Park Hotels & Resorts Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in millions of dollars except per-share data. Park is a lodging REIT with interests in 48 hotels and resorts; 39 consolidated hotels were included in its comparable-hotel set.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $703 | $731 | $1,362 | $1,399 |
| Operating income | $111 | $149 | $240 | $323 |
| Net income attributable to stockholders | $82 | $216 | $178 | $366 |
| Diluted EPS | $0.40 | $1.07 | $0.88 | $1.77 |
| Hotel Adjusted EBITDA | $209 | $228 | $390 | $402 |
| Adjusted FFO per diluted share | $0.81 | $0.93 | $1.49 | $1.57 |
- Revenue and profitability: Q2 revenue declined 3.8% year over year; operating income fell to $111 million. Q2 reported net income and EPS were sharply lower, in part because prior-year results included a $108 million gain on the sale of an unconsolidated investment and a $7 million asset-sale gain, versus a $12 million asset-sale loss in Q2 2019. Six-month 2018 results likewise benefited from those gains and $96 million of gains on hotel sales.
- Comparable hotel trends: Comparable RevPAR rose 0.8% in Q2 and 2.5% for the first half. Q2 comparable Hotel Adjusted EBITDA was $208 million versus $212 million; first-half comparable Hotel Adjusted EBITDA increased to $384 million from $374 million. The reported total Hotel Adjusted EBITDA decline partly reflects fewer non-comparable hotels after dispositions.
- Cash flow: First-half operating cash flow was $244 million, up from $148 million, primarily due to timing of customer receipts/vendor payments and $28 million less in income-tax payments. Investing cash flow was $111 million, down from $467 million, reflecting lower disposition and affiliate-sale proceeds and higher capital spending. Financing cash outflow was $300 million versus $555 million, with the prior period including $348 million of share repurchases.
- Capital spending and distributions: First-half property capital expenditures were $120 million versus $86 million. Dividends paid were $291 million versus $204 million. The company declared quarterly dividends of $0.45 per share, including a September-quarter dividend payable October 15, 2019.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $310 million and restricted cash was $170 million; total cash including restricted cash was $480 million. Restricted cash included $154 million held for a like-kind exchange. Debt was $2.949 billion, broadly unchanged from year-end, and the $1 billion revolving facility was undrawn. Operating lease liabilities were $200 million. The company said available cash, operating cash flow and borrowing capacity should cover foreseeable operating and capital needs.
- Debt profile: Debt included $2.0 billion of CMBS loans, a $750 million term loan and $207 million of mortgage debt. Contractual maturities, assuming available extensions, include $751 million in 2021 and $728 million in 2023. The company had also secured a $1.1 billion delayed-draw term-loan commitment for the proposed Chesapeake transaction; no amount had been drawn as of June 30.
Material changes and unusual items
- Park sold five consolidated hotels in the first half for gross proceeds of $235 million and recognized a $19 million net gain. Q2 sales of three hotels generated an aggregate sale price of $166 million. Dispositions reduced non-comparable revenue and expenses, affecting year-over-year comparisons.
- Park adopted the new lease accounting standard on January 1, 2019, recording $213 million of operating lease right-of-use assets and liabilities at adoption. It recorded an $8 million cumulative-effect impairment to retained earnings; June 30 balances were $207 million of right-of-use assets and $200 million of lease liabilities.
- Caribe Hilton reopened on May 15, 2019 after hurricane-related closure. At June 30, an insurance receivable of $22 million remained; the company said insurance recoveries could change and gains would not be recognized until contingencies were resolved.
- Corporate general and administrative expense rose to $22 million in Q2 from $15 million, including $7 million of merger-related transaction costs.
Outlook, transaction, and risks
- Management reported comparable RevPAR growth of 0.8% in Q2 and 2.5% for the first half, but gave no specific full-year financial guidance in the provided filing text. It said the remainder-of-2019 outlook depends on group and transient demand, renovation timing, economic conditions, supply growth, and competition from online booking and short-term lodging services.
- Park agreed to acquire Chesapeake Lodging Trust for $11.00 cash plus 0.628 Park share per Chesapeake share, subject to customary conditions and Chesapeake shareholder approval scheduled for September 10, 2019. Closing was expected in mid-to-late September. Park planned to fund the cash component and related obligations with hotel-sale proceeds, cash, and potentially the $1.1 billion financing commitment.
- Park estimated pro forma consolidated debt of approximately $4 billion after the merger, including assumed or refinanced Chesapeake debt. Risks include transaction completion and financing, higher leverage and interest costs, integration and synergy execution, potential asset-sale delays, and possible changes to dividends. The merger’s fixed exchange ratio means the market value of consideration can fluctuate with Park’s share price.
- Two purported shareholder class actions challenge merger disclosures; Park said it considers the claims without merit and intends to defend them. The company also disclosed approximately $75 million of hotel capital-expenditure commitments and ordinary-course litigation, which it did not expect to have a material overall effect.
Important facts for investors to verify
- Whether Chesapeake shareholder approval, other closing conditions, and the expected merger timetable were achieved, and the final funding mix and pro forma debt.
- Comparable RevPAR, hotel-level operating costs, and renovation timing as the year progresses, including market-level weakness noted in Chicago, New York, and New Orleans.
- Cash available for the merger and capital spending after accounting for restricted cash, dividends, debt maturities, and the company’s $75 million of capital commitments.
- Progress and final recoveries on hurricane-related insurance claims, and any material outcome from merger litigation or other contingencies.
- The sustainability of dividends and leverage following the proposed acquisition; the filing notes future distributions remain at the board’s discretion.