Hilton Worldwide Holdings Inc. 10-Q

Item 2. 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 unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements include, but are not limited to, statements related to our expectations regarding the impact of and recovery from the COVID-19 pandemic, the performance of our business, our financial results, our liquidity and capital resources and other non-historical statements. In some cases, you can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "projects," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties including, among others, risks inherent to the hospitality industry, macroeconomic factors beyond our control, such as challenges due to labor shortages and supply chain disruptions, risks related to the impact of the COVID-19 pandemic, including as a result of new strains and variants of the virus and uncertainty of acceptance of the COVID-19 vaccines and their effectiveness, competition for hotel guests and management and franchise contracts, risks related to doing business with third-party hotel owners, performance of our information technology systems, growth of reservation channels outside of our system, risks of doing business outside of the U.S. and our indebtedness. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, those described under "Part I—Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. COVID-19 Pandemic The COVID-19 pandemic has significantly impacted the global economy and strained the hospitality industry since the beginning of 2020. Our Asia Pacific region began experiencing the effects of the COVID-19 pandemic in January 2020, while the pronounced negative results and suspensions of hotel operations in the Americas and Europe, Middle East and Africa ("EMEA") regions did not begin until mid-March 2020. Since the beginning of the pandemic, the pervasiveness and severity of travel restrictions and stay-at-home directives have varied by country and state, fluctuating based on a number of factors, including: (i) COVID-19 infection surges and contractions; (ii) the emergence of new strains and variants of the virus; and (iii) the distribution of COVID-19 vaccinations, which commenced in late 2020. The pandemic had a material adverse impact on our results for the three and nine months ended September 30, 2021 and 2020 when compared to periods prior to the onset of the pandemic, and although all periods were significantly impacted by the pandemic, none of these periods are considered comparable, and no periods affected by the pandemic are expected to be comparable to future periods. Although we have observed signs of economic recovery, we are still unable to predict the time required for a widespread sustainable economic recovery to take hold on a global scale. Accordingly, given the ongoing nature of the pandemic, the ultimate impact that it will have on the Company’s business, financial performance and results of operations remains uncertain. Although certain restrictions have been reinstated with the spread of new variants of the virus, the broader distribution of COVID-19 vaccinations in early 2021 and the overall easing of travel and other restrictions have generated renewed interest in travel and tourism activities in many markets around the globe. However, the continued spreading of COVID-19 and its related variants could result in travel and other restrictions being implemented or reinstated in the affected areas, where our hotels may be located, in future periods. While the restrictions and the reduction in travel resulted in the suspensions of operations at certain hotels throughout 2020, and the operations of approximately 335 hotels were suspended for some period of time during the nine months ended September 30, 2021, reopenings have significantly outpaced suspensions during 2021, and only 69 hotels remained suspended as of October 20, 2021. We expect nearly all of our hotel properties that were suspended for some period of time as a result of the pandemic to be open by the end of 2021. 18 Overview Our Business Hilton is one of the largest hospitality companies in the world, with 6,758 properties comprising 1,061,686 rooms in 122 countries and territories as of September 30, 2021. 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 September 30, 2021, we had 123 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 the 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 properties in our ownership segment. 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 exchange for the use of one of our brand names and related commercial services, such as our reservation systems, 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) EMEA; and (iii) Asia Pacific. The Americas region includes North America, South America and Central America, including all Caribbean nations. Although the U.S., which represented 71 percent of our system-wide hotel rooms as of September 30, 2021, is included in the Americas region, it 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 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. During the nine months ended September 30, 2021, we added 320 hotels, consisting of over 51,000 rooms, to our system, contributing to nearly 42,100 net additional hotel rooms. As of September 30, 2021, we had more than 2,620 hotels in our development pipeline that we expect to add to our system in the future, representing 404,000 rooms under construction or approved for development throughout 114 countries and territories, including 27 countries and territories where we do not currently have any existing 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, 249,000 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. 19 Brexit In June 2016, the U.K. held a referendum in which voters approved an exit from the European Union ("E.U.") (commonly referred to as "Brexit"). In December 2020, the U.K. and the E.U. reached a new bilateral trade and cooperation deal governing their future relationship (the "EU-UK Trade and Cooperation Agreement"), which was fully implemented from May 1, 2021. 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. While our results as of and for the three and nine months ended September 30, 2021 were not materially affected by Brexit specifically, we will continue to monitor the potential impact of Brexit on our business in future periods. 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 6,699 hotels in our system as of September 30, 2021, 5,572 hotels were classified as comparable hotels. Our 1,127 non-comparable hotels included 66 hotels, or less than one percent of the total hotels in our system, that were removed from the comparable group during the last twelve months because they have 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, no hotel that had completely or partially suspended operations on a temporary basis at any time as a result of the COVID-19 pandemic was excluded from the definition of comparable hotels on that basis alone. 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 three and nine months ended September 30, 2021 and 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 the 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, based on the comparable hotels as of September 30, 2021, 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 three and nine months ended September 30, 2021 and 2020 use the exchange rates used to translate the results of the Company's foreign operations within its financial statements for the three and nine months ended September 30, 2021, respectively, and for the three months ended September 30, 2021 and 2019, use the 20 exchange rates used to translate the results of the Company's foreign operations within its financial statements for the three months ended September 30, 2021. 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 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 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 capital expenditures for property and equipment, 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 GAAP and should not be considered as alternatives, either in isolation or as a substitute, for net income (loss) or other measures of financial performance or liquidity, including cash flows, derived in accordance with GAAP. Further, EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as 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 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. 21 Results of Operations The hotel operating statistics by region for our system-wide comparable hotels were as follows: Three Months Ended Change Nine Months Ended Change September 30, 2021 2021 vs. 2020 September 30, 2021 2021 vs. 2020 U.S. Occupancy 67.9 % 23.4 % pts. 59.9 % 17.7 % pts. ADR $ 146.89 34.2 % $ 130.26 7.0 % RevPAR $ 99.71 104.9 % $ 78.00 51.9 % Americas (excluding U.S.) Occupancy 54.4 % 30.1 % pts. 40.7 % 12.1 % pts. ADR $ 116.18 19.9 % $ 108.63 (3.1) % RevPAR $ 63.15 168.3 % $ 44.25 38.0 % Europe Occupancy 59.3 % 27.7 % pts. 37.0 % 6.8 % pts. ADR $ 132.23 28.9 % $ 115.89 1.0 % RevPAR $ 78.42 142.3 % $ 42.92 23.8 % MEA Occupancy 52.9 % 27.8 % pts. 48.1 % 15.0 % pts. ADR $ 120.92 (0.4) % $ 125.50 — % RevPAR $ 63.94 110.1 % $ 60.40 45.2 % Asia Pacific Occupancy 49.5 % (4.8) % pts. 49.8 % 9.5 % pts. ADR $ 102.67 15.4 % $ 99.95 3.1 % RevPAR $ 50.86 5.2 % $ 49.81 27.5 % System-wide Occupancy 64.3 % 21.5 % pts. 55.7 % 15.6 % pts. ADR $ 140.57 32.2 % $ 125.93 6.2 % RevPAR $ 90.39 98.7 % $ 70.15 47.6 % During the three and nine months ended September 30, 2021, the COVID-19 pandemic continued to negatively impact our business and our hotel operating statistics. However, during the nine months ended September 30, 2021, we experienced significant improvement in our results, due to an upward trend in travel and tourism with the easing of many COVID-19 restrictions and the more expansive distribution of COVID-19 vaccinations. Further, in addition to all regions showing improvement in RevPAR during the three months ended September 30, 2021 as compared to the same period in 2020, almost all regions showed sequential improvement in RevPAR during the period from the three months ended June 30, 2021. While the recoveries of the Europe and Americas Non-US regions were outpaced by other regions in prior periods during 2021, the easing of travel restrictions, and, for Europe, a more expansive vaccination program, accelerated their recovery during the three months ended September 30, 2021, resulting in improved operating statistics more consistent with system-wide results. In Asia Pacific, stronger prior year results and a fluctuating recovery due to prolonged COVID-19 and travel restrictions in certain countries, particularly China, Australia and New Zealand, resulted in a more muted increase in RevPAR in the quarter when compared to the other regions. Further, as a result of the pandemic, certain hotels suspended operations at various times throughout 2020, but the majority of those hotels were reopened by 2021. In line with our recovery, although some hotels did suspend operations during the nine months ended September 30, 2021, reopenings significantly outpaced suspensions. As such, the operations of only approximately 335 hotels, primarily located in the U.S. and Europe, were suspended for some period of time during the nine months ended September 30, 2021, as compared to approximately 1,270 hotels during the nine months ended September 30, 2020. Ninety-nine percent of our global hotel properties were open as of September 30, 2021. Additionally, while most properties, including those that reopened following suspensions of their operations, experienced significantly lower occupancy during 2020 and early 2021 as compared to periods prior to the onset of the pandemic, system-wide occupancy has steadily improved during the year. Further, our system-wide RevPAR and ADR for the three months ended September 30, 2021 was 22 down 18.8 percent and 2.5 percent, respectively, compared to the same period in 2019 on a comparable and currency neutral basis. The table below provides a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in millions) Net income (loss) $ 240 $ (81) $ 259 $ (495) Interest expense 98 116 302 316 Income tax expense (benefit) 100 (33) 64 (80) Depreciation and amortization expenses 46 90 143 269 EBITDA 484 92 768 10 Loss on sale of assets, net 8 — 8 — Loss (gain) on foreign currency transactions — 12 (1) 16 Loss on debt extinguishment — — 69 — FF&E replacement reserves 15 18 30 39 Share-based compensation expense 52 25 144 37 Reorganization costs — — — 38 Impairment losses — 9 — 136 Amortization of contract acquisition costs 9 7 23 22 Net other expenses (revenues) from managed and franchised properties (62) 44 57 281 Other adjustments (1) 13 17 19 59 Adjusted EBITDA $ 519 $ 224 $ 1,117 $ 638 ____________ (1) The three and nine months ended September 30, 2021 and 2020 include costs recognized for certain legal settlements. The nine months ended September 30, 2020 also includes losses related to the disposal of an investment and the settlement of a debt guarantee for a franchised hotel. All periods include severance not related to the reorganization activities undertaken in response to the COVID-19 pandemic and other items. Revenues Three Months Ended Percent Nine Months Ended Percent September 30, Change September 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions) Franchise and licensing fees $ 451 $ 241 87.1 $ 1,062 $ 712 49.2 Base and other management fees $ 49 $ 24 NM (1) $ 116 $ 92 26.1 Incentive management fees 26 7 NM (1) 60 25 NM (1) Total management fees $ 75 $ 31 NM (1) $ 176 $ 117 50.4 ____________ (1) Fluctuation in terms of percentage change is not meaningful. The COVID-19 pandemic began to significantly impact our franchise and licensing fees and total management fees in March 2020. However, during 2021, we are experiencing increases in fees recognized, as compared to fees recognized during the same periods in 2020, driven by an upward trend in travel and tourism resulting from increased desire to travel by our customers, as COVID-19 vaccinations were distributed more broadly and COVID-19 restrictions eased in many areas. Additionally, there were decreases in the number of hotels that had suspended operations as a result of the pandemic during the respective periods, with approximately 1,235 managed and franchised hotels with suspended operations for some period of time during the nine months ended September 30, 2020, compared to approximately 320 managed and franchised hotels during the nine months ended September 30, 2021. As of September 30, 2021, all but 87 of these hotels had reopened. For the three months ended September 30, 2021, RevPAR increased 93.8 percent at our comparable franchised properties and 119.2 percent at our comparable managed properties as a result of increased occupancy of 22.3 percentage points and 18.6 percentage points, respectively, and increased ADR of 30.7 percent and 38.7 percent, respectively. For the nine months ended September 30, 2021, RevPAR increased 51.5 percent at our comparable franchised properties and 36.2 percent at our 23 comparable managed properties as a result of increased occupancy of 17.3 percentage points and 10.6 percentage points, respectively, and increased ADR of 7.5 percent and 3.1 percent, respectively. Including new development and ownership type transfers, from January 1, 2020 to September 30, 2021, we added 650 managed and franchised properties on a net basis, providing an additional 91,000 rooms to our management and franchise segment. As new hotels were part of our system for full periods and were part of the recovery from the negative impact of the COVID-19 pandemic, such hotels increased our franchise and management fees during the periods, and we expect this trend to continue in future periods. Additionally, licensing and other fees increased $33 million and $61 million during the three and nine months ended September 30, 2021, respectively, primarily due to increases in licensing fees from our strategic partnerships and HGV, which were the result of increased co-branded credit cardholder spend and timeshare revenues, respectively, both resulting from the rise in travel and tourism during the periods. Incentive management fees increased during the periods as they are based on hotels' operating profits, which have improved from the prior year as a result of increased demand at our properties. Three Months Ended Percent Nine Months Ended Percent September 30, Change September 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions) Owned and leased hotels $ 199 $ 94 NM (1) $ 376 $ 335 12.2 ____________ (1) Fluctuation in terms of percentage change is not meaningful. The increases in owned and leased hotel revenues during the three and nine months ended September 30, 2021 were primarily attributable to increases in revenues from our comparable owned and leased hotels, particularly as a result of the ongoing recovery from the COVID-19 pandemic. Further, although the operations of approximately 15 and 35 of our owned and leased hotels were suspended for some period of time during the nine months ended September 30, 2021 and 2020, respectively, as a result of the COVID-19 pandemic, all of these hotels were reopened before the three months ended September 30, 2021, with no additional suspensions during the period. The increase during the three months ended September 30, 2021 was primarily attributable to an $84 million and $20 million increase, on a currency neutral basis, from our comparable and non-comparable owned and leased hotels, respectively. with no significant impact from fluctuations in foreign currency exchange rates. The increase from our comparable owned and leased hotels was primarily the result of increased RevPAR of 151.1 percent, due to increases in occupancy and ADR of 25.2 percentage points and 23.0 percent, respectively. The increase during the nine months ended September 30, 2021 included an $11 million increase as a result of favorable fluctuations in foreign currency exchange rates and, on a currency neutral basis, a $34 million increase from our comparable owned and leased hotels, only partially offset by a $4 million decrease from our non-comparable owned and leased hotels. The increase from our comparable owned and leased hotels was the result of increased RevPAR of 9.8 percent, primarily due to increased occupancy of 3.4 percentage points, partially offset by decreased ADR of 2.6 percent, as well as a $22 million increase in COVID-19 relief subsidies from international governments. The decrease in revenues from our non-comparable owned and leased hotels included a $10 million decrease, on a currency neutral basis, from properties that were sold or for which the lease agreements were terminated, with most of the properties transferring to our management and franchise segment during 2021 and 2020. The increase in revenues from the remaining non-comparable owned and leased hotels included a $7 million increase in COVID-19 relief subsidies from international governments. Three Months Ended Percent Nine Months Ended Percent September 30, Change September 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions) Other revenues $ 18 $ 19 (5.3) $ 56 $ 52 7.7 For the nine months ended September 30, 2021, other revenues increased primarily due to increased revenue from our purchasing operations related to improving hotel demand resulting from the rise in travel and tourism during the period. 24 Operating Expenses Three Months Ended Percent Nine Months Ended Percent September 30, Change September 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions) Owned and leased hotels $ 200 $ 144 38.9 $ 452 $ 478 (5.4) The increase in owned and leased hotel expenses during the three months ended September 30, 2021 was primarily related to our comparable owned and leased hotels and reflects the increase in occupancy during the period, as discussed in "—Revenues," which drove increased food and beverage expenses and certain operating costs of the hotels. The decrease for the nine months ended September 30, 2021 included decreases of $34 million and $15 million, on a currency neutral basis, from our comparable and non-comparable owned and leased hotels, respectively, which were partially offset by a $23 million increase as a result of unfavorable fluctuations in foreign currency exchange rates. Despite the increase in occupancy during the period, our owned and leased hotels had decreases in certain operating expenses, as well as expenses related to FF&E replacement reserves due to reduced required FF&E spending during the period at our leased properties. Additionally, expenses from our non-comparable owned and leased hotels included an $11 million decrease due to properties being sold or lease agreements terminated, with most of the properties transferring to our management and franchise segment during 2021 and 2020. Three Months Ended Percent Nine Months Ended Percent September 30, Change September 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions) Depreciation and amortization expenses $ 46 $ 90 (48.9) $ 143 $ 269 (46.8) General and administrative expenses 107 66 62.1 302 189 59.8 Reorganization costs — — NM (1) — 38 (100.0) Impairment losses — 9 (100.0) — 136 (100.0) Other expenses 12 21 (42.9) 31 48 (35.4) ____________ (1) Fluctuation in terms of percentage change is not meaningful. The decreases in depreciation and amortization expenses were due to decreases in amortization expenses, primarily resulting from certain management and franchise contract intangible assets that were recorded at the Merger becoming fully amortized during 2020, as well as a result of certain software project costs becoming fully amortized. The increases in general and administrative expenses were primarily due to increased share-based compensation expense as a result of expenses recognized during the three and nine months ended September 30, 2021 for all of the outstanding performance shares, which were probable of achievement as of September 30, 2021, while the expenses recognized during the three and nine months ended September 30, 2020 were net of the reversal of expenses recognized in prior periods as a result of the determination that the performance conditions of the performance shares that were originally awarded in 2018, 2019 and 2020 were no longer probable of achievement. See Note 8: "Share-Based Compensation" in our unaudited condensed consolidated financial statements for additional information. Also contributing to the increase for the three and nine months ended September 30, 2021 was an increase in payroll expenses, primarily resulting from our corporate workforce that was retained during 2021 after completion of our reorganization activities, of which a significant portion was on reduced pay or furlough for a six month period during the nine months ended September 30, 2020. During the nine months ended September 30, 2020, we recognized reorganization costs related to activities undertaken in response to the COVID-19 pandemic, primarily relating to reductions in our workforce and associated costs. During the three and nine months ended September 30, 2020, we recognized impairment losses of $3 million and $24 million for property and equipment, respectively, including $2 million and $4 million, respectively, for finance lease ROU assets. During the nine months ended September 30, 2020, we also recognized impairment losses of $51 million and $46 million for operating lease ROU assets and other intangible assets, respectively. All of these impairment losses were related to our leased hotel properties. Additionally, during the three and nine months ended September 30, 2020, we recognized impairment losses of $6 million and $15 million related to management contract acquisition costs. These impairment losses 25 were due to a decline in results and expected future performance at the related hotels as a result of the COVID-19 pandemic, as well as actual and expected early terminations of the related management contracts. Other expenses decreased primarily as a result of expenses related to the settlement of a dispute with an owner of a managed hotel that were recognized during the three and nine months ended September 30, 2020 and, during the nine months ended September 30, 2021, as a result of expenses related to performance guarantees that were recognized during 2020. Non-operating Income and Expenses Three Months Ended Percent Nine Months Ended Percent September 30, Change September 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions) Interest expense $ (98) $ (116) (15.5) $ (302) $ (316) (4.4) Gain (loss) on foreign currency transactions — (12) (100.0) 1 (16) NM (1) Loss on debt extinguishment — — NM (1) (69) — NM (1) Other non-operating income (loss), net 6 3 NM (1) 16 (20) NM (1) Income tax benefit (expense) (100) 33 NM (1) (64) 80 NM (1) ____________ (1) Fluctuation in terms of percentage change is not meaningful. The decreases in interest expense during the three and nine months ended September 30, 2021 included the decreases resulting from the issuances of new senior unsecured notes and the use of such proceeds for extinguishments of existing senior unsecured notes in December 2020 and February 2021, which reduced the weighted average interest rates on our outstanding senior unsecured notes. Additionally, we repaid the entire outstanding balance on the Revolving Credit Facility as of June 30, 2021, while it was fully drawn for the period from March 2020 to December 2020. For the nine months ended September 30, 2021, our variable interest expense also decreased due to declines in the variable interest rate on our Term Loan; however, the decrease in interest expense during the nine months ended September 30, 2021 was partially offset by an increase due to the issuances of the 2025 Senior Notes and the 2028 Senior Notes in April 2020. See Note 5: "Debt" in our unaudited condensed 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 were the result of various currencies, but primarily the Australian dollar and, for the three and nine months ended September 30, 2020, the euro. Additionally, during the three and nine months ended September 30, 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 extinguishment for the nine months ended September 30, 2021 related to the redemption of the 2026 Senior Notes and included a redemption premium of $55 million and the accelerated recognition of unamortized deferred financing costs on the 2026 Senior Notes of $14 million. See Note 5: "Debt" in our unaudited condensed consolidated financial statements for additional information. The change in other non-operating income (loss), net primarily resulted from losses related to the disposal of an investment and the settlement of a debt guarantee for a franchised hotel recognized during the nine months ended September 30, 2020. The increases in income tax expense during the three and nine months ended September 30, 2021 were primarily attributable to the increase in income before income taxes. Additionally, during the nine months ended September 30, 2021, the increase in expense was partially offset by benefits recognized as a result of tax rate changes and increased tax benefits recognized for net operating losses generated in 2021 in certain foreign jurisdictions. For additional information, see Note 7: "Income Taxes" in our unaudited condensed consolidated financial statements. Segment Results Refer to Note 11: "Business Segments" in our unaudited condensed 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. 26 Refer to "—Revenues" for further discussion of the increases in revenues from our managed and franchised properties, which are correlated to our management and franchise segment revenues and segment operating income. 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 losses. Liquidity and Capital Resources Overview As of September 30, 2021, we had total cash and cash equivalents of $1,387 million, including $99 million of restricted cash and cash equivalents, increasing $260 million from June 30, 2021, primarily driven by cash flows from operations during the three months ended September 30, 2021. The majority of our restricted cash and cash equivalents are related to cash collateral and cash held for FF&E reserves. In response to the global crisis resulting from the COVID-19 pandemic, in addition to the actions we took to prioritize the safety and security of our guests, employees and owners and support our communities, we took certain proactive measures in 2020 to help our business withstand this uncertain time. This included securing our liquidity position to be able to meet our obligations for the foreseeable future, including issuing senior notes, drawing down on the full capacity of our Revolving Credit Facility and consummating the Honors Points Pre-Sale. Further, in February 2021, we issued the 2032 Senior Notes to continue to extend debt maturities and reduce our cost of debt by repaying the 2026 Senior Notes. Based on our continued recovery and expectations of the foreseeable demands on our available cash and our liquidity in future periods, we fully repaid the $1.7 billion outstanding debt balance on the Revolving Credit Facility during the nine months ended September 30, 2021. 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 September 30, 2021 is somewhat less than periods prior to the start of the pandemic, we are generally experiencing slower payment of certain fees due to us, and have considered these payment trends in developing our estimates of expected future credit losses. During the second and third quarter of 2021, we experienced relative improvement with respect to the timing of customer payments and overall cash flow from operations, particularly in comparison to periods impacted by the pandemic in 2020. 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 formally suspended share repurchases in March 2020, given the economic environment and our efforts to preserve cash, and no share repurchases have been made since then. However, the stock repurchase program remains authorized by the board of directors, with approximately $2.2 billion remaining available for share repurchases under the program, and we may resume share repurchases in the future at any time, depending on market conditions, our capital needs and other factors. Additionally, we suspended dividend payments in 2020, but we expect that both share repurchases and dividend payments will be reinstated in future periods and result in uses of liquidity. Although the COVID-19 pandemic has caused us to temporarily change our cash management strategy, 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, which we expect to reimplement at some time in the future. 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 September 30, 2021, cash generated from our operations and, as needed, the use of the available capacity of our Revolving Credit Facility. After considering our approach to liquidity and our available sources of cash, we believe that our cash position and sources of liquidity will 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 27 any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Sources and Uses of Our Cash and Cash Equivalents The following table summarizes our net cash flows: Nine Months Ended Percent September 30, Change 2021 2020 2021 vs. 2020 (in millions) Net cash provided by (used in) operating activities $ (22) $ 846 NM (1) Net cash used in investing activities (34) (89) (61.8) Net cash provided by (used in) financing activities (1,814) 2,087 NM (1) ____________ (1) Fluctuation in terms of percentage change is not meaningful. Operating Activities As we recover from the negative impacts of the pandemic and our system-wide RevPAR increases, we are returning to a position, particularly during the three months ended September 30, 2021, where cash flows are being generated from our operations. During the nine months ended September 30, 2021, the change in cash flows from operating activities was primarily attributable to the $1.0 billion of cash received in connection with the Honors Points Pre-Sale during the nine months ended September 30, 2020. Excluding the impact of this transaction, cash flows from operating activities increased during the nine months ended September 30, 2021 primarily due to the increase in cash inflows generated from our management and franchise segment, largely as a result of an increase in managed and franchised RevPAR of 48.2 percent due to the recovery from the COVID-19 pandemic. This increase was only partially offset by a $123 million increase in payments of contract acquisition costs, which reflects our strategic investment in growing our system by adding hotels to our management and franchise segment. Investing Activities Net cash used in investing activities primarily related to capitalized software costs that were related to various systems initiatives for the benefit of both our hotel owners and our overall corporate operations and to capital expenditures for property and equipment related to our corporate facilities and the renovation of certain hotels in our ownership segment. Beginning in March 2020, we took steps to temporarily reduce such expenditures in response to the COVID-19 pandemic and have continued to deliberately govern investment spending through 2021; however, we expect such costs to continue to increase in future periods, aligned to our recovery from the pandemic. Financing Activities The change in cash flows from financing activities was primarily attributable to our Revolving Credit Facility, which we fully drew down during the nine months ended September 30, 2020 in response to the COVID-19 pandemic, resulting in net cash inflows of $1.5 billion, while we fully repaid the $1.7 billion outstanding debt balance during the nine months ended September 30, 2021. Additionally, during the nine months ended September 30, 2020, we had a net additional $1.0 billion of senior notes borrowings, as compared to the nine months ended September 30, 2021. Further, cash outflows decreased $338 million as a result of decreases in share repurchases and dividend payments, as both programs remained suspended after their suspension was initiated in March 2020. Debt and Borrowing Capacity As of September 30, 2021, our total indebtedness, excluding unamortized deferred financing costs and discount, was approximately $8.9 billion. For additional information on our total indebtedness, including financing transactions executed during the nine months ended September 30, 2021, availability under our Revolving Credit Facility and guarantees on our debt, refer to Note 5: "Debt" in our unaudited condensed consolidated financial statements. 28 If we are unable to generate sufficient cash flows 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 as compared to periods prior to the onset of the pandemic, and will continue to do so for an indeterminate period of time. During 2020, we took precautions to secure our cash position, as discussed above, and, with our business recovering during the current year, we were able to repay outstanding debt borrowings on our Revolving Credit facility and we expect to be able to meet our current obligations. Furthermore, we do not have any material indebtedness outstanding that matures prior to May 2025. Contractual Obligations During the nine months ended September 30, 2021, we issued the 2032 Senior Notes, redeemed the 2026 Senior Notes and fully repaid the $1.7 billion outstanding debt balance on our Revolving Credit Facility. Otherwise, there were no material changes to our contractual obligations from what we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Summarized Guarantor Financial Information HOC is the issuer of the Senior Notes and is 100 percent owned directly by Hilton Worldwide Parent LLC ("HWP"), which, in turn, is 100 percent owned directly by 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 (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 September 30, 2021, none of our foreign subsidiaries or domestic subsidiaries owned by foreign subsidiaries 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. 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 September 30, 2021 (in millions) ASSETS Total current assets $ 1,014 Intangible assets, net 8,793 Total intangibles and other assets 9,293 TOTAL ASSETS 10,307 LIABILITIES AND EQUITY (DEFICIT) Total current liabilities 2,053 Long-term debt 8,537 Total liabilities 14,250 Total Hilton stockholders' deficit (3,943) TOTAL LIABILITIES AND EQUITY (DEFICIT) 10,307 29 Nine Months Ended September 30, 2021 (in millions) Revenues Revenues $ 1,057 Other revenues from managed and franchised properties 1,969 Total revenues $ 3,026 Expenses Expenses $ 330 Other expenses from managed and franchised properties 2,054 Total expenses $ 2,384 Operating income $ 645 Interest expense (290) Income tax expense (70) Net income 224 Net income attributable to Hilton stockholders 224 Critical Accounting Policies and Estimates The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed the policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and, during the nine months ended September 30, 2021, there were no material changes to those previously disclosed.