Park Hotels & Resorts Inc. — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed February 27, 2020. The filing also reports unaudited fourth-quarter results. Park is a lodging REIT; it completed its Chesapeake Lodging Trust merger on September 18, 2019. Its portfolio comprised 60 hotels and 33,225 rooms as of February 27, 2020, with more than 86% of rooms in luxury or upper-upscale properties.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $2.844 billion | $2.737 billion |
| Operating income | $426 million | $504 million |
| Net income | $316 million | $477 million |
| Net income attributable to stockholders | $306 million | $472 million |
| Diluted EPS | $1.44 | $2.31 |
| Hotel Adjusted EBITDA (non-GAAP) | $802 million | $761 million |
| Adjusted FFO attributable to stockholders (non-GAAP) | $613 million | $603 million |
| Adjusted FFO per diluted share (non-GAAP) | $2.88 | $2.96 |
| Net cash provided by operating activities | $499 million | $444 million |
| Capital expenditures | $240 million | $178 million |
Annual operating margin was approximately 15.0%, down from 18.4%; net margin was approximately 11.1%, versus 17.4%. These GAAP margins were affected by transaction and other nonrecurring items. Comparable-hotel RevPAR rose 2.0% to $183.46, occupancy increased to 82.7% from 82.2%, and ADR rose to $221.90 from $219.01.
Fourth quarter: Revenue was $810 million, operating income $148 million, net income $126 million, net income attributable to stockholders $123 million, and diluted EPS $0.51. The comparable quarter of 2018 reported $686 million, $97 million, $55 million, $54 million, and $0.27, respectively. Merger-related portfolio changes affect comparability.
At year-end, cash and cash equivalents were $346 million and restricted cash $40 million; $1 billion remained available under the revolver. Debt was $3.871 billion, including debt assumed in the merger; the filing also reports approximately $225 million as Park’s share of affiliate debt, excluded from that balance. Debt carried a weighted-average rate of 3.9%, with approximately 64% fixed rate. The company reported $4.638 billion in scheduled debt payments, including estimated interest, over the contractual-obligations periods; $173 million was due within one year. Operating cash flow less reported capital expenditures was approximately $259 million, before dividends and other cash needs.
Changes and significant events
- Revenue increased 3.9% year over year, but operating income fell 15.5%, net income fell 33.8%, and diluted EPS declined. Hotel Adjusted EBITDA increased 5.4%; Adjusted FFO increased 1.7%, while Adjusted FFO per share decreased 2.7%.
- Comparable RevPAR growth reflected stronger group and contract business, partly offset by weaker transient revenue. Results also reflected the reopening of Caribe Hilton in May 2019 after hurricane-related closure, acquisitions, dispositions, and renovation-related disruption.
- The Chesapeake merger added 18 hotels, two of which Park sold in December. Merger consideration was approximately $2.0 billion, including about $1.013 billion cash and 37.8 million shares. Merger-related acquisition costs were $70 million. The purchase-price allocation remained preliminary at filing.
- Park sold seven consolidated hotels in 2019 for gross proceeds of $436 million and recorded a $19 million net gain. The Conrad Dublin interest sale generated a $44 million gain. Proceeds from the 2019 hotel and affiliate sales helped repay $230 million of debt.
- Hurricane-related insurance recoveries included $70 million recognized in 2019. The company recorded an $18 million net casualty gain, while a $9 million loss related to damage it might not recover from insurers. The Caribe Hilton insurance claims were settled in December 2019.
- Dividends declared were $1.90 per share for 2019, including a fourth-quarter dividend of $0.55. Cash dividends paid totaled $494 million. No shares were repurchased under the $300 million authorization.
Outlook, risks and contingencies
Management reported 2.0% comparable RevPAR growth for 2019 and said 2020 performance would depend on group and transient demand, renovation timing, macroeconomic conditions, supply growth, and online and short-term lodging competition. The filing warns that the 2019 Novel Coronavirus outbreak could negatively affect 2020 RevPAR, but its impact was not yet known. No specific quantitative 2020 earnings or RevPAR guidance is provided in the filing text.
- Key exposures include lodging-cycle volatility, seasonality, concentrated markets, labor and operating-cost pressures, reliance on third-party managers and hotel brands, competition from online intermediaries and alternative lodging, natural disasters, and cybersecurity and privacy risks.
- Debt, variable interest rates, refinancing needs, restrictive covenants, and the transition away from LIBOR present financing risks. About $1.4 billion of debt was LIBOR-indexed at year-end.
- REIT qualification and tax matters pose potential risks, including possible tax liabilities related to the 2017 spin-off and built-in gains. The company also reserved approximately $7 million for ongoing indemnification-related claims concerning an Australian tax audit.
- Park disclosed approximately $43 million of construction contract commitments for capital expenditures. It reported ordinary-course litigation and believed reserves were adequate; management did not expect the matters to have a material adverse effect, while noting an unfavorable resolution could affect a particular period.
- Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Confirm the final Chesapeake purchase-price allocation, integration progress, and realized synergies against the preliminary accounting and management’s stated expectations.
- Assess the effect of COVID-19 and renovation schedules on subsequent RevPAR, cash flow, hotel valuations, and liquidity; this filing does not quantify the outbreak’s impact.
- Review debt maturities, covenant headroom, floating-rate exposure, LIBOR transition provisions, and whether the $1 billion revolver availability remains current.
- Reconcile GAAP earnings with Hotel Adjusted EBITDA and Adjusted FFO, including the $70 million merger costs, insurance gains, asset-sale gains, and dilution from shares issued in the merger.
- Verify subsequent sales disclosed in the filing: Hilton São Paulo Morumbi for approximately $118 million and Embassy Suites Washington DC Georgetown for approximately $90 million, and determine how proceeds were used.