NOTE 3. DISCONTINUED OPERATIONS

As discussed in Note 1 “Organization and Basis of Presentation,” LQH Parent completed the Spin-Off on May 30, 2018. As part of the Spin-Off closing, LQH Parent distributed to its stockholders all the outstanding shares of CorePoint common stock. Each holder of LQH Parent common stock received one share of CorePoint common stock for each share of LQH Parent common stock held by such holder on the record date, after giving effect to a reverse stock split, whereby each share of the common stock of LQH Parent (par value $0.01) was reclassified and combined into one half of a share of the common stock of LQH Parent (par value $0.02) (the “Reverse Stock Split”). Immediately following the Spin-Off, pursuant to the terms of the merger agreement, LQH Parent became a wholly-owned subsidiary of Wyndham Worldwide and each share of LQH Parent common stock (after giving effect to the Reverse Stock Split) was converted into the right to receive $16.80 per share in cash (after giving effect to the Reverse Stock Split), without interest. Wyndham Worldwide repaid $715 million of LQH Parent’s debt net of cash and set aside a reserve of $240 million for estimated taxes expected to be incurred in connection with the Spin-Off. Immediately following the Spin-Off, LQH Parent did not own any shares of any class of CorePoint outstanding common stock.

In connection with the Spin-Off, CorePoint entered into a Separation and Distribution Agreement (the “Separation and Distribution Agreement”) in January 2018 and entered into several other agreements with LQH Parent prior to consummation of the Spin-Off. These agreements set forth the principal transactions required to effect CorePoint’s separation from LQH and provide for the allocation between CorePoint and LQH Parent of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities) and govern the relationship between CorePoint and LQH after completion of the Spin-Off.

Notwithstanding the legal form of the Spin-Off, for accounting and financial reporting purposes, LQH Parent is presented as being spun-off from CorePoint as a reverse spin. This presentation is in accordance with GAAP and is primarily a result of the relative significance of CorePoint’s business to LQH’s business, as measured in terms of revenues, profits, and assets. Therefore, CorePoint Lodging is considered the divesting entity and treated as the accounting successor, and LQH Parent is the accounting spinnee and accounting predecessor for consolidated financial reporting purposes.

In accordance with GAAP, the results of operations related to LQH Parent’s hotel franchise and hotel management business are reported as discontinued operations for all periods presented. In addition, the assets and liabilities of LQH Parent’s hotel franchise and hotel management business have been segregated from the assets and liabilities related to the Company’s continuing operations and presented separately on the Company’s consolidated balance sheet as of December 31, 2017. Additionally, the financial statement presentation was modified to be more consistent with other REIT lodging companies and reflects the results of discontinued operations.

Because the separation was a spin-off among stockholders, for financial statement presentation, there is no gain or loss on the separation of the disposed net assets and liabilities. Rather, the carrying amounts of the net assets and liabilities of the Company’s former hotel franchise and hotel management accounts are removed at their historical cost with an offsetting amount to stockholders’ equity. In connection with the Spin-Off, the Company recorded a $740 million adjustment in stockholders’ equity. The amount recognized will be adjusted in future reporting periods as the amount recorded is preliminary pending the finalization of various items including the final determination of the tax liabilities associated with the transaction and the settlement of other remaining considerations with Wyndham Worldwide. As these matters are finalized pursuant to the transaction agreements, the Company will record an adjustment to its cash balance or other working capital accounts with an offsetting amount to stockholders’ equity. Additionally, as the Spin-Off was a taxable spin, Wyndham Worldwide reserved $240 million to cover the tax payment for the spin transaction. Any residual amount of the reserve in excess of the tax payment will be remitted to the Company. Any related tax payment in excess of such reserve is the responsibility of Wyndham Worldwide with the Company responsible for delivering to Wyndham Worldwide either cash equal to the excess or issuing shares of common stock to Wyndham Worldwide in lieu of cash. Any such shares issued to Wyndham Worldwide would be subject to a registration rights agreement. As these tax valuations are completed and the estimates are refined and finalized, the impact of the reorganization and separation from LQH on stockholders’ equity will be adjusted.

Results of Discontinued Operations

The following table summarizes the results of the hotel franchise and hotel management business which are presented as discontinued operations (in millions).

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2018		2017			2018			2017
FRANCHISE AND OTHER FEE BASED REVENUES	$	—	$	42		$	58		$	111
OPERATING EXPENSES
Corporate, general, administrative and marketing		—		28			64			86
Depreciation and amortization		—		2			4			6
Total Operating Expenses		—		30			68			92
Operating Income (Loss)		—		12			(10	)		19
OTHER EXPENSES:
Interest expense		—		(8	)		(15	)		(25	)
Loss on extinguishment of debt		—		—			(7	)		—
Total Other Expenses		—		(8	)		(22	)		(25	)
Income (loss) Before Income Taxes		—		4			(32	)		(6	)
Income tax benefit (expense), primarily current		—		(1	)		7			3
Income (loss) from Discontinued Operations, net of tax	$	—	$	3		$	(25	)	$	(3	)

The following table presents the carrying amounts of the major classes of assets and liabilities of LQH Parent that were included in assets and liabilities from discontinued operations as of December 31, 2017 (in millions):

	December 31, 2017


ASSETS FROM DISCONTINUED OPERATIONS
Total real estate, net	$	49
Intangible assets, net of accumulated amortization		171
Accounts receivable, net		24
Other assets		36
Total Assets From Discontinued Operations	$	280

LIABILITIES FROM DISCONTINUED OPERATIONS
Debt, net	$	696
Accounts payable and accrued expenses		109
Other liabilities		21
Deferred tax liabilities		20
Total Liabilities From Discontinued Operations	$	846

In connection with the Spin-Off, CorePoint made a cash payment to LQH Parent of approximately $1 billion (the “Cash Payment”), immediately prior to and as a condition of the Spin-Off. The Cash Payment was to facilitate the repayment of part of LQH Parent’s existing debt. Accordingly, concurrently with the closing of the Merger, Wyndham Worldwide repaid, or caused to be repaid, on behalf of LQH Parent, LQH Parent’s existing debt.

As permitted under GAAP, the Company has elected not to adjust the condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and September 30, 2017 to exclude cash flows attributable to discontinued operations. As such, the following table presents selected financial information of LQH Parent included in the condensed consolidated statements of cash flows (in millions):

	For the Nine Months Ended September 30,
	2018		2017

Non-cash items included in net income (loss):
Depreciation and amortization	$	4	$	6
Amortization of deferred costs		1		2
Loss on extinguishment of debt		7		—
Equity based compensation expense		4		6

Investing activities:
Capital expenditures	$	11	$	18