Park Hotels & Resorts Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Park owns interests in 67 premium-branded hotels and resorts with more than 35,000 rooms. Hilton completed the company’s spin-off on January 3, 2017, making Park an independent, publicly traded hotel REIT. The 2016 comparative statements are historical carve-out results and may not reflect the costs or arrangements Park would have had as a standalone company. Park intends to qualify as a REIT for 2017.
Financial and operating performance
- Revenue: Q3 total revenue was $688 million, up 2.5% from $671 million; nine-month revenue was $2.105 billion, up 2.3% from $2.057 billion. Q3 room revenue was flat at $460 million; food and beverage revenue rose to $160 million from $156 million, and other revenue increased to $68 million from $55 million.
- Profit: Q3 operating income was $89 million versus $110 million. Net income attributable to stockholders was $103 million versus $34 million. Nine-month attributable net income was $2.565 billion versus $116 million, driven primarily by a $2.360 billion deferred-tax benefit from derecognizing tax liabilities in connection with Park’s intended REIT status—not by hotel operating performance. Q3 diluted EPS was $0.48; nine-month diluted EPS was $11.94.
- Hotel operations: Q3 Hotel Adjusted EBITDA was $182 million, down 9.5%; margin fell to 26.6% from 30.1%. Comparable Hotel Adjusted EBITDA declined 8.0% to $172 million, with margin down to 27.0% from 30.5%. Comparable RevPAR decreased 0.1% in Q3 and rose 0.4% for the first nine months.
- Cash flow: Nine-month operating cash flow was $458 million, compared with $294 million; capital expenditures were $125 million versus $170 million. Financing activities used $315 million, including $294 million of dividends paid. Cash and cash equivalents ended at $357 million, with an additional $20 million of restricted cash.
- Debt and liquidity: Debt had a $3.015 billion carrying amount ($3.027 billion principal) at September 30, versus $3.012 billion carrying amount at year-end. Park had $1 billion available under its revolving credit facility and no revolver borrowings. A $55 million unsecured note was due in December 2017. Management stated that cash and operating cash flow should meet foreseeable operating and capital needs.
- Dividends: Regular quarterly dividends declared in 2017 were $0.43 per share; Q3 dividend was paid October 16. Park must distribute at least 90% of REIT taxable income to maintain REIT status.
Material changes and management commentary
- Q3 revenue growth did not translate into stronger hotel-level earnings: Hotel Adjusted EBITDA fell as costs and management fees increased. Management attributed comparable margin compression mainly to new management and other agreements entered into with the Hilton spin-off. Comparable management fees rose 60% in Q3; property-level and departmental costs also increased.
- Interest expense declined to $32 million in Q3 from $49 million and to $93 million for nine months from $141 million, reflecting debt refinancing in connection with the spin-off.
- Performance varied by market. Q3 RevPAR declined in New York (7.8%), Chicago (5.9%), New Orleans (3.6%) and Florida (1.3%); Northern California and Hawaii improved. Management cited weak group demand, renovations and hurricane effects among the factors.
- Hurricanes Irma and Maria damaged or disrupted Florida and Puerto Rico properties. The Puerto Rico hotel remained closed. Park had recognized $2 million of hurricane losses and estimated another $15 million–$20 million of losses, including deductibles and uninsured costs. Insurance recovery gains, including business-interruption proceeds, would not be recognized until contingencies were resolved.
- Park had approximately $99 million of outstanding hotel capital-expenditure contract commitments; contracts allow some or all work to be canceled, subject to costs incurred and cancellation-related costs.
- No specific financial guidance was provided. Park said its Puerto Rico hotel would continue to experience business interruption through year-end 2017, and treated its results as non-comparable. Park expects to adopt the new revenue recognition standard in 2018 and did not anticipate a material retained-earnings adjustment.
Risks, contingencies and other items
- REIT qualification depends on meeting continuing tests for income, asset composition, distributions and ownership. Required distributions could require use of cash reserves, asset sales or additional borrowing if operating cash is insufficient.
- Park is exposed to interest-rate and foreign-currency risks; it said exposure had not materially changed from its 2016 Form 10-K. Litigation arises in the ordinary course; management did not expect pending matters to have a material overall effect, while noting an unfavorable outcome could affect a particular period.
- Management concluded disclosure controls were effective as of September 30, 2017; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Underlying hotel earnings and margins excluding the one-time REIT-related deferred-tax benefit; the nine-month GAAP profit and EPS are not representative of recurring operating performance.
- Whether new management and spin-off-related agreements continue to weigh on margins, and how hotel costs compare with revenue growth.
- Final hurricane repair, business-interruption and insurance-recovery amounts, and the timing of the Puerto Rico hotel’s reopening.
- Liquidity after dividends, capital expenditures, the December 2017 note repayment and REIT distribution requirements; also review debt maturities and covenant terms.
- Comparability limitations from the January 2017 spin-off, carve-out historical statements, hotel exclusions and renovation-related disruptions.