Park Hotels & Resorts Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative figures are for Q1 2016. Amounts are in millions except per-share data and operating statistics. Park became an independent public company following Hilton’s spin-off on January 3, 2017, and intends to qualify as a REIT beginning January 4, 2017. Its portfolio comprised 67 hotels, including 58 consolidated and nine unconsolidated hotels.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $684 | $661 |
| Operating income | $94 | $80 |
| Net income attributable to stockholders | $2,350 | $22 |
| Reported diluted EPS | $11.02 | $0.11 |
| Operating cash flow | $141 | $95 |
| Capital expenditures | $37 | $65 |
| Hotel Adjusted EBITDA | $179 | $182 |
| Hotel Adjusted EBITDA margin | 26.3% | 27.7% |
| Comparable hotel RevPAR | $156.34; up 1.4% | $154.23 |
Revenue increased 3.5%. Comparable hotel revenue rose 3.8%, while comparable Hotel Adjusted EBITDA fell 3.5% to $165 and its margin declined 200 basis points to 25.9%. Adjusted FFO was $138, or $0.64 per diluted share, versus $113, or $0.57, in Q1 2016.
Q1 2017 net income and EPS were heavily affected by a $2.3 billion income tax benefit from derecognizing deferred tax liabilities after the company declared its intent to elect REIT status. This noncash tax benefit is not representative of hotel operating performance; the company reported $7 million of tax expense from foreign REIT operations and taxable REIT subsidiaries, offset within the reported tax benefit.
Liquidity, debt and distributions
- At March 31, cash and cash equivalents were $318; restricted cash was $18, for total cash including restricted cash of $336. Cash declined $19 during the quarter.
- Operating cash flow was $141; investing cash outflow was $37 and financing cash outflow was $124. Financing outflows included $110 of cash dividends.
- Reported debt carrying value was $3,012, with gross debt and capital lease obligations of $3,026 before $14 of unamortized financing costs and discount. The company also reported a $1 billion revolving credit facility with no borrowings outstanding.
- Debt included $2.0 billion of CMBS loans, a $750 term loan, $207 of mortgage loans and $55 of unsecured notes due December 2017. The term loan matures in December 2021; CMBS maturities are in 2023 and 2026.
- The company declared a regular quarterly dividend of $0.43 per share, payable April 17, 2017, and listed another $0.43 dividend payable July 17. It is required, as a REIT, to distribute at least 90% of REIT taxable income, subject to operating and debt-service requirements.
Changes, outlook and risks
- Comparable RevPAR rose 1.4% overall: domestic RevPAR increased 1.7%, while international RevPAR decreased 5.3%, principally because of lower Brazil contract revenue. Washington, D.C., Chicago and Hawaii were among the stronger markets; Northern and Southern California experienced declines.
- Management fees increased to $34 from $26 following new post-spin management agreements. Management attributed lower comparable hotel margins primarily to new management and other agreements. The new HGV services agreement at Hilton Hawaiian Village increased other hotel revenue and related expenses.
- Interest expense declined to $30 from $46, reflecting changes in the debt portfolio, including repayment of a prior CMBS loan and new CMBS and term-loan financing. The company had $54 of outstanding hotel capital-expenditure commitments, with contractual cancellation provisions.
- Management stated existing cash and operating cash flows should meet anticipated operating, debt-service and capital needs for the foreseeable future. No quantified earnings or operating guidance was provided. REIT qualification depends on ongoing income, asset, distribution and ownership tests; required distributions could require use of reserves, asset sales or additional borrowing.
- Other considerations include interest-rate and foreign-currency exposure, ordinary-course litigation, and limited near-term support from Hilton under transition-services arrangements. Management said pending litigation was not expected to have a material effect, while noting an adverse outcome could affect results in a particular period. No material change to previously disclosed risk factors was reported.
- In April, the company entered into contracts to buy one parcel adjacent to Hilton Hawaiian Village for $10 and an option to buy two additional parcels for $15. These remain subject to due diligence and cancellation rights.
Important facts for investors to verify
- Separate recurring hotel performance from the one-time $2.3 billion deferred-tax-liability reversal; review Adjusted FFO and hotel-level results alongside GAAP net income.
- Assess whether new management and HGV agreements continue to pressure hotel margins, and monitor comparable RevPAR by market, particularly international operations and Brazil.
- Confirm REIT election and ongoing qualification, distribution requirements, and the cash impact of regular dividends and any other distributions.
- Review liquidity and refinancing needs, especially the $55 unsecured notes due in December 2017, capital commitments and the terms of the credit facility.
- Account for the spin-off and carve-out basis: prior-period allocations and historical expenses may not be comparable with costs as a standalone company, and the 2016 portfolio included two hotels not retained after the spin-off.