Park Hotels & Resorts(PK) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited condensed consolidated financial statements for the period ended June 30, 2020, reflect a severe negative impact from the COVID-19 pandemic, showing a significant decline in revenues, a shift from net income to a substantial net loss, negative operating cash flow, and a weakened balance sheet primarily due to a large goodwill impairment and increased debt from drawing on credit facilities to bolster liquidity Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in millions) | Account | June 30, 2020 | December 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $1,274 | $346 | +$928 | | Goodwill | $0 | $607 | -$607 | | Total Assets | $11,059 | $11,290 | -$231 | | Liabilities & Equity | | | | | Debt | $5,118 | $3,871 | +$1,247 | | Total Liabilities | $5,733 | $4,839 | +$894 | | Retained Earnings | $871 | $1,922 | -$1,051 | | Total Equity | $5,326 | $6,451 | -$1,125 | - The balance sheet as of June 30, 2020, shows a significant increase in cash and debt, primarily due to drawing on credit facilities to enhance liquidity amidst the pandemic[12] - Concurrently, total equity decreased substantially, driven by a large net loss which included the complete impairment of goodwill[12] Condensed Consolidated Statements of Comprehensive (Loss) Income Condensed Consolidated Statements of Comprehensive (Loss) Income (in millions) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $42 | $703 | $641 | $1,362 | | Impairment Loss | $0 | $0 | $694 | $0 | | Operating (Loss) Income | ($200) | $111 | ($837) | $240 | | Net (Loss) Income Attributable to Stockholders | ($259) | $82 | ($947) | $178 | | (Loss) Earnings Per Share - Diluted | ($1.10) | $0.40 | ($4.01) | $0.88 | - Revenues for Q2 2020 plummeted to $42 million from $703 million in Q2 2019, a decrease of over 94%, leading to a net loss of $259 million[14] - For the first six months of 2020, the company recorded a net loss of $947 million, heavily impacted by a $694 million impairment charge[14] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Six Months Ended June 30, in millions) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($158) | $244 | | Net cash provided by investing activities | $150 | $111 | | Net cash provided by (used in) financing activities | $931 | ($300) | - For the first six months of 2020, cash flow from operations turned negative at -$158 million, a stark contrast to the $244 million provided in the same period of 2019[16] - A significant net cash inflow of $931 million from financing activities, driven by $1 billion in borrowings on the Revolver and $652 million from Senior Secured Notes, was used to bolster liquidity[16] Notes to Condensed Consolidated Financial Statements - The COVID-19 pandemic severely impacted operations, leading to the temporary suspension of 38 of 60 hotels, a significant decline in occupancy and RevPAR, and a drop in operating cash flow[26][27] - To mitigate the effects of the pandemic, the company drew down its $1 billion revolving credit facility, issued $650 million in Senior Secured Notes, suspended dividends after Q1 2020, and deferred approximately $150 million in planned capital expenditures[27][28] - The company fully impaired its remaining goodwill balance of $607 million in Q1 2020 due to the adverse effects of COVID-19 on its business[50][51] - In May 2020, credit and term loan facilities were amended to suspend compliance with all existing financial covenants through March 31, 2021, and to extend the Revolver's maturity to December 2021[27][56] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion attributes the significant downturn in financial performance directly to the COVID-19 pandemic, which caused an unprecedented decline in lodging demand, occupancy, and RevPAR, detailing its response including suspending hotel operations, aggressive cost-saving measures, and significant financing activities to preserve liquidity, highlighting a monthly cash burn estimate of approximately $65 million under a full suspension scenario and confirming the suspension of dividends and stock repurchases to conserve capital COVID-19 Effect on Business - The company experienced a significant decline in occupancy, ADR, and RevPAR since March 2020 due to the COVID-19 pandemic, with RevPAR dropping by as much as 97.6% in April 2020 compared to the prior year[90] Pro-forma RevPAR Change (YoY) | Month (2020) | Pro-forma RevPAR Change (YoY) | | :--- | :--- | | March | (63.8)% | | April | (97.6)% | | May | (97.3)% | | June | (93.0)% | - In response to the pandemic, the company suspended operations at 38 of its 60 hotels, deferred approximately $150 million in capital expenditures, suspended dividends after Q1 2020, and drew down its $1 billion revolver[91] - As of August 5, 2020, operations remained suspended at 16 consolidated hotels (13,963 rooms) and 2 unconsolidated hotels (1,740 rooms)[93] Results of Operations - The decline in hotel revenues and operating expenses was primarily driven by the effects of COVID-19, which overshadowed the impacts of property acquisitions and dispositions[115][116][117] - For Q2 2020, the change from "Other Factors," primarily COVID-19, accounted for a $395 million decrease in rooms revenue and a $187 million decrease in food and beverage revenue[116] - A net impairment loss of $694 million was recognized in the first six months of 2020, consisting of $607 million for goodwill and $88 million for a hotel property, due to the economic impact of COVID-19[122] - Interest expense increased by 51.5% in Q2 2020 and 38.5% in H1 2020 compared to the prior year, driven by borrowings under the 2019 Term Facility, the Revolver, and the new Senior Secured Notes[125][127] Liquidity and Capital Resources - As of June 30, 2020, the company had approximately $1.3 billion in cash and cash equivalents, significantly bolstered by drawing $1 billion from its Revolver and issuing $650 million of Senior Secured Notes[129][130] - The company estimates an average monthly cash burn of approximately $65 million if all 60 hotels were to have suspended operations from August to December 2020[131] - Based on this, management believes it has sufficient liquidity to withstand a full suspension for two years[131] - The quarterly dividend was suspended after the Q1 2020 payment of $0.45 per share as a precautionary measure to preserve cash[144][145] - During Q1 2020, the company repurchased 4.6 million shares for $66 million[137] - No shares were repurchased in Q2 2020, and the program is effectively suspended due to restrictions in amended credit facilities[137] Non-GAAP Financial Measures Non-GAAP Financial Measures (in millions) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net (Loss) Income | ($261) | $84 | | Adjusted EBITDA | ($122) | $207 | | Hotel Adjusted EBITDA | ($108) | $209 | Non-GAAP Financial Measures (in millions) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Nareit FFO attributable to stockholders | ($184) | $156 | | Adjusted FFO attributable to stockholders | ($175) | $164 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risk from changes in interest rates, which can affect future income, cash flows, and the fair value of its financial instruments, and may use hedging arrangements to mitigate some of this risk but remains exposed to unhedged portions - The primary market risk exposure is from changes in interest rates, which can impact future income and cash flows[149] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2020, with no material changes to the company's internal control over financial reporting during the most recent fiscal quarter - As of June 30, 2020, the company's management concluded that its disclosure controls and procedures were effective[150] - No material changes were made to the internal control over financial reporting during the second quarter of 2020[151] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various claims and lawsuits arising in the ordinary course of business, which management believes are either covered by insurance or adequately reserved for, and does not expect them to have a material adverse effect on the company's financial position, results, or liquidity - The company is involved in ordinary course litigation but does not anticipate a material adverse effect on its financial condition from these proceedings[154] Item 1A. Risk Factors This section highlights that the COVID-19 pandemic has significantly and adversely impacted, and is expected to continue to disrupt, the company's business, financial performance, and cash flows, causing an unprecedented reduction in global lodging demand, leading to historically low occupancy levels, temporary hotel closures, and significant cancellations, and has also caused severe disruptions in the U.S. and global economies, which could constrain the company's liquidity and access to capital - The COVID-19 pandemic is identified as a primary risk factor, having caused a significant decline in occupancy and RevPAR, leading to the temporary suspension of operations at numerous properties[156][158] - The pandemic has triggered a global recession and disrupted financial markets, which could constrain the company's access to capital and make future financing more difficult or costly[157][162] - A prolonged economic recession could result in significantly below-average lodging demand even after the pandemic subsides and government restrictions are lifted[165] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not have any unregistered sales of equity securities, and under its stock repurchase program, no shares were repurchased during the three months ended June 30, 2020, though repurchases were made in the first quarter, and approximately $234 million remained available under the program as of June 30, 2020, however, amendments to credit facilities impose restrictions on future repurchases Stock Repurchase Program Details (in millions) | Period | Total Shares Purchased | Weighted Average Price Paid Per Share | Shares Purchased as Part of Program | Approx. Dollar Value Remaining in Program | | :--- | :--- | :--- | :--- | :--- | | Jan 2020 | 9,248 | $22.99 | — | $300 | | Feb 2020 | 75,032 | $23.57 | — | $300 | | Mar 2020 | 4,557,446 | $14.48 | 4,550,882 | $234 | | Q2 2020 | 2,321 | Various | — | $234 | - The company repurchased over 4.5 million shares in March 2020 but suspended repurchases in the second quarter[168][170] - The ability to repurchase stock is now restricted by covenants in its amended credit facilities[168][170] Item 3. Defaults Upon Senior Securities Not applicable, as the company reported no defaults upon senior securities - Not applicable[172] Item 4. Mine Safety Disclosures Not applicable - Not applicable[173] Item 5. Other Information None - None[174] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including agreements related to the company's formation, mergers, debt indentures, credit facility amendments, and officer certifications as required by the Sarbanes-Oxley Act - Key exhibits filed include the Indenture for the Senior Secured Notes issued in May 2020 and amendments to the company's credit agreements, also from May 2020[176]