Park Hotels & Resorts Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Park owns interests in 67 hotels with more than 35,000 rooms; 58 hotels were consolidated. It became an independent, publicly traded company in January 2017 following its spin-off from Hilton and intends to qualify as a REIT beginning January 4, 2017. The 2016 comparisons are historical carve-out results and may not reflect standalone costs or the post-spin management agreements.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $733 million | $725 million | $1.417 billion | $1.386 billion |
| Operating income | $123 million | $142 million | $217 million | $222 million |
| Net income attributable to stockholders | $112 million | $60 million | $2.462 billion | $82 million |
| Hotel Adjusted EBITDA | $212 million | $232 million | $391 million | $414 million |
| Hotel Adjusted EBITDA margin | 29.1% | 32.1% | 27.7% | 30.0% |
| Adjusted FFO attributable to stockholders | $173 million | $138 million | $311 million | $251 million |
| Adjusted FFO per diluted share | $0.81 | $0.70 | $1.45 | $1.28 |
- The six-month net income and reported EPS ($11.79 basic; $11.48 diluted) were dominated by a $2.312 billion income tax benefit from derecognizing deferred tax liabilities after the company announced its intention to elect REIT status. The corresponding Q2 tax benefit was $24 million. These items are not representative of recurring hotel operations.
- Comparable RevPAR was down 0.2% in Q2 and up 0.5% for the first half. Q2 comparable hotel revenue rose 1.3%, while comparable Hotel Adjusted EBITDA fell 9.5%; the comparable margin contracted 340 basis points to 29.2%.
- Rooms revenue was broadly flat. Other hotel revenue increased, partly reflecting a new services agreement with Hilton Grand Vacations (HGV); related HGV service revenue was accompanied by increased related expenses. Management fees rose 56% in Q2, primarily due to new post-spin management agreements.
Cash, debt and liquidity
- Cash and cash equivalents were $306 million at June 30; restricted cash was $18 million, making total cash including restricted cash $324 million. Operating cash flow was $274 million for the first half, versus $219 million a year earlier.
- First-half capital expenditures were $86 million, compared with $128 million in 2016. Investing cash outflow was $86 million; financing cash outflow was $220 million, including $202 million of dividends paid. Cash declined $31 million from year-end.
- Debt carrying value was $3.014 billion; principal, including capital leases and before financing-cost discounts, was $3.027 billion. Debt included $2.0 billion of CMBS loans, a $750 million term loan, $207 million of mortgage loans and $55 million of unsecured notes. The $1 billion revolving facility was undrawn. The $55 million notes mature in 2017; the term loan matures in 2021.
- Stockholders’ equity was $6.049 billion. The company declared regular quarterly dividends of $0.43 per share for each of the first three 2017 quarters. As a REIT, it generally must distribute at least 90% of REIT taxable income, subject to qualification rules and other requirements.
Outlook, commentary and risks
- Management stated that available cash and operating cash flow should meet anticipated operating needs and capital expenditures for the foreseeable future. The filing provides no quantified full-year earnings or operating guidance.
- Management attributed Q2 RevPAR weakness to Northern California, where Moscone Convention Center renovations affected demand, and fewer citywide events in New Orleans. Florida and Hawaii growth partly offset these declines. First-half domestic RevPAR increased 0.7%; international RevPAR declined 1.3%.
- The company had approximately $83 million of outstanding hotel capital-expenditure contract commitments, with cancellation costs possible. Management did not expect pending or threatened litigation to materially affect results, financial position or cash flows, but noted that an unfavorable outcome could affect a particular period.
- REIT qualification depends on continuing to meet income, asset, distribution and ownership tests. The company cautioned that required distributions could, in some circumstances, require use of cash reserves, asset sales or additional borrowing. It also faces interest-rate and foreign-exchange risks.
- Management reported effective disclosure controls as of June 30, 2017 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the reported earnings change is attributable to the nonrecurring REIT-related tax benefit, versus recurring operating performance; review Adjusted FFO and its reconciliation.
- Whether post-spin management and HGV agreements continue to pressure hotel margins, and how those costs compare with any associated revenue.
- Trends in comparable RevPAR, particularly Northern California, New Orleans and international markets, and the impact of renovations and event timing.
- Debt terms, maturity and refinancing exposure, the availability of the revolving facility, and liquidity after dividends and committed capital spending.
- Ongoing REIT qualification and distribution requirements, including whether operating cash flow supports required distributions and planned hotel investment.