Park Hotels & Resorts Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in millions of dollars except per-share and operating statistics. Park owns premium-branded hotels and resorts and is taxed as a REIT. At quarter-end, its portfolio included interests in 54 hotels with more than 32,000 rooms; 46 hotels were consolidated.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $652 | $688 | $2,051 | $2,105 |
| Operating income | $84 | $89 | $407 | $306 |
| Net income | $55 | $105 | $422 | $2,570 |
| Net income attributable to stockholders | $52 | $103 | $418 | $2,565 |
| Diluted EPS | $0.26 | $0.48 | $2.04 | $11.94 |
| Hotel Adjusted EBITDA | $171 | $183 | $573 | $576 |
| Adjusted FFO per diluted share | $0.65 | $0.66 | $2.23 | $2.11 |
- Comparable-hotel RevPAR rose 2.6% in Q3 and 2.7% for the nine-month period. Q3 comparable occupancy was 83.8%, versus 83.6%; ADR was $209.19, versus $204.45.
- Q3 revenue declined 5.2% year over year, while nine-month revenue declined 2.6%. Lower revenue largely reflected 2018 hotel sales and the closure of the Caribe Hilton after Hurricane Maria. Q3 comparable rooms revenue increased 2.0%; total reported rooms revenue fell 6.7%.
- Q3 Hotel Adjusted EBITDA declined to $171 from $183, partly because the prior-year comparison included properties sold in 2018 and the Caribe Hilton. Comparable Hotel Adjusted EBITDA increased to $166 from $162.
- Nine-month earnings comparisons are heavily affected by unusual items: 2017 included a $2,344 income tax benefit, primarily from derecognition of deferred tax liabilities following the REIT election. 2018 included $98 of gains on consolidated hotel sales and a $107 gain on the Hilton Berlin investment sale. Adjusted FFO provides a more comparable view of ongoing performance.
Cash, debt and capital allocation
- Cash and cash equivalents were $399 at September 30, 2018; restricted cash was $16, for total cash and restricted cash of $415. The company reported a $1 billion revolving credit facility with no borrowings outstanding.
- Debt carrying value was $2,948, down from $2,961 at December 31, 2017. Debt includes $725 of San Francisco CMBS, $1,275 of Hilton Hawaiian Village CMBS, $750 of term loans and $207 of mortgage loans. The term loan and revolver mature in December 2021; major CMBS maturities are in 2023 and 2026.
- For the first nine months, operating cash flow was $295, versus $458 in 2017; investing cash flow was positive $473, versus negative $125; financing cash flow was negative $730, versus negative $308. Operating cash flow fell primarily due to working-capital timing and increased taxes paid.
- Investing inflows included $369 net proceeds from consolidated asset dispositions, $150 net proceeds from the sale of investments in affiliates, and $87 of insurance proceeds for property damage. Capital expenditures were $133.
- Financing outflows included $379 of dividends and $348 to repurchase 14 million shares. The company paid a $0.45-per-share special dividend following the Hilton Berlin sale, in addition to regular quarterly dividends of $0.43 per share.
- Total equity was $5,728 at quarter-end, versus $5,962 at year-end 2017. Total assets were $9,355, versus $9,714.
Outlook, risks and notable items
- Management described the U.S. lodging backdrop as positive, citing economic growth and business investment, but said remaining-2018 RevPAR growth depended on group and transient demand and renovation timing. It also identified consumer confidence, employment, GDP, new supply and online/short-term lodging competition as factors affecting performance.
- Management expected a fourth-quarter 2018 dividend of $0.95 to $1.05 per share, subject to Board approval. It said $0.65 to $0.75 represented the regular fourth-quarter payment based on estimated 2018 results, with the remaining $0.30 attributable to 2018 asset-sale gains.
- The Caribe Hilton was expected to remain closed for the rest of 2018 following Hurricane Maria. The company recorded hurricane-related losses and recognized insurance receivables; as of September 30, an insurance receivable of $23 remained. The ultimate damage and insurance recoveries could change, and insurance gains are not recognized until contingencies are resolved.
- In 2018, the company sold 12 consolidated hotels and its 40% interest in the Hilton Berlin venture. These transactions generated substantial gains and reduced its UK and European currency exposure.
- Approximately $31 of capital expenditure commitments remained under third-party contracts, which are cancellable subject to incurred costs and contract-discharge costs.
- Litigation includes a continuing UK claim concerning lease-related work at nine hotels retained by Hilton. Park stated that related liabilities are expected to be indemnified by Hilton under the spin-off agreement. A separate claim was voluntarily discontinued without prejudice; fees and costs were being pursued.
- The company expected to adopt the new lease accounting standard on January 1, 2019, anticipating recognition of right-of-use assets and corresponding lease liabilities. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and cash generation reflects recurring hotel operations versus hotel sales, the Berlin investment sale, insurance recoveries and tax items.
- Whether comparable RevPAR and Hotel Adjusted EBITDA trends persist, particularly given weaker Florida performance, renovation effects and the Caribe Hilton closure.
- The timing and amount of insurance recoveries for hurricane damage, remaining repair costs and the Caribe Hilton’s reopening and operating recovery.
- The final Board-approved fourth-quarter dividend and the company’s cash needs after dividends, repurchases, capital expenditures and required REIT distributions.
- Debt maturities, interest-rate exposure and liquidity available under the revolving facility; the filing reports no revolver borrowings but does not provide a detailed covenant headroom calculation in the supplied text.
- Developments in the UK lease litigation and confirmation of Hilton’s indemnification obligations.