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, 2022. 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 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 inflation, changes in interest rates, challenges due to labor shortages and supply chain disruptions and instability in the banking system as a result of several recent bank failures; risks related to the impact of the COVID-19 pandemic (the "pandemic"); 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.; risks associated with the Russian invasion of Ukraine; 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, 2022. 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. Recent Developments COVID-19 Pandemic Although our results for the three months ended March 31, 2022 included a strong recovery from the pandemic when compared to the same periods in 2020 and 2021, the Omicron variant of COVID-19 limited the recovery of certain regions and segments of our business during that period, such that the results for the three months ended March 31, 2023 reflect notable improvement in comparison. Adverse Developments Affecting the Financial Services Industry In March 2023, certain U.S. and international government banking regulators took steps to intervene in the operations of certain financial institutions due to liquidity concerns, which caused general heightened uncertainties in financial markets. While these events have not had a material direct impact on our operations, if further liquidity and financial stability concerns arise with respect to banks and financial institutions, either nationally or in specific regions, the ability of our owners or our ability to access cash or enter into new financing arrangements may be threatened, which could have a material adverse effect on our business, financial condition and results of operations. Overview Our Business Hilton is one of the largest hospitality companies in the world, with 7,215 properties comprising 1,133,277 rooms in 122 countries and territories as of March 31, 2023. Our premier brand portfolio includes: our luxury hotel brands, Waldorf Astoria Hotels & Resorts, LXR Hotels & Resorts and Conrad Hotels & Resorts; our lifestyle hotel brands, Canopy by Hilton, Curio Collection by Hilton, Tapestry Collection by Hilton, Tempo by Hilton and Motto by Hilton; our full service hotel brands, Signia by Hilton, Hilton Hotels & Resorts and DoubleTree by Hilton; our focused service hotel brands, Hilton Garden Inn, Hampton by Hilton and Tru by Hilton; our all-suites hotel brands, Embassy Suites by Hilton, Homewood Suites by Hilton and Home2 Suites by Hilton; our premium economy brand, Spark by Hilton; and our timeshare brand, Hilton Grand Vacations. As of 15 March 31, 2023, we had 158 million members in our award-winning guest loyalty program, Hilton Honors, a 19 percent increase from March 31, 2022. 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 and services: (i) management and franchise and (ii) ownership. The management and franchise segment provides services, including hotel management and licensing of our IP. Revenues from this segment include: (i) management and franchise fees charged to third-party hotel owners; (ii) licensing fees from our strategic partners, including co-branded credit card providers, and HGV for the right to use our IP; and (iii) fees for managing hotels in our ownership segment. As a manager of hotels, we typically are responsible for supervising or operating the hotel 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 system, marketing and information technology services, while a third party manages or operates such franchised hotels. The ownership segment primarily derives revenues from nightly hotel room sales, food and beverage sales and other services at our consolidated 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., which represented 69 percent of our system-wide hotel rooms as of March 31, 2023, 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 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 hotel network, as well as of our fee-based business. As we enter into new management and franchise contracts, we expand our business with limited 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 IP. Prior to approving the addition of new hotels to our management and franchise development pipeline, we evaluate the economic viability of the hotel 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. See further discussion on our cash management policy in "—Liquidity and Capital Resources." While these objectives have not changed as a result of the pandemic, the current economic environment has posed certain challenges to the execution of our growth strategy, which have included and may continue to include delays in openings and new development. 16 In addition to our current hotel portfolio, we are focused on the growth of our business by expanding our global hotel network through our development pipeline, which represents hotels that we expect to add to our system in the future. The following table summarizes our development activity: As of and for the Three Months Ended March 31, 2023 Hotels Rooms (1) Hotel system Openings 64 9,200 Net additions (2) 48 5,300 Development pipeline (3) Additions 203 24,900 Count as of period end (4) 2,926 428,100 ____________ (1) Rounded to the nearest hundred. (2) Represents room additions, net of rooms removed from our system, during the period, which contributed to net unit growth from March 31, 2022 of 4.4 percent. (3) Hotels in our system were under development throughout 116 countries and territories, including 30 countries and territories where we did not have any existing hotels. (4) In our development pipeline, as of March 31, 2023, 215,700 of the rooms were under construction and 246,200 of the rooms were located outside of the U.S. Nearly all of the rooms in our development pipeline will be in our management and franchise segment. We do not consider any individual development project to be material to us. 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 7,133 hotels in our system as of March 31, 2023, 6,143 hotels were classified as comparable hotels. Our 990 non-comparable hotels as of March 31, 2023 included 383 hotels, or approximately five 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, encountered business interruption, underwent large-scale capital projects or comparable results were otherwise not available. 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 available capacity at a hotel or group of hotels. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help management determine achievable Average Daily Rate ("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. Revenue per Available Room ("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 17 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 occupancy, ADR and RevPAR are presented on a comparable basis, based on the comparable hotels as of March 31, 2023, and references to ADR and RevPAR are presented on a currency neutral basis, unless otherwise noted. As such, comparisons of these hotel operating statistics for the three months ended March 31, 2023 and 2022 use the foreign currency exchange rates used to translate the results of the Company's foreign operations within its unaudited condensed consolidated financial statements for the three months ended March 31, 2023. EBITDA and Adjusted EBITDA EBITDA reflects net income (loss), excluding interest expense, a provision for income tax benefit (expense) and depreciation and amortization expenses. 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 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 expenses, 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 assigned to those depreciating or amortizing assets for accounting purposes. 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 depreciation of such capitalized assets is reported within depreciation and amortization expenses; (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 debt 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, including: • 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; 18 • 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. Results of Operations The hotel operating statistics by region for our system-wide comparable hotels were as follows: Three Months Ended Change March 31, 2023 2023 vs. 2022 U.S. Occupancy 68.6 % 6.5 % pts. ADR $ 159.67 10.0 % RevPAR $ 109.56 21.4 % Americas (excluding U.S.) Occupancy 65.5 % 14.7 % pts. ADR $ 147.48 21.0 % RevPAR $ 96.62 56.0 % Europe Occupancy 62.1 % 15.3 % pts. ADR $ 142.42 27.0 % RevPAR $ 88.38 68.4 % MEA Occupancy 74.3 % 8.1 % pts. ADR $ 175.13 17.6 % RevPAR $ 130.12 32.1 % Asia Pacific Occupancy 65.8 % 24.1 % pts. ADR $ 116.18 21.3 % RevPAR $ 76.42 91.2 % System-wide Occupancy 67.7 % 9.8 % pts. ADR $ 153.20 11.2 % RevPAR $ 103.72 30.0 % All regions showed improvement in RevPAR, occupancy and ADR during the three months ended March 31, 2023 due to the continued recovery from the pandemic and the increase in travel, including the desire and ability to travel with the easing of cross-border travel restrictions that have occurred since the latter half of 2022, particularly in Japan, China and Canada. While occupancy improvement was driven by Asia Pacific, occupancy in the U.S. was positively impacted by spring break travel, and Europe and MEA continued to experience strong international demand from the U.S., which contributed to the year-over-year and sequential quarter growth in system-wide ADR. Additionally, all of our customer segments showed improvement from the same period in the prior year, particularly our group segment, with increased RevPAR, occupancy and ADR as business and group meeting demand continue to strengthen. 19 The table below provides a reconciliation of net income to EBITDA and Adjusted EBITDA: Three Months Ended March 31, 2023 2022 (in millions) Net income $ 209 $ 211 Interest expense 116 90 Income tax expense 93 80 Depreciation and amortization expenses 37 44 EBITDA 455 425 Loss on foreign currency transactions — 4 Loss on investments in unconsolidated affiliate (1) 92 — FF&E replacement reserves 8 12 Share-based compensation expense 33 37 Amortization of contract acquisition costs 10 8 Net other expenses (revenues) from managed and franchised properties 38 (30) Other adjustments (2) 5 (8) Adjusted EBITDA $ 641 $ 448 ___________ (1) Amount for the three months ended March 31, 2023 includes losses recognized related to equity and debt financing that we had previously provided to an unconsolidated affiliate with underlying investments in hotels that we currently or in the future will manage or franchise; refer to Note 4: Loss on Investments in Unconsolidated Affiliate in our unaudited condensed consolidated financial statements for additional information. (2) All periods include net losses (gains) related to certain of Hilton's investments in unconsolidated affiliates, other than the loss included separately in "loss on investments in unconsolidated affiliate," severance and other items. Revenues Three Months Ended Percent March 31, Change 2023 2022 2023 vs. 2022 (in millions) Franchise and licensing fees $ 508 $ 413 23.0 Base and other management fees $ 80 $ 55 45.5 Incentive management fees 65 34 91.2 Total management fees $ 145 $ 89 62.9 Franchise and management fees increased as a result of increases in RevPAR at our comparable franchised and managed hotels of 23.5 percent and 50.7 percent, respectively, due to increased occupancy of 7.8 percentage points and 16.0 percentage points, respectively, and increased ADR of 9.4 percent and 13.5 percent, respectively. Further, as new hotels enter our system, we expect such hotels to increase our franchise and management fees during the period. Including new development and ownership type transfers, from January 1, 2022 to March 31, 2023, we added nearly 360 franchised and managed properties on a net basis, providing an additional 54,300 rooms to our management and franchise segment, which also contributed to the increases in franchise and management fees. Additionally, licensing fees increased as a result of increases in fees from our strategic partnerships and HGV. Increased fees from our strategic partnerships resulted from new cardholder acquisitions and increased cardholder spend under our co-branded credit card arrangements. Increased fees from HGV resulted from increased timeshare revenues, including the impact of adding new timeshare properties to our system between the periods. Incentive management fees increased as they are based on hotels' operating profits, which generally have improved from the prior year as increased consumer demand drove higher revenues and, ultimately, higher managed hotel profits. 20 Three Months Ended Percent March 31, Change 2023 2022 2023 vs. 2022 (in millions) Owned and leased hotels revenues $ 248 $ 150 65.3 The increase in owned and leased hotels revenues included increases of $102 million and $11 million, on a currency neutral basis, from our comparable and non-comparable owned and leased hotels, respectively, which were partially offset by a $15 million decrease as a result of unfavorable fluctuations in foreign currency exchange rates. The increase in revenues, on a currency neutral basis, from our comparable owned and leased hotels was the result of increased RevPAR of 110.7 percent, due to increases in occupancy of 24.9 percentage points and ADR of 26.7 percent, reflective of the ongoing easing of travel restrictions in the latter half of 2022, particularly in Japan. The increase in revenues, on a currency neutral basis, from our non-comparable owned and leased hotels, which also benefited from increased RevPAR, included increases from leased hotels that were under renovation during 2022, which were partially offset by decreases from properties that exited our system after March 31, 2022. Three Months Ended Percent March 31, Change 2023 2022 2023 vs. 2022 (in millions) Other revenues $ 35 $ 18 94.4 The increase in other revenues was primarily due to revenues from our purchasing operations. Operating Expenses Three Months Ended Percent March 31, Change 2023 2022 2023 vs. 2022 (in millions) Owned and leased hotels expenses $ 251 $ 185 35.7 The increase in owned and leased hotels expenses included increases of $75 million and $9 million, on a currency neutral basis, from our comparable and non-comparable owned and leased hotels, respectively, which were partially offset by a $18 million decrease as a result of favorable fluctuations in foreign currency exchange rates. The currency neutral increase in expenses from our non-comparable owned and leased hotels included increases in expenses from leased hotels that were under renovation during 2022, which were partially offset by decreases in expenses from properties which exited our system after March 31, 2022. Our owned and leased hotels had currency neutral increases in certain operating expenses as a result of increased occupancy including labor costs, utilities and variable rent costs, which is generally based on a percentage of hotel revenues or profits, which increased as discussed in "—Revenues." Three Months Ended Percent March 31, Change 2023 2022 2023 vs. 2022 (in millions) Depreciation and amortization expenses $ 37 $ 44 (15.9) General and administrative expenses 91 91 — Other expenses 21 11 90.9 The decrease in depreciation and amortization expenses was primarily due to a decrease in amortization expense, driven by the full amortization of certain software project costs between the periods, partially offset by the amortization related to software additions between the periods. The increase in other expenses was primarily due to costs associated with higher volume in our purchasing operations. 21 Non-operating Income and Expenses Three Months Ended Percent March 31, Change 2023 2022 2023 vs. 2022 (in millions) Interest expense $ (116) $ (90) 28.9 Loss on foreign currency transactions — (4) NM (1) Loss on investments in unconsolidated affiliate (92) — NM (1) Other non-operating income, net 12 16 (25.0) Income tax expense (93) (80) 16.3 ____________ (1) Fluctuation in terms of percentage change is not meaningful. The increase in interest expense included increases related to the interest rate increase on the variable rate Term Loan and the amortization of previously dedesignated interest rate swaps. See Note 5: "Debt" in our unaudited condensed consolidated financial statements for additional information on the interest rates on our indebtedness. The net gains and losses on foreign currency transactions included the impact of changes in foreign currency exchange rates on certain intercompany financing arrangements, including short-term cross-currency intercompany loans, and other transactions denominated in foreign currencies. The loss on investments in unconsolidated affiliate for the three months ended March 31, 2023 included: (i) a $44 million other-than-temporary impairment loss on our investment in the Fund and (ii) $48 million of credit losses on financing receivables provided to the Fund. See Note 4: "Loss on Investments in Unconsolidated Affiliate" and Note 6: "Fair Value Measurements" in our unaudited condensed consolidated financial statements for additional information. Other non-operating income, net consists of interest income, equity in earnings (losses) from unconsolidated affiliates, certain components of net periodic pension cost or credit related to our employee defined benefit pension plans and other non-operating gains and losses. Other non-operating income, net decreased primarily due to an $11 million gain recognized during the three months ended March 31, 2022 resulting from the remeasurement of certain investments in unconsolidated affiliates, whereas no such gain was recognized during 2023. The loss related to our investment in the Fund is presented separately in "loss on investments in unconsolidated affiliate" in our unaudited condensed consolidated statement of operations for the three months ended March 31, 2023, as discussed above. The decrease was partially offset by an increase in interest income due to increases in interest rates since March 31, 2022. The increase in income tax expense was primarily attributable to the increase in income before income taxes and a valuation allowance provided on a deferred tax asset during the three months ended March 31, 2023 based on our assessment of the deductibility of capital losses based on future offsetting capital gain income. 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 total revenues and of segment operating income to consolidated income before income taxes. 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, as well as for further discussion of the increases in revenues from our owned and leased hotels, which are correlated to our ownership segment revenues. In addition, refer to "—Operating Expenses" for further discussion of the increases in operating expenses at our owned and leased hotels, which, when netted with ownership segment revenues, results in our ownership segment operating losses. 22 Liquidity and Capital Resources Overview As of March 31, 2023, we had total cash and cash equivalents of $978 million, including $77 million of restricted cash and cash equivalents. The majority of our restricted cash and cash equivalents is related to cash collateral and cash held for FF&E reserves. Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including: (i) costs associated with the management and franchising of hotels; (ii) corporate expenses; (iii) payroll and compensation costs; (iv) taxes and compliance costs; (v) scheduled debt maturities and interest payments on our outstanding indebtedness; (vi) lease payments under our finance and operating leases; (vii) costs, other than compensation and rent that are noted separately, associated with the operations of owned and leased hotels, including, but not limited to, utilities and operating supplies; (viii) committed contract acquisition costs; (ix) capital and maintenance expenditures for required renovations and maintenance at the hotels within our ownership segment; (x) dividends as declared; and (xi) share repurchases. Our known long-term liquidity requirements primarily consist of funds necessary to pay for: (i) scheduled debt maturities and interest payments on our outstanding indebtedness; (ii) lease payments under our finance and operating leases; (iii) committed contract acquisition costs; (iv) capital improvements to the hotels within our ownership segment; (v) corporate capital and information technology expenditures; (vi) dividends as declared; (vii) share repurchases; and (viii) commitments to owners in our management and franchise segment made in the normal course of business for which we are reimbursed by these owners through program fees to operate our marketing, sales and brands programs. 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, 2022. During the three months ended March 31, 2023, we repurchased approximately 3.2 million shares of our common stock for $446 million. As of March 31, 2023, approximately $2.7 billion remained available for share repurchases under our stock repurchase program. In circumstances where we have the opportunity to support our strategic objective of growing our global hotel network, we may provide guarantees or other commitments, as necessary, to owners of hotels that we currently or in the future will manage or franchise or other third parties. See Note 12: "Commitments and Contingencies" in our unaudited condensed consolidated financial statements for additional information on our commitments that were outstanding as of March 31, 2023. 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. Within the framework of our investment policy, we intend to finance our business activities primarily with cash on our balance sheet as of March 31, 2023, cash generated from our operations and, as needed, the use of the available capacity of our Revolving Credit Facility. Additionally, we have continued access to debt markets and expect to be able to obtain financing as a source of liquidity as required and to extend maturities of existing borrowings, if necessary. 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 other compensation costs, 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 retirements of outstanding debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. 23 Sources and Uses of Our Cash and Cash Equivalents The following table summarizes our net cash flows: Three Months Ended Percent March 31, Change 2023 2022 2023 vs. 2022 (in millions) Net cash provided by operating activities $ 330 $ 195 69.2 Net cash used in investing activities (85) (26) NM (1) Net cash used in financing activities (547) (167) NM (1) ____________ (1) Fluctuation in terms of percentage change is not meaningful. Operating Activities The increase in cash provided by operating activities was primarily due to the increase in cash inflows generated from our management and franchise segment, largely as a result of the increase in RevPAR at our comparable managed and franchised properties of 29.1 percent. The increase in cash provided by operating activities was partially offset by a $90 million increase in payments of contract acquisition costs due to the timing of certain strategic hotel developments supporting our growth, as well as a $19 million decrease in the cash inflows related to net income tax refunds. In April 2020, we pre-sold Hilton Honors points to American Express and, before the end of the second quarter of 2022, all of those points had been used by American Express. As such, American Express resumed purchasing Hilton Honors points with cash in connection with a co-branded credit card arrangement with them, which contributed to the increase in our operating cash flows during the period when compared to the same period in the prior year. We expect American Express to continue to purchase points with cash under the co-branded credit card arrangement in future periods. Investing Activities Net cash used in investing activities included cash flows related to: (i) capitalized software costs that were related to various systems initiatives for the benefit of both our hotel owners and our overall corporate operations; (ii) capital expenditures for property and equipment related to corporate property and the renovation of certain hotels in our ownership segment; and (iii) equity and debt financing that we provided to unconsolidated affiliates and owners of hotels that we currently or in the future will manage or franchise to support our strategic objectives. Additionally, our investing activities include the net cash inflows and outflows related to our undesignated derivative financial instruments that we have in place to hedge against changes in foreign currency exchange rates, which, for both periods, were primarily the result of changes in the exchange rates for the Great British pound to the U.S. dollar. Financing Activities Net cash used in financing activities primarily related to the return of capital to shareholders, including share repurchases, which resumed in March 2022, as well as quarterly dividend payments for the three months ended March 31, 2023, which resumed in June 2022, after both programs were suspended in 2020. Debt and Borrowing Capacity As of March 31, 2023, our total indebtedness, excluding the deduction for unamortized deferred financing costs and discount, was approximately $8.8 billion, and we had no borrowings and $60 million of letters of credit outstanding under our Revolving Credit Facility, resulting in an available borrowing capacity of $1,940 million. For additional information on our total indebtedness and guarantees on our debt, refer to Note 5: "Debt" in our unaudited condensed 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. However, we do not have any material indebtedness outstanding that matures prior to May 2025. 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. 24 Critical Accounting 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 estimates and assumptions that we believe are critical because they involve a higher degree of judgment in their application and are based on information that is inherently uncertain in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and, during the three months ended March 31, 2023, there were no material changes to those critical accounting estimates that were previously disclosed.