Business combinations

Business combination with the Sagicor Parties

On February 26, 2018, we entered into a Share Exchange Implementation Agreement with JCSD Trustee Services Limited, X Fund Properties Limited, Sagicor Pooled Investment Funds Limited, and Sagicor Real Estate X Fund Limited (collectively, the “Sagicor Parties”), as amended by that certain First Amendment to Share Exchange Implementation Agreement dated May 31, 2018 (as amended, the “Contribution Agreement”). Pursuant to the Contribution Agreement, the Sagicor Parties agreed to contribute a portfolio of the following assets (the “Sagicor Assets”) to a subsidiary of Playa in exchange for consideration consisting of a combination of our ordinary shares and cash:


•	The Hilton Rose Hall Resort & Spa;


•	The Jewel Runaway Bay Beach & Golf Resort;


•	The Jewel Dunn’s River Beach Resort;


•	The Jewel Paradise Cove Beach Resort & Spa;


•	The 88 units comprising one of the towers in the multi-tower condominium and spa at the Jewel Grande Montego Bay, which will be incorporated into the Hyatt Ziva Rose Hall in Jamaica;


•	Developable land sites adjacent to the Jewel Grande Montego Bay and the Hilton Rose Hall Resort & Spa;


•	The management contract for a portion of the units owned by the Sagicor Parties at the Jewel Grande Montego Bay; and


•	All of the Sagicor Parties' rights to “The Jewel” hotel brand.

On June 1, 2018 (the “Acquisition Date”), we consummated our acquisition of the Sagicor Assets for total consideration, after preliminary working capital adjustments, of $308.5 million. The Company accounted for the acquisition as a business combination in accordance with ASC 805, Business Combinations, and allocated the purchase price to the fair values of assets acquired and liabilities assumed. The business combination with the Sagicor Parties allows us to expand our portfolio of resorts in the all-inclusive segment of the lodging industry, capitalize on opportunities for internal growth and create significant operational synergies.

The following table summarizes the fair value of each class of consideration transferred to the Sagicor Parties on the Acquisition Date ($ in thousands, except share data):



Cash consideration, net of cash acquired of $0.1 million	$	93,128
Ordinary shares (20,000,000 shares at the Acquisition Date closing price of $10.77 per share, €0.10 par value)	215,400
Total purchase consideration	$	308,528

Preliminary fair values of assets acquired and liabilities assumed

The following table presents our preliminary estimates of fair values of the assets that we acquired and the liabilities that we assumed on the Acquisition Date. Our preliminary estimates are based on the information that was available as of the Acquisition Date, and we are continuing to evaluate the underlying inputs and assumptions used in our valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which can be up to one year from the Acquisition Date ($ in thousands):



Total purchase consideration	$	308,528
Net assets acquired
Working capital	(1,665		)
Property, plant and equipment	309,452
Identifiable intangible assets and liabilities	2,197
Deferred income taxes	(28,753		)
Goodwill	27,297
Total net assets acquired	$	308,528

Property, plant and equipment

We acquired property, plant and equipment, which primarily consists of the all-inclusive resorts and adjacent developable land sites that we acquired. We provisionally estimated the value of the acquired property, plant and equipment using a combination of the income and market approaches, which are primarily based on significant Level 2 and Level 3 assumptions (as described in Note 16), such as estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the Sagicor Assets.

Identified intangible assets and liabilities

The following table presents our preliminary estimates of the fair values of the identified intangible asset and liabilities and their related estimated useful lives that we acquired on the Acquisition Date ($ in thousands):



	Balance Sheet Classification	Estimated Fair Value			Weighted-Average Amortization Period (in years)
Management agreement	Other intangible assets	$	1,900		20
Favorable ground lease asset	Prepayments and other assets	2,631			22
Unfavorable ground lease liability	Other liabilities	(2,334		)	22
Total identifiable intangibles acquired		$	2,197

We provisionally estimated the value of the management agreement using the multi-period excess earnings valuation method, which is a variation of the income valuation approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. This valuation approach utilizes Level 3 inputs (as described in Note 16).

Deferred income taxes

Deferred income taxes primarily relate to the fair value of non-current assets and liabilities acquired from the Sagicor Parties, including property, plant and equipment, intangible assets and liabilities and other. We provisionally estimated deferred income taxes based on the statutory rate in the jurisdiction of the legal entities where the acquired non-current assets and liabilities are recorded. We will update our estimate of deferred income taxes based on changes to our preliminary valuations of the related assets and liabilities, which could result in changes to these preliminary values.

Goodwill

The excess of the purchase consideration over the aggregate estimated fair values of assets acquired and liabilities assumed was recorded as goodwill. The goodwill recognized is attributable primarily to expected synergies and future growth opportunities of our combined operations and is not deductible for income tax purposes. Goodwill related to the business combination was recognized at the Jamaica reportable segment (refer to discussion of our reportable segments in Note 19).

Pro forma results of operations

The following unaudited pro forma results of operations have been prepared as though the business combination was completed on January 1, 2017. This unaudited pro forma financial information does not necessarily reflect the results of operations of Playa that actually would have resulted had the acquisition of the Sagicor Assets occurred at the date indicated, nor does it project the results of operations of Playa for any future date or period ($ in thousands, except per share amounts):



	Three Months Ended June 30,					Six Months Ended June 30,
	2018		2017			2018		2017
Pro forma revenue	$	163,270	$	166,101		$	372,183	$	370,765
Pro forma net income (loss)	$	19,911	$	(9,517	)	$	50,319	$	20,052
Pro forma earnings (losses) per share - Basic	$	0.15	$	(0.08	)	$	0.39	$	0.09
Pro forma earnings (losses) per share - Diluted	$	0.15	$	(0.08	)	$	0.39	$	0.09

The unaudited pro forma financial information for the three and six months ended June 30, 2018 and 2017 includes adjustments for:


•	Depreciation and amortization expense resulting from the estimated fair values of acquired property, plant and equipment and identifiable definite-lived intangible assets and liabilities, respectively;


•	Elimination of the Sagicor Assets' management fees and interest expense;


•	Interest expense resulting from the issuance of an $100.0 million term loan add-on (see Note 14);


•	Related income tax effects; and


•	Weighted average number of shares outstanding.

For the six months ended June 30, 2018, we incurred approximately $2.0 million in transaction costs related to the acquisition and approximately $1.3 million in transaction costs related to the issuance of the $100.0 million term loan add-on. These costs are recorded within selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and are reflected in unaudited pro forma net income for the six months ended June 30, 2017 in the table above.

Sagicor Assets' results of operations

The following table presents the results of the Sagicor Assets' operations, which are recorded within our Jamaica reportable segment, included in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the period from the Acquisition Date through June 30, 2018 ($ in thousands):



	June 2, 2018 - June 30, 2018
Revenue	$	8,662
Net income	$	2,692

Recapitalization transaction

At 12:00 a.m. Central European Time on March 12, 2017, we consummated a business combination (the “Pace Business Combination”) pursuant to that certain transaction agreement by and among us, Playa Hotels & Resorts B.V. (our “Predecessor”), Pace Holdings Corp. (“Pace”) and New Pace Holdings Corp. (“New Pace”), the effects of which replicated the economics of a reverse merger between our Predecessor and Pace. In connection with the Pace Business Combination, Pace formed Porto Holdco B.V., a Dutch private limited liability company (besloten vennootschap met beperkte aansprakelijkheid), as a wholly-owned subsidiary to facilitate the reverse merger with our Predecessor. Prior to the consummation of the Pace Business Combination, Porto Holdco B.V. was converted to a Dutch public limited liability company (naamloze vennootschap) and changed its name to Porto Holdco N.V. Upon the consummation of the Pace Business Combination, the Company's name was changed to Playa Hotels & Resorts N.V.

For accounting and financial reporting purposes, the Pace Business Combination was accounted for as a recapitalization of our Predecessor because Pace was incorporated as a special purpose acquisition company and considered a public shell company. Our Predecessor also maintained effective control of the combined entity because our Predecessor's operations comprise the ongoing operations of the combined entity, our Predecessor's senior management became the senior management of the combined entity and our Predecessor's directors were appointed to, and constitute the majority of, the combined entity's board of directors. Accordingly, no step-up in basis of assets or goodwill were recorded.

The Condensed Consolidated Financial Statements presented herein are those of our Predecessor for all periods prior to the completion of the Pace Business Combination and the recapitalization of the number of ordinary shares attributable to our Predecessor shareholders is reflected retroactively to the earliest period presented. Accordingly, the number of ordinary shares presented as outstanding as of December 31, 2016 totaled 50,481,822 and consisted of the number of ordinary shares issued to Predecessor shareholders. This number of shares was also used to calculate the Company’s earnings per share for all periods prior to the Pace Business Combination.

The consideration received as a result of the Pace Business Combination is summarized as follows ($ in thousands):



Purchase of all of our Predecessor's cumulative redeemable preferred shares ⁽¹⁾	$	353,873
Net cash transferred from Pace	78,859
Playa Employee Offering⁽²⁾	799
Total consideration transferred	$	433,531

________

⁽¹⁾Balance consisted of the face value of our Predecessor's cumulative redeemable preferred shares (“Preferred Shares”) and their associated PIK dividends as of March 10, 2017, per the terms of the Pace Business Combination.

⁽²⁾In connection with the Pace Business Combination, we entered into subscription agreements (the “Subscription Agreements”) with Playa employees, their family members and persons with business relationships with Playa, pursuant to which those persons agreed to purchase 82,751 ordinary shares for an aggregate purchase price of $0.8 million.