Park Hotels & Resorts Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited results; amounts are in millions except per-share data. Park is a lodging REIT. On September 18, it completed its acquisition of Chesapeake Lodging Trust, adding 18 hotels with 5,981 rooms. Results include the acquired hotels only from the closing date.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $672 | $652 | $2,034 | $2,051 |
| Operating income | $38 | $84 | $278 | $407 |
| Net income | $9 | $55 | $190 | $422 |
| Net income attributable to stockholders | $5 | $52 | $183 | $418 |
| Diluted EPS | $0.02 | $0.26 | $0.90 | $2.04 |
| Hotel Adjusted EBITDA | $183 | $171 | $573 | $573 |
| Adjusted FFO attributable to stockholders | $140 | $132 | $440 | $456 |
| Adjusted FFO per diluted share | $0.68 | $0.65 | $2.16 | $2.23 |
Q3 operating margin was approximately 5.7%, versus 12.9% a year earlier; nine-month margin was approximately 13.7%, versus 19.8%. The filing reports no standalone gross margin. Comparable-hotel RevPAR rose 1.9% in Q3 and 2.3% year to date, with occupancy of 83.7% in Q3 (flat) and 83.3% year to date (+0.4 percentage points); ADR increased 1.9% in both periods.
Nine-month operating cash flow was $349, up from $295. Investing activities used $855, largely reflecting the Chesapeake acquisition and $182 of capital expenditures, partly offset by disposition proceeds. Financing provided $445, including $850 of term borrowing; dividends paid were $382. Cash and cash equivalents were $321 and restricted cash $43 at quarter-end, compared with $410 and $15 at year-end 2018.
Debt was $4.10 billion at September 30, versus $2.95 billion at December 31, 2018. This includes an $850 five-year term borrowing and approximately $310 of assumed mortgage loans. Park also had a $1 billion undrawn revolving facility. The filing lists $2.41 billion of debt maturities thereafter, assuming available extensions. Operating lease liabilities were $284, with $544 of undiscounted minimum lease payments. The quarterly dividend was $0.45 per share.
Material changes and notable items
- Q3 revenue increased 3.1%, while nine-month revenue declined 0.8%. Comparable hotel performance improved, but portfolio sales and the timing of the Chesapeake acquisition affected comparisons.
- Q3 earnings were substantially lower year over year, including $59 of Chesapeake-related acquisition costs and higher interest expense; the nine-month acquisition-cost total was $65. Prior-year comparisons also included larger gains from hotel and affiliate dispositions: $98 of consolidated hotel sale gains and a $107 affiliate-sale gain in 2018, versus $20 of consolidated hotel sale gains in 2019.
- Chesapeake consideration was approximately $2.0 billion, comprising cash and about 37.8 million Park shares. The purchase-price allocation remained preliminary. Acquired hotels contributed $23 of revenue and $4 of net income from closing through September 30.
- Caribe Hilton reopened on May 15, 2019 after hurricane-related closure. Park recognized $23 of hurricane insurance recoveries year to date and a $7 net loss for amounts not expected to be recovered; the company reported a $5 insurance receivable at quarter-end.
Outlook, risks and contingencies
Management cited 1.9% comparable RevPAR growth in Q3 despite a 3% decline in non-residential fixed business investment. Further RevPAR growth depends on group and transient demand and renovation timing. The filing identifies corporate profitability, consumer confidence, employment, GDP, new hotel supply, and online and short-term lodging competition as relevant factors. It provides no specific numerical earnings or RevPAR guidance.
Management stated available cash, operating cash flow, borrowing capacity and potential securities issuance should cover foreseeable operating and capital needs. It expects higher dividend outflows after issuing shares in the merger and anticipates funding them from acquired-hotel cash flows. Risks include variable-rate debt exposure, hotel renovations and demand conditions, merger integration, and REIT distribution and qualification requirements. The company reported $68 of hotel capital-expenditure commitments, generally cancellable subject to costs incurred and contract discharge costs. Management did not expect pending litigation to materially affect results, financial position or cash flows; two merger-related shareholder suits were closed after dismissal with prejudice as to the named plaintiffs.
Subsequent to quarter-end, Park agreed to sell the Ace Hotel and Theater Downtown Los Angeles for $117 and Hilton São Paulo Morumbi for approximately $125, subject to customary closing adjustments. It also agreed to terminate the Hilton Sheffield ground lease, expected before January 31, 2020.
Key facts for investors to verify
- Whether Chesapeake integration, the preliminary purchase-price allocation and acquired-hotel performance develop as expected.
- Debt levels, variable-rate exposure, covenant headroom, upcoming maturities and liquidity after the acquisition.
- Whether comparable RevPAR growth and acquired-hotel cash flows support operating performance and the increased dividend burden.
- Renovation displacement, the timing and cost of committed capital projects, and hurricane insurance recoveries or remaining losses.
- How much of reported earnings and FFO changes reflects recurring hotel operations versus acquisition costs, asset-sale gains and other adjustments.