Park Hotels & Resorts(PK) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Q2 2019 unaudited financial statements reflect decreased revenues and net income, slight asset growth, and new lease accounting standard adoption Condensed Consolidated Balance Sheets Total assets increased to $9.431 billion as of June 30, 2019, influenced by new lease accounting standards, with liabilities rising and equity slightly decreasing Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $9,431 | $9,363 | | Property and equipment, net | $7,764 | $7,975 | | Cash and cash equivalents | $310 | $410 | | Operating lease right-of-use assets | $207 | $— | | Total Liabilities | $3,855 | $3,777 | | Debt | $2,949 | $2,948 | | Operating lease liabilities | $200 | $— | | Total Equity | $5,576 | $5,586 | Condensed Consolidated Statements of Comprehensive Income Q2 2019 total revenues decreased to $703 million, with net income attributable to stockholders significantly lower at $82 million due to asset sales Financial Performance Summary (in millions, except per share data) | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $703 | $731 | $1,362 | $1,399 | | Operating Income | $111 | $149 | $240 | $323 | | Net Income Attributable to Stockholders | $82 | $216 | $178 | $366 | | Diluted EPS | $0.40 | $1.07 | $0.88 | $1.77 | Condensed Consolidated Statements of Cash Flows H1 2019 saw net cash from operating activities increase to $244 million, while investing and financing activities both decreased Cash Flow Summary for Six Months Ended June 30 (in millions) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $244 | $148 | | Net cash provided by investing activities | $111 | $467 | | Net cash used in financing activities | ($300) | ($555) | | Net increase in cash | $55 | $59 | Notes to Condensed Consolidated Financial Statements Notes detail the Chesapeake merger, $235 million hotel sales, new lease accounting standard adoption, and $2.95 billion total debt as of June 30, 2019 - The company entered into a definitive merger agreement with Chesapeake Lodging Trust on May 5, 2019, where Chesapeake common shares will convert into $11.00 in cash and 0.628 of a share of Park Hotels & Resorts common stock[25] - During the first six months of 2019, the company sold five consolidated hotels for total gross proceeds of $235 million, recognizing a net gain of $19 million[33] - The company adopted the new lease accounting standard ASU 2016-02 on January 1, 2019, recognizing an operating lease right-of-use asset and a corresponding liability of $213 million[30][31] Debt Summary as of June 30, 2019 (in millions) | Debt Instrument | Principal Balance | | :--- | :--- | | SF CMBS Loan | $725 | | HHV CMBS Loan | $1,275 | | Mortgage loans | $207 | | Term loan | $750 | | Total Principal | $2,958 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the hotel portfolio, Q2 2019 RevPAR growth, revenue decline from dispositions, the pending Chesapeake merger, and strong liquidity - The company's portfolio consists of 48 premium-branded hotels with over 29,000 rooms, primarily luxury and upper upscale, located in the U.S[73] - The pending merger with Chesapeake Lodging Trust is expected to close in mid-to-late September 2019, subject to Chesapeake shareholder approval[78] Comparable Hotel Performance (2019 vs 2018) | Period | RevPAR Growth | Primary Drivers | | :--- | :--- | :--- | | Q2 2019 | 0.8% | Increases in transient (1.1%) and contract (11.4%) revenues | | YTD 2019 | 2.5% | Increases in group (4.0%), contract (13.8%), and transient (0.4%) revenues | Reconciliation of Net Income to Adjusted FFO (in millions) | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to stockholders | $82 | $216 | $178 | $366 | | Nareit FFO attributable to stockholders | $156 | $171 | $286 | $307 | | Adjusted FFO attributable to stockholders | $164 | $187 | $300 | $324 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is from interest rate changes, potentially mitigated by hedging, but unhedged risks persist - The company's main market risk exposure is from interest rate changes[143] - To reduce cash flow volatility from interest rate changes, the company may enter into financial hedging arrangements[143] Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - As of June 30, 2019, the company's disclosure controls and procedures were deemed effective by the CEO and CFO[144] - No material changes were made to the internal control over financial reporting during the second quarter of 2019[145] PART II. OTHER INFORMATION Legal Proceedings The company faces ordinary course legal claims and two shareholder class action lawsuits challenging merger disclosures, which it deems meritless - Two shareholder class action lawsuits were filed challenging the disclosures in the Form S-4 Registration Statement for the proposed merger with Chesapeake Lodging Trust[149] - The company believes the claims in the merger-related lawsuits are without merit and plans to defend against them vigorously[149] Risk Factors New risk factors relate to the Chesapeake merger, including fixed exchange ratio, integration challenges, increased $4 billion indebtedness, and potential dividend changes - The merger's exchange ratio is fixed (0.628 shares of PK stock plus $11.00 cash per Chesapeake share) and will not be adjusted for changes in the market price of either company's stock[151][152] - The company faces risks of being unable to successfully integrate Chesapeake's operations, which could prevent the realization of anticipated cost savings and synergies[162] - Upon completion of the merger, the company's total pro forma consolidated indebtedness is expected to increase from approximately $3 billion to $4 billion[165] - There is a risk that the company may not continue to pay dividends at or above the current rate post-merger due to changes in cash requirements, financial position, or board discretion[173] Unregistered Sales of Equity Securities and Use of Proceeds During H1 2019, 86,023 shares were repurchased from employees for tax obligations, not under the formal stock repurchase program - A total of 86,023 shares were purchased from employees to satisfy tax obligations on vested restricted stock; these were not part of the formal stock repurchase program[181] - No shares of common stock were repurchased under the company's publicly announced stock repurchase program during the period[181] Exhibits Exhibits filed with Form 10-Q include the Chesapeake Merger Agreement, corporate governance documents, financing commitment, and officer certifications