Park Hotels & Resorts Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless otherwise noted, figures are in millions of dollars. The company owns premium-branded hotels and resorts and is a REIT. COVID-19 sharply curtailed travel and hotel operations during the quarter.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $42 | $703 | $641 | $1,362 |
| Net income (loss) | $(261) | $84 | $(950) | $181 |
| Net income (loss) attributable to stockholders | $(259) | $82 | $(947) | $178 |
| Diluted EPS | $(1.10) | $0.40 | $(4.01) | $0.88 |
| Hotel Adjusted EBITDA | $(108) | $209 | $(17) | $390 |
| Operating cash flow | Not separately stated | Not separately stated | $(158) | $244 |
- Q2 revenue fell approximately 94% year over year; rooms revenue was $21 versus $434. Management attributed the broad decline primarily to COVID-19, with portfolio acquisitions and dispositions also affecting comparability.
- Six-month operating expenses included $694 of net impairment loss and casualty gain, principally $607 of goodwill impairment and $88 of property impairment. The impairment charges drove much of the reported six-month net loss.
- Investing cash flow was $150 for the first half, including $207 of net proceeds from hotel sales and $56 of capital expenditures. Financing cash flow was $931, reflecting borrowing and note proceeds, partly offset by debt repayments, dividends, and share repurchases.
- At June 30, cash and cash equivalents were $1,274; restricted cash was $35. Total assets were $11,059 and total equity was $5,326. Debt carrying value was $5,118, up from $3,871 at year-end 2019; stated total indebtedness was approximately $5.1 billion.
- Interest expense was $50 in Q2, up from $33, and $90 for the first half, up from $65. The filing does not provide a clear, directly comparable operating margin measure; hotel-level adjusted EBITDA was negative in Q2.
Material changes versus prior comparable periods
- COVID-19 drove steep declines in lodging metrics. Compared with the same month in 2019, pro forma RevPAR fell 97.6% in April, 97.3% in May, and 93.0% in June 2020; occupancy fell 80.9, 79.9, and 78.5 percentage points, respectively.
- By August 5, 37 of 53 consolidated hotels were open, but 30% of rooms at those open hotels were suspended; 16 consolidated hotels remained fully suspended. Among unconsolidated hotels, five of seven were open, with 35% of rooms suspended at those open hotels.
- The company issued $650 of 7.5% senior secured notes due 2025, drew and later partially repaid its revolving facility, and repaid $69 of its 2016 term loan. The Revolver balance was $681 at quarter-end.
- Two hotel dispositions generated $208 of gross proceeds and a $64 gain before the additional currency-translation component included in the reported net gain. A $63 net gain on asset sales was reported for the first half.
Outlook, liquidity, risks, and unusual items
- Management expected COVID-19 to adversely affect results at least through the remainder of 2020 and said meaningful recovery depended on improved traveler confidence, medical advances, easing restrictions, and returning demand. It did not provide earnings or revenue guidance.
- The company deferred approximately $150 of its originally budgeted $200 in 2020 capital expenditures, suspended its dividend after paying $0.45 per share for Q1, and implemented hotel cost reductions. Its credit amendments restrict dividends and repurchases, subject to exceptions including distributions needed to maintain REIT status.
- May 2020 amendments suspended existing financial covenant testing through March 31, 2021, set a monthly minimum liquidity covenant, added collateral and guarantors, and extended Revolver maturity to December 24, 2021. Management expected to comply with financial covenants when testing resumes for the quarter ending June 30, 2021; future compliance remains a risk.
- In a downside scenario assuming all 60 hotels had no room or other revenue from August through December, management estimated average monthly cash burn of approximately $65, comprising $42 at hotel level and $23 at corporate level. It said liquidity was expected to withstand suspension of all hotels for two years, but this estimate excludes capital expenditures and depends on assumptions; actual cash needs could be higher.
- Debt maturities, assuming available extensions, included $1,321 in 2021 and $827 in 2023. The company noted that future financing or refinancing could be difficult or costly. Other risks include renewed hotel closures, weak group and business travel, fixed hotel costs, further impairments, and reduced access to capital.
- Other notable items: the company fully impaired its remaining $607 goodwill balance in Q1; the CARES Act NOL carryback provisions produced an expected $23 tax refund; and the company reported a $7 reserve for an Australian Tax Office-related indemnification claim.
Most important facts for investors to verify
- Actual hotel reopening pace, available room capacity, occupancy, ADR, and RevPAR versus management’s expectations.
- Cash burn, unrestricted liquidity, and compliance with the monthly minimum liquidity covenant and financial covenants when testing resumes.
- Debt maturity and refinancing plans, including the terms and restrictions of secured debt and the Revolver.
- Whether deferred capital spending resumes, is cancelled, or affects property condition and competitiveness.
- Dividend policy, REIT distribution requirements, and any restrictions on future dividends or share repurchases.
- Assumptions and valuation estimates underlying impairment charges, cash runway estimates, and the expected tax refund.