Park Hotels & Resorts Inc. annual report, FY2017

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Park Hotels & Resorts Inc. — 2017 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2017; quarterly information is also provided. Park became an independent public company on January 3, 2017, following its spin-off from Hilton, and began NYSE trading as PK on January 4. Pre-spin financials are carve-out results and may not be comparable with stand-alone results.

At year-end, the portfolio comprised 55 premium-branded hotels and resorts with more than 32,000 rooms. More than 85% of rooms were luxury or upper-upscale and more than 95% were in the U.S.; substantially all properties used Hilton brands. The company intends to qualify as a REIT.

Financial and operating performance

  • Revenue: $2.791 billion, up 2.3% from $2.727 billion. Rooms revenue was essentially flat at $1.794 billion; food and beverage revenue rose 2.8% to $739 million. Fourth-quarter revenue was $686 million versus $670 million a year earlier.
  • Profit: Operating income was $371 million, down from $419 million. GAAP net income was $2.631 billion, versus $139 million; diluted EPS was $12.21 versus $0.67. The 2017 result principally reflects a $2.347 billion deferred-tax benefit associated with the intended REIT election, not a comparable increase in hotel operating earnings.
  • Adjusted measures: Adjusted EBITDA was $757 million versus $814 million; Hotel Adjusted EBITDA was $758 million versus $804 million. Adjusted FFO attributable to stockholders was $596 million, or $2.78 per diluted share, compared with $522 million, or $2.64 per share. These are non-GAAP measures.
  • Hotel trends: Comparable RevPAR increased 0.7% to $163.49, with ADR of $201.56 and occupancy of 81.1% (down 0.2 percentage points). Comparable Hotel Adjusted EBITDA increased to $709 million, while non-comparable Hotel Adjusted EBITDA fell to $49 million from $134 million.
  • Cash flow and capital spending: Operating cash flow was $653 million versus $399 million. Investing activities used $165 million, including $185 million of capital expenditures. Financing activities used $459 million, including $386 million of dividends and $55 million of debt repayment.
  • Debt and liquidity: Year-end debt was $2.961 billion; cash and cash equivalents were $364 million, plus $15 million restricted cash. A $1 billion revolving facility was available and undrawn. Management reported a 3.9% weighted-average debt rate, with approximately 74% fixed-rate. The company targets net debt to Adjusted EBITDA of three to five times through the lodging cycle.
  • Equity distributions: Regular quarterly dividends declared totaled $1.84 per share for 2017. A separate $2.79-per-share E&P dividend was paid in cash and stock to distribute pre-REIT earnings and profits.

Material changes versus comparable periods

  • Comparable RevPAR growth was modest, and Hotel Adjusted EBITDA declined 5.7%, despite revenue growth. Management and franchise fees rose to $141 million from $91 million, primarily because of new agreements entered into after the spin-off.
  • Interest expense decreased to $124 million from $181 million, reflecting the debt refinancing completed before the spin-off. Debt declined by $51 million year over year.
  • The intended REIT election and related deferred-tax remeasurement reduced deferred tax liabilities substantially and produced the unusually large GAAP tax benefit. The 2017 diluted EPS comparison is therefore not representative of recurring performance.
  • Revenue and expense comparisons are affected by portfolio changes, the spin-off, new hotel agreements, and hurricane-related disruption. In 2017, comparable RevPAR was weaker in several urban markets, including New York, Chicago, New Orleans and Northern California.

Outlook, risks, contingencies and unusual items

  • The filing provides no specific earnings or RevPAR guidance. Management emphasizes active asset management, selective acquisitions and dispositions, and maintaining a flexible balance sheet. It expects required REIT distributions to be supported by cash available, while noting that reserves, asset sales or borrowing could be needed if cash is insufficient.
  • Hurricanes Irma and Maria damaged Florida properties and significantly damaged the Caribe Hilton, which was expected to remain closed throughout 2018. The company recognized a net $16 million casualty loss and a $56 million insurance receivable at year-end; it received $16 million of additional insurance proceeds in January 2018. Insurance recovery and interruption proceeds remain subject to uncertainty.
  • The Hilton Chicago O’Hare ground lease expires in December 2018 and will not be renewed; the city is expected to assume ownership. The property represented 1.7% of 2017 Hotel Adjusted EBITDA.
  • After year-end, the company sold the Hilton Rotterdam for approximately $62 million and 11 additional hotels for approximately $318 million. These transactions are subsequent events, not 2017 operating results.
  • A February 2018 English court claim against the company, Hilton and others alleged damages exceeding £600 million relating to leases for ten hotels retained by Hilton. The claim had not been served as of March 1, 2018. A related 2016 lease dispute sought specific performance or £113 million in damages; the company expects associated liabilities to be indemnified by Hilton.
  • Key risks include lodging-cycle and market concentration exposure, reliance on Hilton’s brands and management, labor and operating-cost inflation, natural disasters and insurance limits, debt covenants and interest rates, REIT qualification and spin-off tax liabilities, and HNA’s approximately 25% ownership and associated governance rights.

Important facts for investors to verify

  • Separate recurring operating performance from the $2.347 billion REIT-related deferred-tax benefit when assessing GAAP net income and EPS.
  • Review the reconciliation and exclusions underlying Adjusted EBITDA, Hotel Adjusted EBITDA and Adjusted FFO; these non-GAAP measures are not cash flow.
  • Track Caribe Hilton repair, reopening, business-interruption claims and insurance collections, as well as the expected transfer of Hilton Chicago O’Hare after lease expiry.
  • Assess leverage, debt maturities, covenant headroom and the company’s capacity to fund capital improvements and REIT distributions.
  • Monitor the English litigation and the scope and collectability of Hilton’s expected indemnification, along with the post-year-end hotel sale proceeds and portfolio effects.