain, net of selling costs, of $64 million on these hotels, which is included in gain on sales of assets, net in our condensed consolidated statements of comprehensive (loss) income. Additionally, the net gain includes the reclassification of a currency translation adjustment of $7 million from accumulated other comprehensive loss into earnings concurrent with the sale of the Hilton São Paulo Morumbi.

During the nine months ended September 30, 2019, we sold our ownership interests in five consolidated hotels listed in the table below for total gross proceeds of $236 million and recognized a gain, net of selling costs, of $20 million on these hotels which is included in gain on sales of assets, net in our condensed consolidated statements of comprehensive (loss) income.

Hotel	Location	Month Sold
Pointe Hilton Squaw Peak Resort	Phoenix, Arizona	February 2019
Hilton Nuremberg	Nuremberg, Germany	March 2019
Hilton Atlanta Airport	Atlanta, Georgia	June 2019
Hilton New Orleans Airport⁽¹⁾	New Orleans, Louisiana	June 2019
Embassy Suites Parsippany⁽¹⁾	Parsippany, New Jersey	June 2019

⁽¹⁾	Hotels were sold as a portfolio in the same transaction.