UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission File Number 001-37795

 

Park Hotels & Resorts Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

36-2058176

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1600 Tysons Boulevard, Suite 1000

McLean, VA 22102

(Address of principal executive offices, including zip code)

(703) 584-7979

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

The number of shares of common stock outstanding on April 28, 2017 was 214,768,394.

 

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Page

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

2

 

Condensed Combined Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

 

2

 

Condensed Combined Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016

 

3

 

Condensed Combined Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

 

4

 

Condensed Combined Consolidated Statements of Equity for the Three Months Ended March 31, 2017 and 2016

 

5

 

Notes to Condensed Combined Consolidated Financial Statements

 

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4.

Controls and Procedures

 

26

 

 

 

 

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

27

Item 1A.

Risk Factors

 

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

Item 3.

Defaults Upon Senior Securities

 

27

Item 4.

Mine Safety Disclosures

 

27

Item 5.

Other Information

 

27

Item 6.

Exhibits

 

28

 

 

 

 

 

Signatures

 

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1


PART I. FINANC IAL INFORMATION

Item 1. Financial Statements.

PARK HOTELS & RESORTS INC.

CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Property and equipment, net

 

$

8,516

 

 

$

8,541

 

Investments in affiliates

 

 

82

 

 

 

81

 

Goodwill

 

 

604

 

 

 

604

 

Intangibles, net

 

 

43

 

 

 

44

 

Cash and cash equivalents

 

 

318

 

 

 

337

 

Restricted cash

 

 

18

 

 

 

13

 

Accounts receivable, net of allowance for doubtful accounts of $3 and $2

 

 

180

 

 

 

130

 

Prepaid expenses

 

 

51

 

 

 

58

 

Other assets

 

 

28

 

 

 

26

 

TOTAL ASSETS (variable interest entities - $242 and $239)

 

$

9,840

 

 

$

9,834

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Debt

 

$

3,012

 

 

$

3,012

 

Accounts payable and accrued expenses

 

 

174

 

 

 

167

 

Due to hotel manager

 

 

125

 

 

 

91

 

Due to Hilton Grand Vacations

 

 

210

 

 

 

210

 

Deferred income tax liabilities

 

 

146

 

 

 

2,437

 

Other liabilities

 

 

202

 

 

 

94

 

Total liabilities (variable interest entities - $216 and $262)

 

 

3,869

 

 

 

6,011

 

Commitments and contingencies - refer to Note 12

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share, 6,000,000,000 shares authorized, 214,767,295 shares issued and outstanding as of March 31, 2017

 

 

2

 

 

 

 

Additional paid-in capital

 

 

3,820

 

 

 

 

Retained earnings

 

 

2,258

 

 

 

 

Accumulated other comprehensive loss

 

 

(60

)

 

 

(67

)

Net Parent investment

 

 

 

 

 

3,939

 

Total stockholders' equity

 

 

6,020

 

 

 

3,872

 

Noncontrolling interests

 

 

(49

)

 

 

(49

)

Total equity

 

 

5,971

 

 

 

3,823

 

TOTAL LIABILITIES AND EQUITY

 

$

9,840

 

 

$

9,834

 

 

Refer to the unaudited notes to condensed combined consolidated financial statements.

2


PARK HOTELS & RESORTS INC.

CONDENSED COMBINED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in millions, except per share data)  

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

Rooms

 

$

432

 

 

$

429

 

Food and beverage

 

 

192

 

 

 

180

 

Other

 

 

60

 

 

 

52

 

Total revenues

 

 

684

 

 

 

661

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Rooms

 

 

114

 

 

 

114

 

Food and beverage

 

 

131

 

 

 

127

 

Other departmental and support

 

 

177

 

 

 

165

 

Other property-level

 

 

46

 

 

 

45

 

Management and franchise fees

 

 

34

 

 

 

26

 

Impairment loss

 

 

 

 

 

15

 

Depreciation and amortization

 

 

70

 

 

 

73

 

Corporate and other

 

 

18

 

 

 

16

 

Total expenses

 

 

590

 

 

 

581

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

94

 

 

 

80

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(30

)

 

 

(46

)

Equity in earnings from investments in affiliates

 

 

4

 

 

 

3

 

Gain on foreign currency transactions

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

69

 

 

 

37

 

Income tax benefit (expense)

 

 

2,281

 

 

 

(14

)

Net income

 

 

2,350

 

 

 

23

 

Net income attributable to noncontrolling interests

 

 

 

 

 

(1

)

Net income attributable to stockholders

 

$

2,350

 

 

$

22

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax benefit (expense):

 

 

 

 

 

 

 

 

Currency translation adjustment, net of tax of $0 and $(1)

 

 

7

 

 

 

9

 

Total other comprehensive income

 

 

7

 

 

 

9

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

2,357

 

 

$

32

 

Comprehensive income attributable to noncontrolling interests

 

 

 

 

 

(1

)

Comprehensive income attributable to stockholders

 

$

2,357

 

 

$

31

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Earnings per share - Basic

 

$

11.65

 

 

$

0.11

 

Earnings per share - Diluted

 

$

11.02

 

 

$

0.11

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - Basic

 

 

202

 

 

 

198

 

Weighted average shares outstanding - Diluted

 

 

213

 

 

 

198

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.43

 

 

$

 

 

Refer to the unaudited notes to condensed combined consolidated financial statements.

3


PARK HOTELS & RESORTS INC.

CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,350

 

 

$

23

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

70

 

 

 

73

 

Impairment loss

 

 

 

 

 

15

 

Equity in earnings from investments in affiliates

 

 

(4

)

 

 

(3

)

Gain on foreign currency transactions

 

 

(1

)

 

 

 

Amortization of deferred financing costs

 

 

1

 

 

 

2

 

Distributions from unconsolidated affiliates

 

 

4

 

 

 

4

 

Deferred income taxes

 

 

(2,288

)

 

 

(15

)

Changes in working capital and other

 

 

9

 

 

 

(4

)

Net cash provided by operating activities

 

 

141

 

 

 

95

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(37

)

 

 

(65

)

Investments in affiliates

 

 

(1

)

 

 

 

Change in restricted cash

 

 

 

 

 

14

 

Distributions from unconsolidated affiliates

 

 

1

 

 

 

2

 

Net cash used in investing activities

 

 

(37

)

 

 

(49

)

Financing Activities:

 

 

 

 

 

 

 

 

Change in restricted cash

 

 

(5

)

 

 

(34

)

Net transfers (to) from Parent

 

 

(9

)

 

 

35

 

Dividends paid

 

 

(110

)

 

 

 

Distributions to noncontrolling interests

 

 

 

 

 

(2

)

Net cash used in financing activities

 

 

(124

)

 

 

(1

)

Effect of exchange rate changes on cash and cash equivalents

 

 

1

 

 

 

(1

)

Net (decrease) increase in cash and cash equivalents

 

 

(19

)

 

 

44

 

Cash and cash equivalents, beginning of period

 

 

337

 

 

 

72

 

Cash and cash equivalents, end of period

 

$

318

 

 

$

116

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures

 

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

Dividends paid in stock

 

$

441

 

 

$

 

Dividends declared but unpaid

 

$

92

 

 

$

 

 

Refer to the unaudited notes to condensed combined consolidated financial statements.

4


PARK HOTELS & RESORTS INC.

CONDENSED COMBINED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited, in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Net Parent

 

 

controlling

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Investment

 

 

Interests

 

 

Total

 

Balance as of December 31, 2016

 

 

 

 

$

 

 

$

 

 

$

 

 

$

(67

)

 

$

3,939

 

 

$

(49

)

 

$

3,823

 

Net transfers to Parent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

(9

)

Issuance of common stock and

   reclassification of former Parent

   investment

 

 

198

 

 

 

2

 

 

 

3,928

 

 

 

 

 

 

 

 

 

(3,930

)

 

 

 

 

 

 

Amortization of share-based

   compensation

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,350

 

 

 

 

 

 

 

 

 

 

 

 

2,350

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Dividends

 

 

16

 

 

 

 

 

 

(110

)

 

 

(92

)

 

 

 

 

 

 

 

 

 

 

 

(202

)

Balance as of March 31, 2017

 

 

214

 

 

$

2

 

 

$

3,820

 

 

$

2,258

 

 

$

(60

)

 

$

 

 

$

(49

)

 

$

5,971

 

 

 

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Net Parent

Investment

 

 

Non-

controlling

Interests

 

 

Total

 

Balance as of December 31, 2015

 

$

(63

)

 

$

2,884

 

 

$

(24

)

 

$

2,797

 

Net income

 

 

 

 

 

22

 

 

 

1

 

 

 

23

 

Other comprehensive income

 

 

9

 

 

 

 

 

 

 

 

 

9

 

Net transfers from Parent

 

 

 

 

 

35

 

 

 

 

 

 

35

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Cumulative effect of the adoption of ASU 2015-02

 

 

 

 

 

(3

)

 

 

1

 

 

 

(2

)

Balance as of March 31, 2016

 

$

(54

)

 

$

2,938

 

 

$

(24

)

 

$

2,860

 

Refer to the unaudited notes to condensed combined consolidated financial statements.

5


PARK HOTELS & RESORTS INC.

NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1: Organization

Park Hotels & Resorts Inc. (“we,” “us,” “our” or the “Company”) is a Delaware corporation that owns a portfolio of premium-branded hotels and resorts located in prime United States (“U.S.”) and international markets. On January 3, 2017, Hilton Worldwide Holdings Inc. (“Hilton” or “Parent”) completed the spin-off of a portfolio of hotels and resorts that established Park Hotels & Resorts Inc. as an independent, publicly traded company. The spin-off transaction, which was effected through a pro rata distribution of Park Hotels & Resorts Inc. stock to existing Hilton stockholders, was intended to be tax-free to both Hilton and Hilton’s stockholders. As a result of the spin-off, each holder of Hilton common stock on the record date of December 15, 2016 received one share of our common stock for every five shares of Hilton common stock owned.

For U.S. federal income tax purposes, we intend to elect to be taxed as a real estate investment trust (“REIT”), effective January 4, 2017.  We are currently, and expect to continue to be, organized and operate in a REIT qualified manner.

As of the spin-off date, Park Intermediate Holdings LLC (our “Operating Company”), directly or indirectly, holds all of our assets and conducts all of our operations. We own 100% of the interests in our Operating Company.

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

Principles of Combination and Consolidation

Subsequent to January 3, 2017, the unaudited condensed consolidated financial statements include the accounts of the Company, our wholly owned subsidiaries and entities in which we have a controlling financial interest, including variable interest entities (“VIEs”) where we are the primary beneficiary. The historical unaudited condensed combined consolidated financial statements through January 3, 2017 represent the financial position and results of operations of entities held by us after the spin-off that had historically been under common control of the Parent. The historical unaudited condensed combined consolidated financial statements were prepared on a carve-out basis and reflect significant assumptions and allocations. The unaudited condensed combined consolidated financial statements reflect our historical financial position, results of operations and cash flows, in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”).

We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP. In our opinion, the accompanying unaudited condensed combined consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All significant intercompany transactions and balances within the financial statements have been eliminated.

Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the audited combined consolidated financial statements and notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K.

Allocations

Through January 3, 2017, the historical condensed combined consolidated statements of comprehensive income included allocations of corporate general and administrative expenses from Hilton on the basis of financial and operating metrics that Hilton historically used to allocate resources and evaluate performance against its strategic objectives. Both we and Hilton considered the basis on which expenses were allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us during the historical period presented. However, the allocations may not include all of the actual expenses that would have been incurred by us and may not reflect our condensed combined consolidated results of operations, financial position and cash flows had we been a stand-alone company during the historical period presented. Actual costs that might have been incurred had we been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions we might have performed ourselves or outsourced and strategic decisions we might have made in areas such as information technology and infrastructure. Following the spin-off, we performed these functions using our own resources or purchased services. For an interim period, some of these functions will continue to be provided by Hilton under our transition services agreement (“TSA”).

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial

6


statements and the reported amou nts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Interim results are not necessarily indicative of full year performance.

Reclassifications

Certain line items on the condensed combined consolidated balance sheets as of December 31, 2016 have been reclassified to conform to the current period presentation.

Summary of Significant Accounting Policies

The Company’s Annual Report on Form 10-K for the year ended December 31, 2016 contains a discussion of the significant accounting policies. There have been no significant changes to the Company’s significant accounting policies since December 31, 2016.

Recently Issued Accounting Pronouncements

Accounting Standards Not Yet Adopted

In February 2017, the FASB issued ASU No. 2017-05 (“ASU 2017-05”), Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU clarifies the scope and application of ASC 610-20 on the sale or transfer of nonfinancial assets, including real estate, and in substance nonfinancial assets to noncustomers, including partial sales. This ASU also clarifies that the derecognition of all businesses is in the scope of ASC 810, Consolidation . The provisions of this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, and are to be applied on a retrospective basis. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. This ASU must be applied concurrently with the new revenue recognition standard within ASU 2014-09. We are currently evaluating the effect that this ASU and ASU 2014-09 will have on our condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04 (“ASU 2017-04”), Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from goodwill impairment testing, including impairment testing for reporting units with zero or negative carrying amounts that fail the qualitative assessment, simplifying the subsequent measurement of goodwill. The provisions of this ASU are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and are to be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. This ASU has no effect on our condensed consolidated financial statements; however, if our goodwill impairment test does not pass Step 1, we will evaluate the effect it will have on our consolidated financial statements.

Note 3: Property and Equipment

Property and equipment were:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(in millions)

 

Land

 

$

3,398

 

 

$

3,397

 

Buildings and leasehold improvements

 

 

6,022

 

 

 

6,015

 

Furniture and equipment

 

 

924

 

 

 

922

 

Construction-in-progress

 

 

115

 

 

 

79

 

 

 

 

10,459

 

 

 

10,413

 

Accumulated depreciation and amortization

 

 

(1,943

)

 

 

(1,872

)

 

 

$

8,516

 

 

$

8,541

 

 

Depreciation of property and equipment, including capital lease assets, was $69 million and $72 million during the three months ended March 31, 2017 and 2016, respectively.

As of March 31, 2017 and December 31, 2016, property and equipment included approximately $19 million of capital lease assets primarily consisting of buildings and leasehold improvements, net of $8 million of accumulated depreciation.

7


Note 4: Consolidated Variable Interest Entities and Investments in Affiliates

Consolidated VIEs

As of March 31, 2017 and December 31, 2016, we consolidated three VIEs that own hotels in the U.S. We are the primary beneficiary of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our VIEs are only available to settle the obligations of these entities. Our condensed combined consolidated balance sheets include the following assets and liabilities of these entities:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(in millions)

 

Property and equipment, net

 

$

210

 

 

$

208

 

Cash and cash equivalents

 

 

13

 

 

 

14

 

Restricted cash

 

 

14

 

 

 

13

 

Accounts receivable, net

 

 

4

 

 

 

2

 

Prepaid expenses

 

 

1

 

 

 

2

 

Debt

 

 

207

 

 

 

207

 

Accounts payable and accrued expenses

 

 

9

 

 

 

6

 

Deferred income tax liabilities

 

 

 

 

 

49

 

 

During the three months ended March 31, 2017 and 2016, we did not provide any financial or other support to these VIEs that we were not previously contractually required to provide, nor do we intend to provide any such support in the future.

Unconsolidated Entities

Investments in affiliates were:

 

 

 

Ownership %

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

(in millions)

 

Hilton Berlin

 

 

40%

 

 

$

32

 

 

$

31

 

Hilton San Diego Bayfront

 

 

25%

 

 

 

19

 

 

 

20

 

All others (7 hotels)

 

20% - 50%

 

 

 

31

 

 

 

30

 

 

 

 

 

 

 

$

82

 

 

$

81

 

 

The affiliates in which we own investments accounted for under the equity method had total debt of approximately $862 million and $861 million as of March 31, 2017 and December 31, 2016, respectively. Substantially all of the debt is secured solely by the affiliates’ assets or is guaranteed by other partners without recourse to us.

8


 

Note 5: Debt

Debt balances, including obligations for capital leases, and associated interest rates as of March 31, 2017, were:

 

 

 

 

 

 

 

Principal balance as of

 

 

 

Interest Rate

at March 31, 2017

 

Maturity Date

 

March 31, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

(in millions)

 

Commercial mortgage-backed securities loan

 

4.11%

 

November 2023

 

$

725

 

 

$

725

 

Commercial mortgage-backed securities loan

 

4.20%

 

December 2026

 

 

1,275

 

 

 

1,275

 

Mortgage loans

 

Average rate of

4.00%

 

2020 to 2026 (1)

 

 

207

 

 

 

207

 

Term loan

 

L + 1.45%

 

December 2021

 

 

750

 

 

 

750

 

Revolving credit facility (2)

 

L + 1.50%

 

December 2021 (1)

 

 

 

 

 

 

Unsecured notes

 

7.50%

 

December 2017

 

 

55

 

 

 

55

 

Capital lease obligations

 

Average rate of

7.00%

 

2019 to 2094

 

 

14

 

 

 

14

 

 

 

 

 

 

 

 

3,026

 

 

 

3,026

 

Less: unamortized deferred financing costs and

   discount

 

 

 

 

 

 

(14

)

 

 

(14

)

 

 

 

 

 

 

$

3,012

 

 

$

3,012

 

 

(1)

Assumes the exercise of all extensions that are exercisable solely at our option.

(2)

$1 billion available under revolving credit facility.

Mortgage Loans

We are required to deposit with the lender certain cash reserves for restricted uses. As of March 31, 2017 and December 31, 2016, our condensed combined consolidated balance sheets included $18 million and $13 million, respectively, of restricted cash related to our commercial mortgaged-backed securities (“CMBS”) loans and mortgage loans.  

Debt Maturities

The contractual maturities of our debt as of March 31, 2017 were:

 

Year

 

(in millions)

 

2017

 

$

55

 

2018

 

 

 

2019

 

 

 

2020 (1)

 

 

12

 

2021

 

 

750

 

Thereafter

 

 

2,209

 

 

 

$

3,026

 

 

(1)

Assumes the exercise of all extensions that are exercisable solely at our option.

Note 6: Fair Value Measurements

We did not elect the fair value measurement option for any of our financial assets or liabilities. The fair values of our Level 1 unsecured notes were based on prices in active debt markets. The fair values of our other Level 3 liabilities presented below were determined based on: (i) indicative quotes received for similar issuances; or (ii) the expected future cash flows discounted at risk-adjusted rates. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts. The fair value of certain financial instruments and the hierarchy level we used to estimate fair values are shown below:

9


 

 

 

 

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

Hierarchy

Level

 

 

Carrying

Amount

 

 

Fair Value

 

 

Carrying

Amount

 

 

Fair Value

 

 

 

 

 

 

 

(in millions)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SF CMBS Loan

 

 

3

 

 

$

725

 

 

$

728

 

 

$

725

 

 

$

725

 

HHV CMBS Loan

 

 

3

 

 

 

1,275

 

 

 

1,274

 

 

 

1,275

 

 

 

1,275

 

Term Loan

 

 

3

 

 

 

750

 

 

 

745

 

 

 

750

 

 

 

750

 

Mortgage loans

 

 

3

 

 

 

207

 

 

 

206

 

 

 

207

 

 

 

208

 

Unsecured notes

 

 

1

 

 

 

55

 

 

 

57

 

 

 

55

 

 

 

57

 

 

Note 7: Income Taxes

We believe that we are organized in conformity with, and operate in a manner that will allow us to elect to be taxed as a REIT, for U.S. federal income tax purposes for our tax year ending December 31, 2017, and expect to continue to be organized and operate so as to qualify as a REIT. To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the real estate qualification of sources of our income, the real estate composition and values of our assets, the amounts we distribute to our stockholders and the diversity of ownership of our stock.  To the extent we qualify as a REIT, we generally will not be subject to U.S. federal income tax on taxable income generated by our REIT activities. Accordingly, no provision for U.S. federal income taxes has been included in our accompanying condensed combined consolidated financial statements for the three months ended March 31, 2017 related to our REIT activities, other than the derecognition of deferred tax liabilities discussed below.

We will be subject to U.S. federal income tax on built-in gains representing the excess of fair value over tax basis for property held by us on January 4, 2017 on any taxable sales of such built-in gain property during the five-year period following our election to be taxed as a REIT.  In addition, we are subject to non-U.S. income tax on foreign held REIT activities. Further, our taxable REIT subsidiaries (“TRSs”) are generally subject to U.S. federal, state and local, and foreign income taxes (as applicable).

We recognized an income tax benefit for the three months ended March 31, 2017 primarily as a result of the derecognition of approximately $2.3 billion of deferred tax liabilities upon our declaration of intent to be taxed as a REIT.

Through January 3, 2017, we had been included in the consolidated federal income tax return of Hilton, as well as certain state tax returns where Hilton filed on a consolidated or combined basis, and foreign tax filings, as applicable. For purposes of our historical condensed combined consolidated balance sheets, we have recorded deferred tax balances as if we filed tax returns on a stand-alone basis separate from Hilton, but not as a REIT. The separate return method applies the accounting guidance for income taxes to the stand-alone financial statements as if we were a separate taxpayer and a standalone enterprise for the periods presented. The calculation of our income taxes on a separate return basis required considerable judgment and use of both estimates and allocations. We believe that the assumptions and estimates used to determine these tax amounts were reasonable. However, our historical condensed combined consolidated balance sheets may not necessarily reflect what our tax liability would have been if we were a stand-alone enterprise during the periods presented.

During the three months ended March 31, 2016, Parent paid $28 million of income taxes related to our operations. Neither us nor our Parent paid income taxes related to our operations during the three months ended March 31, 2017.

Note 8: Share-Based Compensation

We issue equity-based awards to our employees pursuant to the 2017 Omnibus Incentive Plan (“2017 Employee Plan”) and our non-employee directors pursuant to the 2017 Stock Plan for Non-Employee Directors (“2017 Director Plan”), effective January 3, 2017. The 2017 Employee Plan provides that a maximum of 8,000,000 shares of our common stock may be issued, and as of March 31, 2017, 6,617,542 shares of common stock remain available for future issuance. The 2017 Director Plan provides that a maximum of 450,000 shares of our common stock may be issued, and as of March 31, 2017, 433,596 shares of common stock remain available for future issuance. For the three months ended March 31, 2017, we recognized $3 million of share-based compensation expense. As of March 31, 2017, unrecognized compensation expense was $31 million, which is expected to be recognized over a weighted-average period of 2.2 years.

 

Restricted Stock Awards

Restricted Stock Awards (“RSAs”) generally vest in annual installments between one and three years from each grant date. The following table provides a summary of RSAs for the three months ended March 31, 2017:

 

10


 

 

Number of Shares

 

 

Weighted-Average Grant Date

Fair Value

 

Unvested at January 1, 2017

 

 

 

 

$

 

Granted

 

 

535,994

 

 

 

26.49

 

Vested

 

 

(3,778

)

 

 

25.67

 

Forfeited

 

 

(3,118

)

 

 

26.22

 

Unvested at March 31, 2017

 

 

529,098

 

 

$

26.50

 

 

Performance Stock Units

Performance Stock Units (“PSUs”) generally vest at the end of a two or three-year performance period and are subject to the achievement of a performance measure based on a measure of the Company’s total shareholder return relative to the total shareholder return of the companies that comprise the FTSE NAREIT Lodging Resorts Index (that have a market capitalization in excess of $1 billion as of the first day of the applicable performance period). The number of PSUs that may become vested ranges from zero to 200% of the number of PSUs granted to an employee, based on the level of achievement of the foregoing performance measure. The following table provides a summary of PSUs for the three months ended March 31, 2017:  

 

 

 

Number of Shares

 

 

Weighted-Average Grant Date

Fair Value

 

Unvested at January 1, 2017

 

 

 

 

$

 

Granted

 

 

385,142

 

 

 

31.95

 

Vested

 

 

 

 

 

 

Forfeited

 

 

(1,039

)

 

 

31.90

 

Unvested at March 31, 2017

 

 

384,103

 

 

$

31.95

 

The weighted average grant date fair values of these awards were determined using a Monte Carlo simulation valuation model with the following assumptions:

 

Expected volatility (1)

 

27.0% - 29.5%

Dividend yield (2)

 

—%

Risk-free rate (3)

 

1.2% - 1.5%

Expected term

 

2 - 3 years

 

(1)

Due to limited trading history of our common stock, we used the historical and implied volatilities of our peer group in addition to our historical volatility over the performance period to estimate appropriate expected volatilities. The weighted average expected volatility was 28.4%.

(2)

Dividends are assumed to be reinvested in shares of common stock and dividends will not be paid unless shares vest. We utilized a dividend yield of zero percent.

(3)

Based on U.S. Separate Trading of Registered Interest and Principal Securities rates collected from Bloomberg.

 


11


Note 9: Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share (“EPS”):

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016 (1)

 

 

 

(in millions, except per share amounts)

 

Weighted average shares outstanding - basic

 

 

202

 

 

 

198

 

Net effect of shares issued with respect to E&P Dividend (2)

 

 

11

 

 

 

 

Weighted average shares outstanding - diluted

 

 

213

 

 

 

198

 

 

 

 

 

 

 

 

 

 

Net income attributable to stockholders (3)

 

$

2,350

 

 

$

22

 

Basic EPS (4)

 

$

11.65

 

 

$

0.11

 

Diluted EPS (4)

 

$

11.02

 

 

$

0.11

 

 

(1)

For 2016, basic and diluted earnings per share were calculated using the number of shares of common stock outstanding upon the completion of the spin-off.