Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
For the discussion of the financial condition and results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018, refer to "Part II—Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our A nnual Report on Form 10-K for the fiscal year ended December 31, 201 9 filed with the SEC on February 11, 2020, which is incorporated herein by reference.
COVID-19 Pandemic
During the year ended December 31, 2020, the COVID-19 pandemic significantly impacted the global economy and strained the hospitality industry due to travel restrictions and stay-at-home directives in place at various times during the period, resulting in cancellations and significantly reduced travel around the world. The reduction in travel resulted in the complete and partial suspensions of hotel operations in many of the areas where our hotels are located, which included approximately 20 percent of our global hotel properties for some portion of the reporting period. As such, it had a material adverse impact on our results for the year ended December 31, 2020 and, based on the potential impact of additional restrictions and continued health and safety concerns, we expect it to continue to have a material adverse impact on our results for an indeterminate duration, as described below under "—Results of Operations."
Although the majority of our hotels that had temporarily suspended operations had reopened by the end of October 2020, travel restrictions re-imposed at the end of 2020 and the beginning of 2021 resulted in additional temporary suspensions and, in some cases, re-suspensions. As of February 10, 2021, 97 percent of our global hotel properties were open, while approximately 220 hotels had temporarily suspended operations. Hotels that have reopened generally have experienced significantly lower occupancy as compared with periods before the onset of the pandemic.
In response to this global crisis, we have taken actions to prioritize the safety and security of our guests, employees and owners and support our communities. During the summer, we launched Hilton CleanStay to deliver a new standard of cleanliness and disinfection to our properties worldwide and Hilton EventReady, which focuses on cleanliness and customer service specific to meetings and events. We also found alternative uses for certain of our hotel properties, partnering with American Express to donate up to one million free room nights to frontline medical professionals. Through our Hilton Effect Foundation, we also provided financial assistance to organizations, including World Central Kitchen, directly responding to community needs that resulted from the COVID-19 pandemic. Additionally, we have taken several steps to help our business withstand this uncertain time, as detailed in "—Liquidity and Capital Resources."
Overview
Our Business
Hilton is one of the largest hospitality companies in the world, with 6,478 properties comprising 1,019,287 rooms in 119 countries and territories as of December 31, 2020. Our premier brand portfolio includes: our luxury and lifestyle hotel brands, Waldorf Astoria Hotels & Resorts, LXR Hotels & Resorts, Conrad Hotels & Resorts, Canopy by Hilton, Tempo by Hilton and Motto by Hilton; our full service hotel brands, Signia by Hilton, Hilton Hotels & Resorts, Curio Collection by Hilton, DoubleTree by Hilton, Tapestry Collection by Hilton and Embassy Suites by Hilton; our focused service hotel brands, Hilton Garden Inn, Hampton by Hilton, Tru by Hilton, Homewood Suites by Hilton and Home2 Suites by Hilton; and our timeshare brand, Hilton Grand Vacations. As of December 31, 2020, we had more than 112 million members in our award-winning guest loyalty program, Hilton Honors.
Segments and Regions
We analyze our operations and business by both operating segments and geographic regions. Our operations consist of two reportable segments that are based on similar products or services: (i) management and franchise and (ii) ownership. The management and franchise segment provides services, including hotel management and licensing of our brands and IP. This segment generates its revenue from: (i) management and franchise fees charged to third-party hotel owners; (ii) licensing fees from HGV and strategic partnerships, including co-branded credit card arrangements, for the right to use certain Hilton marks and IP; and (iii) fees for managing our owned and leased hotels. As a manager of hotels, we typically are responsible for supervising or operating the property in exchange for management fees. As a franchisor of hotels, we charge franchise fees in
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exchange for the use of one of our brand names and related commercial services, such as our reservation system, marketing and information technology services, while a third party manages or operates such franchised hotels. The ownership segment primarily derives earnings from providing nightly hotel room sales, food and beverage sales and other services at our owned and leased hotels.
Geographically, we conduct business through three distinct geographic regions: (i) the Americas; (ii) Europe, Middle East and Africa ("EMEA"); and (iii) Asia Pacific. The Americas region includes North America, South America and Central America, including all Caribbean nations. Although the U.S. is included in the Americas, it represents a significant portion of our system-wide hotel rooms, 72 percent as of December 31, 2020; therefore, the U.S. is often analyzed separately and apart from the Americas region and, as such, it is presented separately within the analysis herein. The EMEA region includes Europe, which represents the western-most peninsula of Eurasia stretching from Iceland in the west to Russia in the east, and the Middle East and Africa ("MEA"), which represents the Middle East region and all African nations, including the Indian Ocean island nations. Europe and MEA are often analyzed separately and, as such, are presented separately within the analysis herein. The Asia Pacific region includes the eastern and southeastern nations of Asia, as well as India, Australia, New Zealand and the Pacific Island nations.
System Growth and Development Pipeline
Our strategic objectives include the continued expansion of our global footprint and fee-based business. As we enter into new management and franchise contracts, we expand our business with minimal or no capital investment by us as the manager or franchisor, since the capital required to build and maintain hotels is typically provided by the third-party owner of the hotel with whom we contract to provide management services or license our brand names and IP. Prior to approving the addition of new properties to our management and franchise development pipeline, we evaluate the economic viability of the property based on its geographic location, the credit quality of the third-party owner and other factors. By increasing the number of management and franchise contracts with third-party owners, over time we expect to increase revenues, overall return on invested capital and cash available to support our business needs. While these objectives have not changed as a result of the COVID-19 pandemic, the current economic environment has posed certain challenges to the execution of our strategy, which have included and may continue to include delays in openings and new development. See further discussion on our cash management policy, as detailed in "—Liquidity and Capital Resources."
During the year ended December 31, 2020, we opened over 410 hotels consisting of nearly 56,000 rooms, contributing to over 47,000 net additional rooms in our system, reflecting a net unit growth of 5.1 percent from December 31, 2019. As of December 31, 2020, we had nearly 2,570 hotels in our development pipeline that we expect to add to our system in the future, representing over 397,000 rooms under construction or approved for development throughout 116 countries and territories, including 31 countries and territories where we do not currently have any open hotels. Nearly all of the rooms in the development pipeline are within our management and franchise segment. Additionally, of the rooms in the development pipeline, 233,000 rooms were located outside the U.S., and 204,000 rooms were under construction. We do not consider any individual development project to be material to us.
Brexit
In June 2016, the U.K. held a referendum in which voters approved an exit from the E.U. (commonly referred to as "Brexit"). The U.K.'s withdrawal from the E.U. occurred on January 31, 2020, beginning the implementation period, which ended on December 31, 2020. In December 2020, the U.K. and the E.U. reached a new bilateral trade and cooperation deal governing the future relationship between the U.K. and the E.U. (the "EU-UK Trade and Cooperation Agreement"), which has been approved by the member states of the E.U. and the U.K. parliament and is expected to be formally ratified by the E.U. parliament during the first quarter of 2021. While our results for the year ended December 31, 2020 were not materially affected by Brexit specifically, the final outcomes are not yet certain. In addition, while the EU-UK Trade and Cooperation Agreement provides clarity in respect of the intended future relationship between the U.K. and the E.U. and some detailed matters of trade and cooperation, it remains unclear what general long-term economic, financial, trade and legal implications the U.K. withdrawal from the E.U. will have and how it will ultimately affect our business. Brexit measures could potentially disrupt the markets we serve and cause tax and foreign currency exchange rate volatility, which could have adverse effects on our business. We will continue to monitor the potential impact of Brexit on our business in future periods.
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Principal Components and Factors Affecting our Results of Operations
Revenues
Principal Components
We primarily derive our revenues from the following sources:
• Franchise and licensing fees . Represents fees earned in connection with the licensing of one of our brands. Under our franchise contracts, franchisees typically pay us franchise fees that include: (i) monthly royalty fees, generally based on a percentage of the hotel's monthly gross room revenue, and, in some cases, a percentage of gross food and beverage revenues and other revenues, as applicable; and (ii) application, initiation and other fees for when new hotels enter the system, when there is a change of ownership of a hotel or when contracts with properties already in our system are extended. We also earn licensing fees from license agreements with HGV and strategic partnerships, including co-branded credit card arrangements, for the use of certain Hilton marks and IP. Consideration to incentivize hotel owners to enter into franchise contracts with us is amortized over the life of the applicable contract as a reduction to franchise and licensing fees.
• Base and incentive management fees. Represents fees earned in connection with the management of hotels. Terms of our management contracts vary, but our fees generally consist of a base fee, which is typically based on a percentage of the hotel's monthly gross revenue and, when applicable, an incentive fee, which is typically based on the hotel's operating profits and, in some cases, may be subject to a stated return threshold to the owner, normally over a one-calendar year period. Outside of the U.S., our fees are often dependent on hotel profitability measures, either because of a single management fee structure where the entire fee is an incentive fee, or because our two-tier fee structure is more heavily weighted toward the incentive fee than the base fee. Consideration to incentivize hotel owners to enter into management contracts with us is amortized over the life of the applicable contract as a reduction to base and other management fees.
• Owned and leased hotels. Represents revenues derived from hotel operations, including hotel room sales, accommodations sold in conjunction with other services, food and beverage sales and other ancillary goods and services. These revenues are primarily derived from two categories of customers: transient and group. Transient guests are individual travelers who are traveling for business or leisure. Group guests are traveling for group events that reserve rooms for meetings, conferences or social functions sponsored by corporate, social, military, educational, religious or other organizations or associations. Group business usually includes a block of room accommodations, as well as other ancillary services, such as meeting facilities and catering and banquet services. A majority of our food and beverage sales and other ancillary goods and services are provided to customers who are also occupying rooms at our hotels. As a result, occupancy affects all components of our owned and leased hotel revenues.
• Other revenues. Represents revenues generated by the incidental support of hotel operations for owned, leased, managed and franchised hotels, including our purchasing operations, and other operating income.
• Other revenues from managed and franchised properties. Represents amounts that are contractually reimbursed to us by property owners, either directly as costs are incurred or indirectly through program fees billed and collected in advance that are associated with certain costs and expenses supporting the operations of the related properties. The direct reimbursements by property owners are for payroll and related costs if the property employees are legally our responsibility, and certain other operating costs of the managed and franchised properties' operations. We have no legal responsibility for the employees or the liabilities associated with operating franchised properties or certain of our managed properties. Revenues and expenses for these direct reimbursements have no net effect on operating income (loss) or net income (loss). The monthly program fee that hotel franchisees and property owners of hotels that we manage pay is based on the underlying hotel's sales or usage and relates to the costs of our brands and shared services, including: (i) advertising, marketing and customer loyalty programs; (ii) internet, technology and reservation systems; and (iii) quality assurance programs. We are contractually required to use these fees solely for these programs.
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Factors Affecting our Revenues
The following factors affect the revenues we derive from our operations:
• Consumer demand and global economic conditions . Consumer demand for our products and services is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Among other factors, declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence and adverse political conditions can lower the amount of management and franchise fee revenues we are able to generate and/or lower the revenues and profitability of our owned and leased hotel operations. Further, competition for hotel guests and the supply of hotel services affect our ability to sustain or increase rates charged to customers at our hotels. In general, several of these factors, as well as health and safety concerns, had a significant effect on global economic conditions and consumer demand for our products and services in 2020, as a result of the COVID-19 pandemic, which is expected to continue to have an overall adverse impact on our revenues for an indeterminate duration. Also, declines in hotel profitability during an economic downturn directly affect the incentive portion of our management fees, which is based on hotel profitability measures. As a result, changes in consumer demand and general business cycles have historically subjected, are currently subjecting and could in the future subject our revenues to significant volatility.
• Contracts with third-party owners and franchisees and relationships with developers . We depend on our long-term management and franchise contracts with third-party hotel owners and hotel franchisees for a significant portion of our management and franchise fee revenues. The success and sustainability of our management and franchise business depends on our ability to perform under our management and franchise contracts and maintain good relationships with third-party owners and franchisees. Our relationships with these third parties also generate new incremental opportunities for property development that can support our growth. Growth and maintenance of our hotel system and earning fees related to hotels in development are dependent on the ability of developers and owners to access capital for the development, maintenance and renovation of properties. We believe that we have good relationships with our third-party owners, franchisees and developers and are committed to the continued growth and development of these relationships. These relationships exist with a diverse group of owners, franchisees and developers and are not significantly concentrated with any one particular third party.
Expenses
Principal Components
We primarily incur the following expenses:
• Owned and leased hotels. Reflects the operating expenses of our consolidated owned and leased hotels, including room expense, food and beverage costs, other support costs and property expenses. Room expense includes compensation costs for housekeeping, laundry and front desk staff, as well as supply costs for guest room amenities and laundry. Food and beverage costs include costs for wait and kitchen staff and food and beverage inventory. Other support expenses include: costs associated with property-level management; utilities; sales and marketing; operating hotel spas; operating telephones, parking and other guest recreation; entertainment; and other services. Property expenses include property taxes, repairs and maintenance, rent and insurance.
• Depreciation and amortization. These are non-cash expenses that primarily consist of: (i) amortization of intangible assets that were recorded at their fair value at the time of the October 24, 2007 transaction whereby we became a wholly owned subsidiary of affiliates of The Blackstone Group Inc. (the "Merger"), which primarily include management and franchise contracts, leases and our Hilton Honors guest loyalty program intangible; (ii) amortization of capitalized software costs; and (iii) depreciation of property and equipment, including our finance lease ROU assets, such as buildings and furniture and equipment that are used in corporate operations or at our consolidated owned and leased hotels.
• General and administrative. Consists primarily of compensation costs for our corporate staff; professional fees, including consulting, audit and legal fees; travel and entertainment expenses; bad debt expenses for uncollected management, franchise and other fees; and administrative and related expenses.
• Other expenses . Consists of expenses incurred by our purchasing operations and other ancillary businesses, along with other operating expenses of the business.
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• Other expenses from managed and franchised properties. Represents certain costs and expenses that are contractually reimbursed to us by property owners for payroll and related costs for properties that we manage where the property employees are legally our responsibility, or paid from program fees collected from properties for certain other operating costs of the managed and franchised properties' operations, including those related to our brands and shared services programs. We are contractually required to use these fees solely for these programs. We have no legal responsibility for the employees or the liabilities associated with operating franchised properties or certain of our managed properties.
Factors Affecting our Costs and Expenses
The following are principal factors that affect the costs and expenses we incur in the course of our operations:
• Fixed expenses. Many of the expenses associated with owning and leasing hotels are relatively fixed. These expenses include personnel costs, rent, property taxes, insurance and utilities. If we are unable to decrease these costs significantly or rapidly when demand for our hotels decreases, the resulting decline in our revenues can have an adverse effect on our net cash flows, margins and profits. This effect can be especially pronounced during periods of economic contraction or slow economic growth, including that which resulted from the COVID-19 pandemic. Economic downturns generally affect the results of our ownership segment more significantly than the results of our management and franchise segment due to the high fixed costs associated with operating an owned or leased hotel. Employees at some of our owned and leased hotels are parties to collective bargaining agreements that may also limit our ability to make timely staffing or labor changes in response to declining revenues. In addition, any efforts to reduce costs, including the deferral or cancellation of capital improvements, could adversely affect the economic value of our hotels and brands. Additionally, the general and administrative expenses of operating a global business also include fixed personnel costs, rent, property taxes, insurance and utilities. The effectiveness of any cost-cutting efforts related to owning and leasing hotels or corporate operations is limited by the amount of inherent fixed costs. However, we have taken steps to reduce our fixed costs to levels we believe are appropriate to maximize profitability and respond to expected future market conditions, while continuing to optimize our customers' experience and the value of our hotels and brands.
• Changes in depreciation and amortization expense. We capitalize costs associated with certain software development projects and, as those projects are completed and placed into service, amortization expense will increase. As the finite-lived intangible assets that were recorded at the Merger become fully amortized, amortization expense will decrease. Additionally, changes in depreciation expense may be driven by renovations of existing hotels, acquisition or development of new hotels, the disposition of existing hotels through sale or closure, expenditures related to our corporate facilities or changes in estimates of the useful lives of our assets. As we place new assets into service, we will be required to recognize additional depreciation expense on those assets. If we are required to recognize impairment losses relating to our depreciable assets or finite-lived intangible assets, the related depreciation or amortization expense, respectively, will decrease.
Other Items
Effect of foreign currency exchange rate fluctuations
Significant portions of our operations are conducted in functional currencies other than our reporting currency, which is USD, and we have assets and liabilities, including those that are payable or receivable by consolidated subsidiaries, denominated in a variety of foreign currencies. As a result, we are required to translate the results of those operations, assets and liabilities from the functional currency into USD at market-based foreign currency exchange rates for each reporting period. When comparing our results of operations between periods, there may be material portions of the changes in our revenues or expenses that are derived from fluctuations in foreign currency exchange rates experienced between those periods. We hedge foreign exchange-based cash flow variability in certain of our fees using forward contracts designated as hedging instruments. We also hold short-term forward contracts to offset exposure to fluctuations in certain of our foreign currency denominated cash balances, primarily related to our intercompany financing arrangements, and we elected not to designate these forward contracts as hedging instruments.
Seasonality
The hospitality industry is seasonal in nature. The periods during which our properties experience higher or lower levels of demand vary from property to property, depending principally upon their location, type of property and competitive mix within
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the specific location. Based on historical results, we generally expect our revenues to be lower in the first quarter of each year than in each of the three subsequent quarters. However, the timing and effects of the COVID-19 pandemic resulted in the first quarter of 2020 being the strongest quarter in the year, as the remainder of the year was more significantly impacted by reduced occupancy due to travel restrictions, safety concerns and complete and partial suspensions of hotel operations.
Key Business and Financial Metrics Used by Management
Comparable Hotels
We define our comparable hotels as those that: (i) were active and operating in our system for at least one full calendar year as of the end of the current period, and open January 1st of the previous year; (ii) have not undergone a change in brand or ownership type during the current or comparable periods reported; and (iii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results were not available. Of the 6,422 hotels in our system as of December 31, 2020, 4,956 hotels were classified as comparable hotels. Our 1,466 non-comparable hotels included 123 hotels, or approximately two percent of the total hotels in our system, that were removed from the comparable group during the last twelve months because they sustained substantial property damage, business interruption, underwent large-scale capital projects or comparable results were otherwise not available.
When considering business interruption in the context of our definition of comparable hotels, any hotel that had completely or partially suspended operations on a temporary basis at any point during the year ended December 31, 2020 as a result of the COVID-19 pandemic was considered to be part of the definition of comparable hotels. Despite these temporary suspensions of hotel operations, we believe that including these hotels within our hotel operating statistics of occupancy, average daily rate ("ADR") and revenue per available room ("RevPAR") reflects the underlying results of our business for the year ended December 31, 2020.
Occupancy
Occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels for a given period. Occupancy measures the utilization of our hotels' available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable ADR pricing levels as demand for hotel rooms increases or decreases.
ADR
ADR represents hotel room revenue divided by the total number of room nights sold for a given period. ADR measures average room price attained by a hotel, and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. ADR is a commonly used performance measure in the industry, and we use ADR to assess pricing levels that we are able to generate by type of customer, as changes in rates charged to customers have different effects on overall revenues and incremental profitability than changes in occupancy, as described above.
RevPAR
RevPAR is calculated by dividing hotel room revenue by the total number of room nights available to guests for a given period. We consider RevPAR to be a meaningful indicator of our performance as it provides a metric correlated to two primary and key drivers of operations at a hotel or group of hotels, as previously described: occupancy and ADR. RevPAR is also a useful indicator in measuring performance over comparable periods for comparable hotels.
References to RevPAR, ADR and occupancy are presented on a comparable basis, and references to RevPAR and ADR are presented on a currency neutral basis, unless otherwise noted. As such, comparisons of these hotel operating statistics for the years ended December 31, 2020 and 2019 use the exchange rates for the year ended December 31, 2020.
EBITDA and Adjusted EBITDA
EBITDA reflects net income (loss), excluding interest expense, a provision for income tax benefit (expense) and depreciation and amortization.
Adjusted EBITDA is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including gains, losses, revenues and expenses in connection with: (i) asset dispositions for both consolidated and unconsolidated equity
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investments; (ii) foreign currency transactions; (iii) debt restructurings and retirements; (iv) furniture, fixtures and equipment ("FF&E") replacement reserves required under certain lease agreements; (v) share-based compensation; (vi) reorganization, severance, relocation and other related expenses; (vii) non-cash impairment; (viii) amortization of contract acquisition costs; (ix) the net effect of reimbursable costs included in other revenues and other expenses from managed and franchised properties; and (x) other items.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) these measures are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions and (ii) these measures are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry. Additionally, these measures exclude certain items that can vary widely across different industries and among competitors within our industry. For instance, interest expense and income taxes are dependent on company specifics, including, among other things, capital structure and operating jurisdictions, respectively, and, therefore, could vary significantly across companies. Depreciation and amortization, as well as amortization of contract acquisition costs, are dependent upon company policies, including the method of acquiring and depreciating assets and the useful lives that are used. For Adjusted EBITDA, we also exclude items such as: (i) FF&E replacement reserves for leased hotels to be consistent with the treatment of FF&E for owned hotels, where it is capitalized and depreciated over the life of the FF&E; (ii) share-based compensation, as this could vary widely among companies due to the different plans in place and the usage of them; (iii) the net effect of our cost reimbursement revenues and reimbursed expenses, as we contractually do not operate the related programs to generate a profit over the terms of the respective contracts; and (iv) other items, such as amounts related to debt restructurings and retirements and reorganization and related severance costs, that are not core to our operations and are not reflective of our operating performance.
EBITDA and Adjusted EBITDA are not recognized terms under U.S. generally accepted accounting principles ("GAAP") and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives, either in isolation or as a substitute, for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP. Some of these limitations are:
• EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
• EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
• EBITDA and Adjusted EBITDA do not reflect income tax expenses or benefits or the cash requirements to pay our taxes;
• EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
• EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;
• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
• other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
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Results of Operations
The hotel operating statistics by region for our system-wide comparable hotels were as follows:
Year Ended Change
December 31, 2020 2020 vs. 2019
U.S.
Occupancy 42.2 % (33.5) % pts.
ADR $ 117.40 (20.0) %
RevPAR $ 49.53 (55.4) %
Americas (excluding U.S.)
Occupancy 29.4 % (39.6) % pts.
ADR $ 98.55 (15.1) %
RevPAR $ 28.98 (63.8) %
Europe
Occupancy 28.6 % (47.8) % pts.
ADR $ 107.37 (22.0) %
RevPAR $ 30.71 (70.8) %
MEA
Occupancy 35.6 % (34.4) % pts.
ADR $ 125.30 (10.1) %
RevPAR $ 44.59 (54.3) %
Asia Pacific
Occupancy 43.9 % (26.3) % pts.
ADR $ 93.85 (19.3) %
RevPAR $ 41.21 (49.5) %
System-wide
Occupancy 40.3 % (34.4) % pts.
ADR $ 114.03 (19.6) %
RevPAR $ 46.00 (56.7) %
During the year ended December 31, 2020, we experienced significant declines in RevPAR in all regions, due to both occupancy and ADR decreases resulting from the COVID-19 pandemic. Our Asia Pacific region experienced the effects of the pandemic early in 2020, with suspensions of hotel operations beginning in late January. Pronounced negative results and hotel suspensions in the Americas and EMEA regions began in mid-March. Of the approximately 1,280 properties that had suspended hotel operations at some point during the year ended December 31, 2020, approximately 44 percent were in the U.S., 10 percent were in the Americas (excluding U.S.), 25 percent were in Europe, 5 percent were in MEA and 16 percent were in Asia Pacific. As of February 10, 2021, the operations at approximately 220 hotels, primarily located in the U.S. and Europe, were temporarily suspended. Additionally, properties that have reopened have experienced significantly lower occupancy compared with periods prior to the onset of the pandemic as business and transient demand remains lower and travel restrictions and stay-at-home directives are still in place in many areas.
On a global level, the pervasive impact of the COVID-19 pandemic began in late March, with its most significant adverse impact on occupancy and RevPAR in April. System-wide occupancy showed sequential month-over-month improvement from April through October and, in the fourth quarter, there was both occupancy and RevPAR improvement in the Americas (excluding U.S.), MEA and Asia Pacific regions. However, travel restrictions re-imposed in late 2020 resulted in additional temporary suspensions and, in some cases, re-suspensions of hotel operations, particularly in Europe, which led to further declines in occupancy and RevPAR in that region in the fourth quarter.
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The table below provides a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA:
Year Ended December 31,
2020 2019
(in millions)
Net income (loss) $ (720) $ 886
Interest expense 429 414
Income tax expense (benefit) (204) 358
Depreciation and amortization 331 346
EBITDA (164) 2,004
Gain on sale of assets, net — (81)
Loss on foreign currency transactions 27 2
Loss on debt extinguishments 48 —
FF&E replacement reserves 57 59
Share-based compensation expense 97 154
Reorganization costs 41 —
Impairment losses 258 —
Amortization of contract acquisition costs 29 29
Net other expenses from managed and franchised properties 397 77
Other adjustment items (1)
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Adjusted EBITDA $ 842 $ 2,308
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(1) Includes severance not related to the 2020 reorganization and other items. The year ended December 31, 2020 also includes costs recognized for the settlement of a dispute with an owner of a managed hotel, losses related to the disposal of an investment and a loan guarantee for a franchised hotel and a gain related to the reimbursement by a third party for taxes owed resulting from the sale of a hotel in a prior period. The year ended December 31, 2019 also includes expenses recognized in connection with the refinancings and repayments of the senior secured credit facilities.
Revenues
Year Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(in millions)
Franchise and licensing fees $ 945 $ 1,681 (43.8)
Base and other management fees
$ 123 $ 332 (63.0)
Incentive management fees
38 230 (83.5)
Total management fees $ 161 $ 562 (71.4)
The COVID-19 pandemic and the related reduction in global travel and tourism resulted in the complete or partial suspensions, and in some cases, re-suspensions, of hotel operations at approximately 1,245 of our managed and franchised properties at some point during the year ended December 31, 2020. Of these hotels, all but approximately 220 had reopened as of December 31, 2020.
On a comparable basis, decreases in occupancy and ADR led to reduced RevPAR, resulting in decreases in franchise fees and management fees from our comparable managed and franchised properties. For the year ended December 31, 2020, RevPAR decreased 53.3 percent at our comparable franchised properties and 64.4 percent at our comparable managed properties, resulting from reduced occupancy of 32.1 percentage points and 40.7 percentage points, respectively, and reduced ADR of 18.1 percent and 21.4 percent, respectively.
Including new development and ownership type transfers, from January 1, 2019 to December 31, 2020, we added 798 managed and franchised properties on a net basis, providing an additional 107,984 rooms to our management and franchise segment. While we have historically experienced increases to management and franchise fees as new hotels are a part of our system for full periods, the impact of the COVID-19 pandemic on our comparable hotels outweighed the impact of these property additions in 2020.
Additionally, licensing and other fees decreased $98 million during the year ended December 31, 2020, primarily due to decreased licensing fees from both HGV due to reductions in timeshare revenues and our strategic partnerships, primarily driven by lower co-branded credit cardholder spend and our strategic partnerships as a result of the COVID-19 pandemic.
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Incentive fees decreased as they are based on hotels' operating profits, which have declined significantly from the prior year as a result of the COVID-19 pandemic.
Year Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(in millions)
Owned and leased hotels $ 421 $ 1,422 (70.4)
Owned and leased hotel revenues decreased primarily due to the COVID-19 pandemic and the related reduction in global travel and tourism. As a result of the COVID-19 pandemic, approximately 35 hotels in our ownership segment, the majority of which are located in Europe, had temporarily suspended operations at some point in time during the year ended December 31, 2020. Although all of these hotels had reopened at some point during the year, additional and reinstated restrictions in Europe during the fourth quarter of 2020, resulted in the re-suspension of operations at approximately 10 of these hotels. On a comparable basis, decreases in occupancy and ADR of 52.1 percentage points and 21.1 percent, respectively, led to reduced RevPAR of 74.8 percent, resulting in decreases in revenues from our comparable owned and leased hotels. Additionally, owned and leased hotel revenues decreased $55 million related to properties for which the lease agreements were terminated, with most of the properties transferring to our management and franchise segment.
Year Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(in millions)
Other revenues $ 73 $ 101 (27.7)
Other revenues decreased primarily due to decreased revenues from our purchasing operations related to delayed hotel improvement projects and lower volume purchasing based on reduced hotel demand as a result of the COVID-19 pandemic.
Operating Expenses
Year Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(in millions)
Owned and leased hotels
$ 620 $ 1,254 (50.6)
Owned and leased hotel expenses decreased primarily due to a decrease in occupancy resulting from the COVID-19 pandemic and approximately 35 hotels temporarily suspending operations at some point in time during the year ended December 31, 2020. Further, as a result of declining performance, variable rent, which is generally based on a percentage of hotel revenues or profits, decreased at most leased hotels that have a variable rent structure. However, certain fixed costs of maintaining the owned and leased hotels, such as fixed rent and certain minimum maintenance and utility costs, even while the hotels were temporarily closed or operating with very low occupancy, could not be reduced at the same rate as the hotel revenue decreases during the year. Additionally, owned and leased hotel expenses decreased $54 million related to properties for which the lease agreements were terminated, with most of the properties transferring to our management and franchise segment.
Year Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(in millions)
Depreciation and amortization $ 331 $ 346 (4.3)
General and administrative 311 441 (29.5)
Reorganization costs 41 — NM (1)
Impairment losses 258 — NM (1)
Other expenses 60 72 (16.7)
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(1) Fluctuation in terms of percentage change is not meaningful.
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The decrease in depreciation and amortization expense was primarily due to a decrease in amortization expense resulting from certain management and franchise contract intangible assets recorded at the Merger fully amortizing during the year ended December 31, 2020, as well as from reduced carrying values of certain intangible assets and property and equipment related to our leased properties due to impairment losses that were recognized during 2020. This decrease was partially offset by an increase in amortization expense resulting from additions to capitalized software costs during 2020 and 2019.
General and administrative expenses decreased primarily as a result of actions taken by the Company during the year ended December 31, 2020 to reduce or eliminate certain corporate costs in response to the COVID-19 pandemic, which included workforce reductions, temporary furloughs and salary reductions of corporate employees; refer to "—Liquidity and Capital Resources" for additional information. These actions are expected to also reduce costs in future periods. In addition, share-based compensation expense decreased primarily as a result of the reversal of expense recognized in prior periods during the year ended December 31, 2020 resulting from the determination that the performance conditions of our outstanding performance shares were no longer probable of achievement, partially offset by expense recorded in December 2020 as a result of the modification of these outstanding performance shares; see Note 15: "Share-Based Compensation" in our consolidated financial statements for additional information.
During the year ended December 31, 2020, we recognized reorganization costs related to activities undertaken in response to the COVID-19 pandemic, primarily relating to reductions in our workforce and the associated costs.
During the year ended December 31, 2020, we recognized $258 million of impairment losses, primarily related to our ownership segment, including $104 million on our ownership reporting unit's goodwill, along with certain assets associated with specific owned and leased hotels. Additionally, $15 million was related to management contract acquisition costs as a result of actual and expected early terminations of management contracts.
Other expenses decreased primarily as a result of a decrease in expenses from our purchasing operations, resulting from reduced demand. Other expenses for the year ended December 31, 2020 also included costs recognized for the settlement of a dispute with an owner of a managed hotel and amounts accrued related to our performance guarantees.
Gain on Sale of Assets, Net
Year Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(in millions)
Gain on sale of assets, net $ — $ 81 (100.0)
During the year ended December 31, 2019, we recognized a gain upon completion of the sale of the Hilton Odawara Resort & Spa ("Hilton Odawara"). See Note 3: "Disposal" in our consolidated financial statements for additional information.
Non-operating Income and Expenses
Year Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(in millions)
Interest expense $ (429) $ (414) 3.6
Loss on foreign currency transactions
(27) (2) NM (1)
Loss on debt extinguishments (48) — NM (1)
Other non-operating income (loss), net
(2) 3 NM (1)
Income tax benefit (expense) 204 (358) NM (1)
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(1) Fluctuation in terms of percentage change is not meaningful.
The increase in interest expense during the year ended December 31, 2020 was primarily due to the full draw down on our senior secured revolving credit facility (the "Revolving Credit Facility") in March 2020 and the issuances of senior notes in June 2019, April 2020 and December 2020. These increases were partially offset by a decrease in interest expense on our senior secured term loan facility (the "Term Loans") due to a 2019 principal repayment of $500 million and a decline in its variable interest rate, redemptions of senior notes in December 2020 and decreased variable interest expense for certain hotel finance
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leases due to a decline in operating performance. See Note 9: "Debt" in our consolidated financial statements for additional information on our indebtedness.
The gains and losses on foreign currency transactions included changes in foreign currency exchange rates on certain intercompany financing arrangements, including short-term cross-currency intercompany loans. The changes for both periods were the result of various currencies, but primarily the euro ("EUR") and the Australian dollar ("AUD"). Additionally, during the year ended December 31, 2020, we recognized losses related to the liquidation of investments in foreign entities that were reclassified out of accumulated other comprehensive loss.
Loss on debt extinguishments for the year ended December 31, 2020 related to the redemptions of senior notes and included redemption premiums totaling $31 million and the accelerated recognition of unamortized deferred financing costs of $17 million. See Note 9: "Debt" in our consolidated financial statements for additional information on these redemptions.
Other non-operating loss, net for the year ended December 31, 2020 primarily included losses related to a loan guarantee for a franchised hotel and the disposal of an investment and a gain related to the reimbursement by a third party for taxes owed resulting from the sale of a hotel in a prior period. Other non-operating income, net for the year ended December 31, 2019 primarily included a loss on the disposal of an unconsolidated real estate investment and expenses recognized in connection with the refinancings and repayments of our senior secured credit facilities.
The change in the income tax provision was primarily attributable to a decrease in income before income taxes. See Note 13: "Income Taxes" in our consolidated financial statements for additional information.
Segment Results
Refer to Note 18: "Business Segments" in our consolidated financial statements for reconciliations of revenues for our reportable segments to consolidated amounts and of segment operating income to consolidated income (loss) before income taxes. We evaluate our business segment operating performance using segment operating income (loss), without allocating other revenues and expenses or general and administrative expenses.
Refer to "—Revenues" for further discussion of the decrease in revenues from our managed and franchised properties, which is correlated to our management and franchise segment revenues and segment operating income (loss). Refer to "—Revenues" and "—Operating Expenses" for further discussion of the changes in revenues and operating expenses at our owned and leased hotels, which are correlated with our ownership segment revenues and segment operating income (loss).
Liquidity and Capital Resources
Overview
As of December 31, 2020, we had total cash and cash equivalents of $3,263 million, including $45 million of restricted cash and cash equivalents. The majority of our restricted cash and cash equivalents balance related to cash collateral on our self-insurance programs and cash held for FF&E reserves.
Although we cannot presently estimate the ultimate and total financial impact of the unprecedented COVID-19 pandemic, which is highly dependent on the severity and duration of the pandemic, we expect it will continue to have a significant adverse impact on our results of operations in future periods. As such, due to these uncertainties and the indeterminate length of time the pandemic will affect the hospitality industry, we took certain proactive measures to secure our liquidity position to be able to meet our obligations for the foreseeable future, which included: (i) fully drawing down on our $1.75 billion Revolving Credit Facility; (ii) suspending dividend payments and share repurchases; (iii) implementing strict cost management measures, such as temporarily halting certain marketing programs, temporarily eliminating non-essential expenses, including capital expenditures, and reducing payroll and related costs through workforce reductions, furloughs and temporary salary reductions; (iv) consummating the April 2020 pre-sale of Hilton Honors points to American Express for $1.0 billion in cash (the "Honors Points Pre-Sale"); (v) issuing $1.0 billion aggregate principal amount of senior notes in April 2020; and (vi) issuing $1.9 billion of aggregate principal amount of senior notes in December 2020 to extend debt maturities and reduce our cost of debt by repaying certain outstanding senior notes. Further, in February 2021, we issued $1.5 billion of aggregate principal amount of senior notes to continue to extend debt maturities and reduce our cost of debt by repaying additional outstanding senior notes. Based on our ability to manage our liquidity position during the COVID-19 pandemic, in January 2021, we repaid $250 million of the outstanding balance under our Revolving Credit Facility. See Note 22:" Subsequent Events" in our consolidated financial statements for additional information on these transactions.
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Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including costs associated with the management and franchising of hotels, corporate expenses, payroll and compensation costs, taxes and compliance costs, interest payments on our outstanding indebtedness, contract acquisition costs and capital expenditures for required renovations and maintenance at the hotels within our ownership segment. While our accounts receivable balance as of December 31, 2020 is less than periods prior to the start of the pandemic, we are generally experiencing slower payment of certain fees due to us. As such, we have considered the implications of these delayed payment trends in developing our estimates of expected future credit losses; see Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our consolidated financial statements for additional information.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements to the hotels within our ownership segment, commitments to owners in our management and franchise segment and corporate capital and information technology expenditures. We have currently suspended dividend payments and share repurchases, but expect that these activities will be reinstated and result in uses of liquidity in future periods.
We have a long-term investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments and returning available capital to stockholders through dividends and share repurchases. However, the COVID-19 pandemic has caused us to temporarily change our cash management strategy as described above. Within the framework of our investment policy, we currently intend to continue to finance our business activities primarily with cash on our balance sheet as of December 31, 2020 and cash generated from our operations.
After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments for the foreseeable future based on current conditions. The objectives of our cash management policy are to maintain the availability of liquidity while minimizing operational costs.
We may from time to time issue or incur or increase our capacity to incur new debt and/or purchase our outstanding debt through underwritten offerings, open market transactions, privately negotiated transactions or otherwise. Issuances or incurrence of new debt (or an increase in our capacity to incur new debt) and/or purchases or retirement of outstanding debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
We formally suspended share repurchases given the current economic environment and our efforts to preserve cash, and no share repurchases have been made since March 5, 2020. The stock repurchase program remains authorized by the board of directors, and we may resume share repurchases in the future at any time, depending on market conditions, our capital needs and other factors. Prior to the suspension, during the year ended December 31, 2020, we repurchased 2.6 million shares of our common stock under our repurchase program for $279 million, which we funded principally with available cash. As of December 31, 2020, approximately $2.2 billion remained available for share repurchases under the program.
Sources and Uses of Our Cash and Cash Equivalents
The following table summarizes our net cash flows:
Year Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(in millions)
Net cash provided by operating activities $ 708 $ 1,384 (48.8)
Net cash used in investing activities (107) (123) (13.0)
Net cash provided by (used in) financing activities 2,032 (1,113) NM (1)
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Operating Activities
The decrease in net cash provided by operating activities was primarily the result of decreases in cash inflows generated from our management and franchise properties and our owned and leased hotels, largely as a result of decreases in system-wide RevPAR due to the COVID-19 pandemic, as further discussed in "—Revenues." The decrease in net cash provided by operating activities was partially offset by $1.0 billion of cash received in connection with the Honors Points Pre-Sale and a decrease in cash paid for taxes of $284 million, primarily resulting from a decrease in income before income taxes, as well as net operating losses that were generated in 2020 in many tax jurisdictions that had taxable income in 2019.
Investing Activities
Net cash used in investing activities primarily related to capital expenditures for property and equipment and capitalized software costs; however, in response to the COVID-19 pandemic, we took steps to temporarily eliminate non-essential expenses, including capital expenditures, in 2020. Our capital expenditures for property and equipment primarily consisted of expenditures related to our corporate facilities and the renovation of hotels in our ownership segment, and our capitalized software costs related to various systems initiatives, for the benefit of both our hotel owners and our overall corporate operations. During the year ended December 31, 2019, we received cash proceeds of $120 million relating to the sale of the Hilton Odawara that partially offset capital expenditures for property and equipment, capitalized software costs and other uses of cash for investing activities.
Financing Activities
The increase in cash provided by financing activities was primarily attributable to a $1.3 billion increase in cash inflows and a $500 million decrease in cash outflows from net borrowings and repayments under our senior secured credit facilities and a $1.4 billion decrease in cash outflows for share repurchases and dividend payments. See Note 9: "Debt" in our consolidated financial statements for additional information regarding our senior notes issuances and repayments, which, other than the related debt issuance costs and redemption premiums, had the same net impact on cash flows from financing activities during the years ended December 31, 2020 and 2019.
Debt and Borrowing Capacity
As of December 31, 2020, our total indebtedness, excluding unamortized deferred financing costs and discount, was approximately $10.6 billion. For additional information on our total indebtedness, including fully drawing down our Revolving Credit Facility, our issuances of series of senior notes totaling $2.9 billion aggregate principal amount, our repayment of $1.9 billion aggregate principal amount of senior notes and guarantees on our debt, refer to Note 9: "Debt" in our consolidated financial statements. For information on our $250 million repayment on our Revolving Credit Facility in January 2021 and the issuance of $1.5 billion aggregate principal amount of senior notes in February 2021, refer to Note 22: "Subsequent Events" in our consolidated financial statements.
If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to reduce capital expenditures or issue additional equity securities. Our ability to make scheduled principal payments and to pay interest on our debt depends on our future operating performance, which is subject to general conditions in or affecting the hospitality industry that may be beyond our control. The COVID-19 pandemic negatively impacted our cash flows from operations during the period, and will continue to do so for an indeterminate period of time. Although our operating activities provided cash during the year ended December 31, 2020, it was primarily a result of the Honors Points Pre-Sale. We took precautions to secure our cash position, as discussed above, and expect to be able to meet our current obligations. Furthermore, we do not have any material indebtedness outstanding that matures prior to June 2024.
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Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2020:
Payments Due by Period
Total Less Than 1 Year 1-3 Years 3-5 Years More Than 5 Years
(in millions)
Long-term debt (1)
$ 12,756 $ 355 $ 710 $ 2,852 $ 8,839
Finance leases (2)
317 68 75 63 111
Operating leases (3)
1,465 210 296 235 724
Other commitments
347 157 120 27 43
Total contractual obligations $ 14,885 $ 790 $ 1,201 $ 3,177 $ 9,717
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(1) Includes principal, as well as estimated interest payments, and excludes finance lease liabilities. For our variable-rate debt, we have assumed a weighted average constant 30-day LIBOR rate of 0.15 percent as of December 31, 2020.
(2) Includes imputed interest using a weighted average interest rate of 5.85 percent as of December 31, 2020.
(3) Includes imputed interest using a weighted average interest rate of 3.82 percent as of December 31, 2020.
The total amount of unrecognized tax benefits as of December 31, 2020 was $451 million. This amount is excluded from the table above because these unrecognized tax benefits are uncertain and subject to the findings of the taxing authorities in the jurisdictions where we are subject to taxation. It is possible that the amount of the liability for unrecognized tax benefits could change. Refer to Note 13: "Income Taxes" in our consolidated financial statements for additional information.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as of December 31, 2020 included letters of credit of $60 million. Additionally, we enter into purchase commitments in the normal course of business for which we are reimbursed by the owners of our managed and franchised hotels to operate our marketing, sales and brand programs. These obligations have minimal or no net effect on our future cash flows. See Note 19: "Commitments and Contingencies" in our consolidated financial statements for additional information.
Summarized Guarantor Financial Information
Hilton Domestic Operating Company Inc. ("HOC") is the issuer of the following senior notes, collectively referred to as the Senior Notes:
• 5.375% Senior Notes due 2025;
• 5.125% Senior Notes due 2026;
• 4.875% Senior Notes due 2027;
• 5.750% Senior Notes due 2028;
• 3.750% Senior Notes due 2029;
• 4.875% Senior Notes due 2030; and
• 4.000% Senior Notes due 2031.
HOC is 100 percent owned directly by Hilton Worldwide Parent LLC ("HWP"), which, in turn, is 100 percent owned directly by Hilton Worldwide Holdings Inc. (the "Parent"). The Senior Notes are guaranteed jointly and severally on a senior unsecured basis by the Parent, HWP and substantially all of the Parent's direct and indirect wholly owned domestic restricted subsidiaries, except for HOC, the issuer (together, the "Guarantors"). The indentures that govern the Senior Notes provide that any subsidiary of the Company that provides a guarantee of our senior secured credit facilities will guarantee the Senior Notes. As of December 31, 2020, none of our foreign subsidiaries or domestic subsidiaries owned by foreign subsidiaries or conducting foreign operations or our non-wholly owned subsidiaries guaranteed the Senior Notes.
The guarantees are full and unconditional, subject to certain customary release provisions. The indentures that govern the Senior Notes provide that any Guarantor may be released from its guarantee so long as: (i) the subsidiary is sold or sells all of its assets; (ii) the subsidiary is released from its guarantee under our senior secured credit facilities; (iii) the subsidiary is declared "unrestricted" for covenant purposes; or (iv) the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied, in each case in compliance with applicable provisions of the indentures.
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Neither HOC nor any of the Guarantors has any reporting obligation under the Exchange Act in respect of the Senior Notes; however, we are supplementally providing the information set forth below. The following tables present summarized financial information for HOC, along with the Parent and all other Guarantors, on a combined basis:
As of
December 31, 2020
(in millions)
ASSETS
Total current assets
$ 686
Intangible assets, net 8,763
Total intangibles and other assets
9,261
TOTAL ASSETS 9,947
LIABILITIES AND DEFICIT
Total current liabilities
1,869
Long-term debt 10,227
Total liabilities
15,893
Total Hilton stockholders' deficit (5,946)
TOTAL LIABILITIES AND DEFICIT 9,947
Year Ended December 31, 2020
(in millions)
Revenues
Revenues $ 956
Other revenues from managed and franchised properties
2,394
Total revenues $ 3,350
Expenses
Expenses $ 490
Other expenses from managed and franchised properties
2,730
Total expenses $ 3,220
Operating income $ 130
Interest expense (412)
Income tax benefit 126
Net loss (207)
Net loss attributable to Hilton stockholders (207)
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. We believe that of our significant accounting policies, which are described in Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our consolidated financial statements, the following accounting policies are critical because they involve a higher degree of judgment, and the estimates required to be made were based on assumptions that are inherently uncertain. As a result, these accounting policies could materially affect our financial position, results of operations, cash flows and related disclosures. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that we believe reflect the current circumstances. While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material effect on our financial position or results of operations.
Management has discussed the development and selection of the following critical accounting policies and estimates with the audit committee of the board of directors.
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Impairment of Goodwill and Brands Intangible Assets
We evaluate goodwill and brands intangible assets for potential impairment on an annual basis or at other times during the year if indicators of impairment exist. Our reporting units are the same as our operating segments as described in Note 18: "Business Segments" in our consolidated financial statements.
As part of the evaluation of goodwill and brands intangible assets for potential impairment, we exercise judgment to:
• perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit or brand intangible asset is less than its carrying value. Factors we consider when making this determination include assessing the overall effect of trends in the hospitality industry and the general economy, regional performance and expectations and historical experience;
• decide whether to bypass the qualitative assessment and perform a quantitative assessment. Factors we consider when making this determination include the amount by which the fair value exceeded the carrying value at the previous quantitative assessment and the period of time that has passed since such quantitative assessment. Additionally, changes in the Company or general economic conditions are taken into consideration; and
• perform a quantitative analysis to identify both the existence of impairment and the amount of the impairment loss. The estimated fair value is based on internal projections of expected future cash flows and operating plans, as well as market conditions relative to the operations of our reporting units and brands.
As of December 31, 2020, we had $5,095 million of goodwill and $4,904 million of brands intangible assets. During the fourth quarter of 2020, we performed a quantitative analysis of goodwill and brands intangible assets for potential impairment and we fully impaired the goodwill attributable to our ownership reporting unit by recognizing impairment losses of $104 million during the year ended December 31, 2020. See Note 6: "Goodwill and Intangible Assets" and Note 11: Fair Value Measurements" in our consolidated financial statements for additional information. Changes in estimates and assumptions used in our impairment testing could result in future impairment losses, which could be material.
Impairment of Certain Finite-Lived Assets
If we determine there are indicators of impairment, we evaluate the carrying value of our specifically identifiable lease intangible assets, operating and finance lease ROU assets and property and equipment for potential impairment, as an asset group, by comparing the expected undiscounted future cash flows to the net carrying value of the assets.
As part of the process, we exercise judgment to:
• determine if there are indicators of impairment present. Factors we consider when making this determination include assessing the overall effect of trends in the hospitality industry and the general economy, regional performance and expectations, historical experience, capital costs and other asset-specific information;
• determine the projected undiscounted future cash flows when indicators of impairment are present. Judgment is required when developing projections of future revenues and expenses based on estimated growth rates over the expected useful life of the asset group. Forward-looking growth rate estimates are based on historical operating results, as well as various internal projections and external sources; and
• determine the asset group fair value when required. In determining the fair value, we often use internally-developed discounted cash flow models, as well as appraisals, recent similar transactions in the market and, if appropriate and available for a specific asset group, current estimated net sales proceeds from pending offers. Assumptions used in the discounted cash flow models include estimating cash flows, which may require us to adjust for specific market conditions, as well as capitalization rates, which are based on location, property or asset type, market-specific dynamics and overall economic performance. The discount rate applied to forward-looking projections takes into account our weighted average cost of capital according to our capital structure and other market specific considerations.
As of December 31, 2020, we had $62 million, $772 million and $346 million of other lease intangible assets, net, operating lease ROU assets and property and equipment, net, respectively. During the year ended December 31, 2020, we recognized impairment losses of $46 million, $65 million and $28 million, respectively, on these assets. See Note 11: "Fair
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Value Measurements" in our consolidated financial statements for additional information. Changes in estimates and assumptions used in our impairment testing could result in future impairment losses, which could be material.
Leases
We record lease liabilities as the present value of the future minimum lease payments using a discount rate that is either the rate implicit in the lease, if available, or our incremental borrowing rate, adjusted for collateral. The collateralized incremental borrowing rate is estimated on a portfolio basis and reflects factors such as the term of the lease and the currency in which the lease payments will be made. The determination of the estimate of lease liabilities utilizes various assumptions that require judgment, including our adjustment for collateral, economic factors, including currency data, and our credit risk. The ROU asset is measured at the amount of the lease liability, with applicable adjustments.
As of December 31, 2020, we had $1.4 billion of lease liabilities. If circumstances arise, such as a modification of an existing lease, that require the reassessment of the collateralized incremental borrowing rate, changes in the estimates previously used for such a modified arrangement could result in material changes to our lease liabilities.
Hilton Honors
Hilton Honors records a point redemption liability for amounts received from participating hotels and strategic partners in an amount equal to the estimated cost per point of the future redemption obligation. We engage outside actuaries to assist in determining the fair value of the future award redemption obligation using statistical formulas that project future point redemptions based on factors that require judgment, including an estimate of "breakage" (points that will never be redeemed), an estimate of the points that will eventually be redeemed and the cost of the points to be redeemed. The cost of the points to be redeemed includes further estimates of available room nights, occupancy rates, room rates and any changes to the program, including devaluation or appreciation of points based on changes in the number of points required to redeem a reward. Any amounts received from participating hotels and strategic partners in excess of the actuarial determined cost per point are recorded as deferred revenue and recognized as revenue upon point redemption or licensing fees, as applicable. We recognize revenue for point redemptions in the amount we expect to retain in excess of the cost per point, inclusive of estimated breakage, and limit the revenue recognized to an amount that is probable to not result in a significant reversal in the cumulative revenue recognized when breakage occurs.
In addition to the Hilton Honors fees we receive from hotel owners to operate the program, we earn fees from co-branded credit card arrangements for the use of our IP license and the issuance of Hilton Honors points. The allocation of the overall fees from the co-branded credit card arrangements between the IP license and the Hilton Honors points is based on their estimated standalone selling prices. The estimated standalone selling price of the IP license is determined using a relief-from-royalty valuation method using statistical formulas based on factors that require significant judgment, including estimates of credit card usage, an appropriate royalty rate and a discount rate to be applied to the projected cash flows. The estimated standalone selling price of the future reward redemptions of Hilton Honors points under the co-branded credit card arrangements is calculated using a discounted cash flow analysis with the same assumptions as the point redemption liability discussed above, adjusted for an appropriate margin.
As of December 31, 2020, we had a $2.5 billion liability for guest loyalty program, including $703 million reflected as a current liability, and deferred revenues related to Hilton Honors, excluding strategic partnerships, of $249 million, including $70 million reflected as a current liability. Changes in the estimates used in developing our breakage rate or other expected future program operations could result in material changes to our liability for guest loyalty program and deferred revenues.
As a result of the impact of the COVID-19 pandemic on our business, we reassessed the expected redemption rate of our Hilton Honors points. The re-evaluation as of March 31, 2020 resulted in reclassifications of the liability for guest loyalty program and deferred revenues from current to long term of $221 million and $50 million, respectively. We continued to use the revised methodology subsequent to March 31, 2020. Further, during 2020, we extended the temporary suspension of the expiration of Hilton Honors points through December 31, 2021. As a result, we adjusted our estimates of breakage to include, among other factors, the anticipated point expirations that will occur on December 31, 2021.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying values and the tax basis of assets and liabilities using currently enacted tax rates. We regularly review our deferred tax assets to assess their potential realization and establish a valuation allowance for portions of such assets that we believe will not be ultimately
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realized. In performing this review, we make estimates and assumptions regarding projected future taxable income, the expected timing of reversals of existing temporary differences and the implementation of tax planning strategies. A change in these assumptions may increase or decrease our valuation allowance resulting in an increase or decrease in our effective tax rate, which could materially affect our consolidated financial statements.
We use a prescribed more-likely-than-not recognition threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return if there is uncertainty in income taxes recognized in the consolidated financial statements. When determining the amount of tax benefit to be recognized, we assume, among other items, the position will be examined, the examiner will have all relevant information and the evaluation of the position will be based on its technical merits. Further, estimates based on a tax position’s technical merits and amounts we would ultimately accept in a negotiated settlement with the tax authorities are used to measure the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Changes to these assumptions and estimates can lead to an additional income tax benefit (expense), which could materially affect our consolidated financial statements.
Legal Contingencies
We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. An estimated loss from a loss contingency will be accrued as a charge to income if it is probable and the amount of the loss can be reasonably estimated. Significant judgment is required when we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially affect our consolidated financial statements.
Consolidation
We use judgment when evaluating whether we have a controlling financial interest in an entity, including the assessment of the importance of rights and privileges of the partners based on voting rights, as well as financial interests in an entity that are not controllable through voting interests. If an entity in which we hold an interest is considered to be a VIE, we use judgment evaluating whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interests in the entity. Changes to judgments used in evaluating our partnerships and other investments could materially affect our consolidated financial statements.
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