Hilton Worldwide Holdings Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Hilton operated or franchised 6,162 hotels and resorts with 977,939 rooms across 118 countries and territories. The quarter was materially affected by the COVID-19 pandemic.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1.920 billion | $2.204 billion | Down 12.9% |
| Operating income | $68 million | $312 million | Down 78.2% |
| Net income attributable to Hilton stockholders | $18 million | $158 million | Down 88.6% |
| Diluted EPS | $0.06 | $0.54 | Down $0.48 |
| Adjusted EBITDA | $363 million | $499 million | Down 27.3% |
| Operating cash flow | $129 million | $364 million | Down 64.6% |
| Capital expenditures for property and equipment | $12 million | $23 million | Down $11 million |
Operating income included $112 million of impairment losses, primarily associated with leased hotel properties. Net income also reflected a $35 million income tax benefit, versus $59 million of tax expense in Q1 2019. Total revenue includes reimbursements from managed and franchised properties, with corresponding expenses.
Hotel operating trends
Comparable system-wide RevPAR fell 22.6%, as occupancy declined 14.3 percentage points to 56.0% and ADR fell 3.0% to $135.90. Asia Pacific RevPAR declined 44.1%; U.S. RevPAR declined 21.1%. The pandemic’s effects became especially pronounced outside Asia in March.
- Franchise and licensing fees declined 11.3%; base and other management fees declined 25.0%; incentive management fees declined 58.2%.
- Owned and leased hotel revenue declined 32.7% to $210 million.
- Approximately 730 properties had suspended operations as of March 31. By May 4, approximately 950 hotels, or 16% of Hilton’s global properties, were experiencing suspensions; approximately 210 previously suspended hotels had reopened.
Financial position and liquidity
- Cash and cash equivalents were $1.734 billion; restricted cash was $71 million. Combined cash, restricted cash and cash equivalents were $1.805 billion at March 31, up from $630 million at year-end 2019.
- Total debt, excluding unamortized financing costs and discounts, was approximately $9.6 billion, versus $8.1 billion at December 31, 2019. Hilton drew $1.69 billion on its revolving facility in March as a precautionary measure. No material debt maturities were due before June 2024.
- Current assets were $3.149 billion and current liabilities were $2.220 billion. Total liabilities were $16.692 billion; total stockholders’ deficit was $904 million.
- Cash provided by operations was $129 million; investing activities used $47 million; financing activities provided $1.100 billion, largely reflecting revolving-credit borrowings.
- In April, Hilton issued $1.0 billion of senior notes: $500 million at 5.375% due 2025 and $500 million at 5.750% due 2028. It also received $1.0 billion from a Hilton Honors points pre-sale to American Express. Management stated that, after giving effect to these transactions, cash, restricted cash and cash equivalents would have been approximately $3.8 billion.
Changes, outlook and risks
- Management said it could not estimate the pandemic’s full financial impact because it depended on its severity and duration, and expected significant adverse effects to continue. No specific earnings or revenue guidance was provided.
- Hilton temporarily suspended dividends and share repurchases to preserve liquidity. It repurchased 2.6 million shares for $279 million during the quarter, with no purchases after March 5; the dividend of $0.15 per share shown for the quarter had already been declared. The board authorization remained in place.
- Management implemented cost controls, including payroll reductions and furloughs, halting marketing programs and reducing non-essential spending and capital expenditures. It said liquidity should cover anticipated requirements for up to 24 months even if very low occupancy persisted, based on available sources and the April transactions.
- Management reported early recovery signs in China: occupancy was approximately 40% as of May 4, compared with approximately 9% in early February, and nearly all of the approximately 150 previously suspended hotels there had reopened.
- Key risks include prolonged weak travel demand, further hotel suspensions, financial distress or nonpayment by third-party owners, delays or cancellations in the development pipeline, access to and cost of financing, and potential effects of cost reductions on staffing and service. Credit ratings had been downgraded or placed on credit watch. Additional risks include possible leased-property impairments and labor, tax and litigation exposures.
- Other notable items: Hilton recorded $112 million of impairments; revised expected Hilton Honors point redemption timing, reclassifying $221 million of loyalty liabilities and $50 million of deferred revenue from current to long-term; and adopted the expected-credit-loss accounting standard with a $10 million cumulative adjustment to accumulated deficit.
Most important facts for investors to verify
- Whether hotel reopenings and occupancy recovery continued after the May 4 update, and whether demand and pricing returned toward prior levels.
- Actual cash, restricted cash, debt and liquidity after the April notes issuance and Honors points pre-sale, including the terms and uses of proceeds.
- Whether operating cash flow, impairment charges and third-party owner collections changed materially in subsequent periods.
- Whether dividends or share repurchases resumed, and how capital allocation compares with liquidity and debt obligations.
- Potential exposure under hotel performance guarantees, loan guarantees, tax disputes and other contingencies; the filing cites approximately $19 million of possible performance-guarantee outlays and $30 million of guaranteed hotel loans.