Park Hotels & Resorts Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Amounts are in millions of dollars except per-share and hotel operating data. Park owns premium-branded hotels and resorts; at quarter-end its portfolio included interests in 54 hotels with more than 32,000 rooms. Of 46 consolidated hotels, 44 were classified as comparable.
Financial performance and liquidity
- Q2 revenue: $731, down 0.3% from $733 a year earlier. Rooms revenue fell 3.8% to $451; food and beverage revenue rose 2.5% to $205; ancillary hotel revenue increased 20.8% to $58.
- Q2 earnings: Operating income was $149 versus $123; net income was $218 versus $115, and diluted EPS was $1.07 versus $0.52. Results included a $108 gain on the Hilton Berlin affiliate sale and a $7 gain on asset sales. Comparable hotel adjusted EBITDA was $215 versus $193; total Hotel Adjusted EBITDA was $228 versus $213. Hotel Adjusted EBITDA as a share of consolidated hotel revenue was approximately 32%, versus 30% (calculated).
- Six-month results: Revenue was $1,399 versus $1,417; operating income was $323 versus $217; net income was $367 versus $2,465. The prior-year comparison includes a $2,312 income-tax benefit related primarily to the planned REIT election, making reported net income and EPS ($11.79 basic; $11.48 diluted) an unusually high and non-recurring comparison. 2018 diluted EPS was $1.77. Adjusted FFO per diluted share was $1.57 versus $1.45.
- Comparable hotel trends: RevPAR increased 4.3% in Q2 and 2.8% for the first half. Q2 comparable occupancy was 86.1% and ADR was $215.58. Growth reflected stronger group business in several markets; renovation displacement weighed on Southern California, and weaker transient demand affected Washington, D.C. in the first half.
- Cash flow: First-half operating cash flow was $148 versus $274, which management attributed primarily to working-capital timing. Investing provided $467, including $518 net proceeds from hotel sales and $35 of insurance proceeds, partly offset by $86 of capital expenditures. Financing used $555, including $348 for share repurchases and $204 of dividends paid. Cash and cash equivalents were $421 at June 30, plus $17 restricted cash.
- Debt and liquidity: Debt was $2,947 carrying value ($2,958 principal) at June 30, down from $2,961 carrying value at year-end. The company reported $1 billion available under its revolving facility and said existing cash and operating cash flow should meet foreseeable operating and capital needs. Principal maturities, assuming available extensions, include $751 in 2021 and $2,162 thereafter. Approximately $234 of affiliate debt was excluded from consolidated debt and is generally nonrecourse to Park.
- Capital returns: Park repurchased 14 million shares for $348 during the half. It declared regular dividends of $0.43 per share for the March and June record dates and a special $0.45 per-share dividend funded partly by the Hilton Berlin sale; approximately $175 of cash was used for dividends paid in July.
Material changes, outlook, and risks
- Park sold 12 consolidated hotels and its interest in the Hilton Berlin affiliate during the first half, recognizing gains of $96 and $108, respectively. These transactions generated substantial proceeds but reduced the year-over-year operating base. Comparable results exclude the sold hotels.
- The Caribe Hilton remained closed for most of 2018 following Hurricane Maria; the filing also cites hurricane impacts at Florida hotels. At June 30, Park recorded an $80 insurance receivable. It recognized $37 of additional hurricane-related expenses and a $22 additional property loss during the half, offset by a $59 additional insurance receivable. It received another $45 of insurance proceeds in July. Final damage and insurance recoveries remain subject to uncertainty.
- Management described the Q2 U.S. lodging environment as supported by positive macroeconomic conditions, but gave no quantified company guidance. Continued RevPAR growth depends on group and transient demand and renovation timing, as well as economic conditions, hotel supply and competition from online booking and short-term lodging services.
- Other risks include interest-rate and foreign-currency exposure; the term loan bears a floating rate. Foreign exchange exposure to the euro and pound declined following hotel sales, with the Brazilian real the largest remaining net exposure at June 30.
- Park disclosed ordinary-course litigation and lease-related claims connected with Hilton-retained hotels for which it expects indemnification under its agreement with Hilton. A separate claim alleging more than £90 million was voluntarily discontinued in July 2018; another related lease claim continued against nine hotels, with Park stating it expected indemnification. Management did not expect pending matters to materially affect results, financial position or cash flows, while noting outcomes cannot be predicted with certainty.
- Park expects to adopt the new lease accounting standard effective January 1, 2019 and was evaluating the impact, including recognition of right-of-use assets and lease liabilities. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- How comparable RevPAR and Hotel Adjusted EBITDA perform after accounting for sold properties, renovation impacts and the Caribe Hilton’s expected reopening.
- The amount and timing of final hurricane insurance recoveries, including the $80 receivable at quarter-end and the $45 received in July.
- Cash available after July dividends, share repurchases and capital expenditures, and the company’s ability to manage the large 2021 and later debt maturities.
- The recurring operating contribution underlying reported earnings, separating hotel operations from asset-sale gains and the prior-year REIT-related tax benefit.
- Developments in the ongoing lease litigation, indemnification coverage, and any remaining exposure to Park.