Business context and reporting period
Park Hotels & Resorts Inc. is a lodging REIT owning premium-branded hotels and resorts. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the first quarter of 2018. At quarter-end, the company reported investments in 51 hotels with more than 30,000 rooms; over 97% were in the U.S. and over 85% were luxury or upper-upscale.
Financial performance and position
Amounts are in millions except per-share data and percentages.
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $659 | $668 |
| Operating income | $129 | $174 |
| Net income attributable to stockholders | $96 | $150 |
| Diluted EPS | $0.48 | $0.71 |
| Hotel Adjusted EBITDA | $181 | $174 |
| NAREIT FFO attributable to stockholders | $130 | $136 |
| Adjusted FFO attributable to stockholders | $136 | $137 |
| Operating cash flow | $72 | $43 |
| Capital expenditures | $64 | $53 |
| Cash and cash equivalents | $276 | $410 at Dec. 31, 2018 |
| Restricted cash | $14 | $15 at Dec. 31, 2018 |
| Debt, net of financing costs and discount | $2,949 | $2,948 at Dec. 31, 2018 |
- Comparable-hotel RevPAR increased 4.5%, with ADR up and occupancy modestly higher. Comparable hotel revenue gains were offset in reported total revenue by hotel dispositions and the end of a lease.
- The $31 gain on asset sales in Q1 2019 was lower than the $89 million gain in Q1 2018, which included a $31 million currency-translation reclassification. This significantly affects the comparison of GAAP operating income and net income.
- Operating cash flow rose by $29 million, primarily due to the timing of customer receipts and payments. Investing cash flow was $2 million, versus $325 million in Q1 2018, largely reflecting lower hotel-sale proceeds. Financing cash outflow was $209 million, including $201 million of dividends paid.
- Total debt principal was approximately $2.958 billion. The company had no revolving-credit borrowings and $1 billion of availability. Debt includes $2 billion of CMBS loans, a $750 million term loan and $207 million of mortgage loans; the term loan and revolver mature in December 2021, assuming available extensions.
- Total assets were $9.394 billion and total liabilities were $3.814 billion at March 31, 2019. The company recorded $212 million of operating lease right-of-use assets and a $204 million lease liability after adopting the new lease standard.
Material changes, outlook and risks
- Comparable RevPAR growth was led by Northern and Southern California, while Hawaii and Chicago declined. Hawaii faced continued disruption following 2018 volcanic activity; Chicago had fewer citywide group-event room nights.
- During Q1, the company sold two hotels for gross proceeds of $69 million and recorded a $31 million net gain. In May, it agreed to sell three additional hotels for aggregate stated prices of $176 million; the filing expected the sales to close in June, subject to customary conditions, and anticipated an approximately $9 million impairment on two of them.
- On May 5, 2019, Park agreed to acquire Chesapeake Lodging Trust in a cash-and-stock transaction valued at approximately $2.7 billion. Chesapeake holders would receive $11 cash and 0.628 Park shares per share. Park secured a $1.1 billion financing commitment. Closing was expected in late Q3 or early Q4 2019, subject to shareholder approval and other conditions.
- Management said the rest-of-2019 RevPAR outlook depends on group and transient demand and renovation timing, as well as economic conditions, hotel supply and competition from online booking and short-term rental platforms. The filing provides no specific quantified company-wide earnings or RevPAR guidance.
- Liquidity sources include operating cash flow, cash, the undrawn revolver and potential securities issuance. Management believed resources were adequate for foreseeable operating expenses and capital expenditures. The company declared a $0.45-per-share dividend for Q1, payable April 15, and declared a further $0.45 dividend payable July 15.
- Outstanding hotel capital-expenditure commitments were approximately $62 million; contracts permit cancellation subject to costs incurred and discharge costs. Hurricane-related property damage and business-interruption claims remain subject to insurance contingencies: the company had a $23 million insurance receivable and had recognized cumulative losses of $16 million for damages up to deductibles.
- Merger risks include failure or delay to close, transaction expenses, management distraction, integration challenges, uncertain realization of expected benefits, and increased indebtedness. Other exposures include interest-rate risk, litigation and maintaining REIT qualification. Management considered pending litigation not likely to have a material overall effect, while noting an unfavorable resolution could affect a particular period.
Important facts for investors to verify
- Whether comparable RevPAR and Hotel Adjusted EBITDA growth can continue, given geographic variation and demand, renovation and supply risks.
- The impact of dispositions and the much smaller asset-sale gain on future reported earnings; distinguish GAAP income from FFO and company-defined Hotel Adjusted EBITDA.
- Merger approval, financing terms, closing timetable, integration costs, leverage after closing and planned asset sales to reduce leverage.
- Cash available after dividends, debt service and the $62 million capital commitment; review debt maturities and any restrictions on cash and reserves.
- Resolution and timing of hurricane insurance claims, hotel-sale agreements and the anticipated impairment charge.