Park Hotels & Resorts Inc. quarterly report, Q2 FY2023

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Park Hotels & Resorts Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Unaudited results; dollar amounts in millions except per-share data. Park owns interests in 45 hotels with more than 29,000 rooms and operates as a REIT.

Financial performance

  • Q2 revenue: $714, up 2.7% from $695 a year earlier. Rooms revenue was $442 versus $433; food and beverage revenue was $178 versus $173.
  • Q2 earnings: Operating loss was $98 versus operating income of $119; net loss attributable to stockholders was $150, or $0.70 per diluted share, versus net income of $150, or $0.66 per share. Results included a $202 impairment charge on a hotel securing the San Francisco mortgage loan.
  • Six-month results: Revenue was $1,362 versus $1,174. Net loss attributable to stockholders was $117 versus net income of $93. The prior-year period included a $92 gain primarily from selling the Hilton San Diego Bayfront joint-venture interests.
  • Hotel Adjusted EBITDA: Q2 was $192 versus $208; six-month total was $344 versus $297. Q2 margin on total revenue was approximately 26.9%, compared with 29.9% in Q2 2022. This non-GAAP measure excludes specified items and is not a substitute for GAAP results or cash flow.
  • FFO: Q2 Nareit FFO attributable to stockholders was $114 ($0.53 diluted share), versus $129 ($0.57). Adjusted FFO was $129 ($0.60 per share), versus $139 ($0.61).
  • Cash flow: Six-month operating cash flow was $250 versus $191. Investing cash flow was negative $20 versus positive $147; financing cash flow was negative $327 versus negative $234. Capital expenditures and land acquisitions totaled $135. Cash and restricted cash ended the period at $842, down from $939 at year-end.
  • Debt and liquidity: Balance-sheet debt was $4,490, down from $4,617 at year-end; total indebtedness was approximately $4.5 billion. Cash and cash equivalents were $797, with $45 restricted cash. The company reported about $946 million of available revolver capacity, including approximately $4 million of standby letters of credit.
  • Capital returns: The company paid $88 in dividends and repurchased approximately 8.8 million shares for $105 during the first half. A $0.15-per-share dividend was declared for each of Q1 and Q2; $225 remained under the $300 repurchase authorization at June 30.

Changes versus the prior comparable period

  • Revenue increased year over year, reflecting stronger demand in markets including Hawaii, New York and Chicago, partly offset by hotel dispositions and the Casa Marina Key West closure for renovations. The company attributed much of the six-month revenue increase to operating improvements, including occupancy gains.
  • Q2 GAAP results shifted from profit to loss, principally because of the $202 impairment associated with the San Francisco loan situation. Excluding specified items, Q2 Hotel Adjusted EBITDA and Adjusted FFO were lower year over year.
  • Operating cash flow rose by $59. Investing cash flow turned negative as capital spending increased and prior-year asset-sale proceeds were not repeated; financing outflows reflected debt repayments, dividends and repurchases.
  • Debt declined following repayment of the $50 revolver balance and an $80 repayment of mortgage debt, including the $75 W Chicago loan. The $725 San Francisco loan remained outstanding and in default.

Outlook, risks and unusual items

  • Management said leisure, group and business-transient demand improved during Q2 and expects positive momentum to continue through the rest of 2023, with international travel demand expected to improve in the second half. The filing provides no specific numeric revenue, earnings or cash-flow guidance.
  • In June, the company stopped debt-service payments on the $725 non-recourse CMBS loan secured by Hilton San Francisco Union Square and Parc 55 San Francisco and received a notice of default. The loan’s default rate rose to 7.11%, with a monthly late-payment administrative fee; lenders may pursue remedies including foreclosure. Management expects the outcome to involve removal of the hotels from the portfolio. Arrears, including interest and fees, were $12 as of August 3, 2023; the company said default interest is non-recourse and it does not intend to fund it.
  • The San Francisco loan is scheduled to mature in November 2023. Management stated that liquidity should cover maturities and other obligations over the next 12 months and beyond, but the loan default and potential property removal are significant uncertainties.
  • Macroeconomic risks cited include inflation, higher interest rates, possible economic slowdown or recession, geopolitical conflicts, travel-demand volatility, labor and operating-cost pressures, and competition. Hotel costs that are relatively fixed could pressure cash flow and margins if demand weakens.
  • The company had approximately $163 of third-party capital-expenditure commitments, including projects at Bonnet Creek, Casa Marina Key West and Hilton Hawaiian Village. Contracts allow some cancellation, subject to incurred and discharge costs.
  • Other unusual items included a $15 gain on the sale of Hilton Miami Airport, a $4 early-termination fee related to Embassy Suites Phoenix Airport, and the $202 impairment. The company also reserved approximately $8 for a contingent indemnification related to Australian tax litigation involving Hilton’s sale of Hilton Sydney.
  • The company reported ordinary-course litigation and spin-off-related claims, but said it believed reserves were adequate and that litigation was not expected to have a material adverse effect overall. It disclosed no material change to previously reported risk factors.

Investor verification priorities

  1. Track negotiations and developments with the San Francisco loan servicer, default charges, potential foreclosure or transfer, and the hotels’ operating contribution and removal timing.
  2. Assess liquidity after considering restricted cash, revolver availability, debt maturities, capital commitments, dividends and planned repurchases.
  3. Compare underlying hotel demand, occupancy, ADR and RevPAR trends with rising labor and other operating costs; the filing provides selected market data but not a clear portfolio-wide RevPAR figure in the supplied text.
  4. Reconcile GAAP losses with Hotel Adjusted EBITDA, FFO and Adjusted FFO, including the impairment and prior-year asset-sale gains.
  5. Monitor renovation spending and the Casa Marina Key West closure, along with litigation and the Australian tax-related indemnification reserve.