What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-11 · 144 added, 108 removed, 264 unchanged (49% of the section changed)

7 unchanged sentences

You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events.

Currently, one of the most significant factors is the potential adverse effect of COVID-19 on our financial condition, results of operations, cash flows and performance, our hotel management companies and our hotels’ tenants, and the global economy and financial markets.

Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in this 10-Q and incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.

Currently, one of the most significant factors is the potential adverse effect of COVID-19, including possible resurgences, on our financial condition, results of operations, cash flows and performance, our hotel management companies and our hotels’ tenants, and the global economy and financial markets.

The extent to which COVID-19 impacts us, our hotel managers, tenants and guests at our hotels will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its effect, additional closures that may be mandated or advisable even after the reopening of certain of our hotels on a limited basis, whether due to an increased number of COVID-19 cases or otherwise, and the direct and indirect economic effects of the pandemic and containment measures, among others.

Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in this 10-Q and incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and our Annual Report on Form 10-K for the year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.

All such forward-looking statements are based on current expectations of management and therefore involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results expressed in the statements.

You should not put undue reliance on any forward-looking statements and we urge investors to carefully review the disclosures we make concerning risk and uncertainties in Item 1A:

“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q.

You should not put undue reliance on any forward-looking statements and we urge investors to carefully review the disclosures we make concerning risks and uncertainties in Item 1A:

“Risk Factors” in this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and our Annual Report on Form 10-K for the year ended December 31, 2019, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q.

Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

17 unchanged sentences

The effects of COVID-19, including related government restrictions, border closings, quarantining, “shelter-in-place” orders and “social distancing,” have had and continue to have a significant adverse effect on the hospitality industry, including our business, and have contributed to a significant decrease in business and consumer spending, with a particularly dramatic effect on travel and hospitality spending.

Travel restrictions and mandated closings of non-essential businesses, which have resulted in temporary suspensions of operations at a majority of our hotels, and significantly reduced capacity at the remainder, along with temporary closings of other restaurants and hotels across entire regions have severely reduced overall lodging demand.

Since the beginning of March, we have experienced a significant decline in occupancy, Average Daily Rate (“ADR”) and Revenue per Available Room (“RevPAR”) associated with COVID-19 throughout our portfolio, which resulted in a decline in our operating cash flow.

Changes in our monthly pro-forma metrics, which excludes results from property dispositions and includes results from property acquisitions, for the first quarter of 2020 as compared to the same period in 2019 are as follows:

In March and April 2020, travel restrictions and mandated closings of non-essential businesses were imposed, which resulted in temporary suspensions of operations at certain of our hotels and significantly reduced capacity at the remainder of our hotels.

Temporary closings of other restaurants and hotels across entire regions also contributed to severely reduced overall lodging demand.

There continues to be significant cancellations of existing reservations, including the vast majority of group business and events throughout the remainder of 2020 and significant reductions in new reservations.

Since the beginning of March, we have experienced a significant decline in occupancy, Average Daily Rate (“ADR”) and Revenue per Available Room (“RevPAR”) associated with the COVID-19 pandemic throughout our consolidated portfolio, which resulted in a decline in our operating cash flow.

Changes in our monthly pro-forma metrics, which exclude results from property dispositions and include results from property acquisitions, for the first six months of 2020 as compared to the same period in 2019 are as follows:

Pro-forma ADR

1 unchanged sentence

Pro-forma RevPAR

We and our hotel managers have temporarily suspended operations at 38 of our hotels, some of which were mandated by state and local governments, as well as selected restaurants and other outlets within our hotels, and our remaining open hotels are operating under reduced capacity.

As a result of these closures and consolidation of operations, rooms currently available are 15% of full capacity.

We expect these effects to continue as there have been significant cancellations of existing reservations, including the vast majority of group business and events through May 2020 and significant reductions in new reservations through the end of the second quarter.

We believe that the government restrictions and economic slowdown associated with COVID-19 will significantly affect our business.

We believe demand will continue to be significantly reduced as a result of mandatory travel restrictions, “social distancing,” and cost-saving measures, as companies continue to reduce non-essential travel and as conferences and events continue to be cancelled and postponed.

We do not expect a material improvement in our results until business traveler and general consumer confidence related to risks associated with the COVID-19 pandemic improves and various government restrictions on travel and freedom of movement are lifted.

Even after such restrictions are lifted and we are able to recommence operations at suspended hotels, there remains considerable uncertainty as to the time it will take to see travel and demand for lodging and travel-related experiences increase and the long-term impacts on consumer attitudes to travel.

Our portfolio also has significant exposure to areas particularly affected by the COVID-19 pandemic, both as a result of the number of actual cases, like New York and Chicago, and by early adoption of shelter-in-place measures, like San Francisco.

In addition, due to the effects of COVID-19, during the three months ended March 31, 2020, we recognized $607 million of impairment losses for goodwill and $88 million of impairment losses related to certain of our assets resulting from a significant decline in market value of those assets.

We believe that imposed or re-imposed government restrictions and the economic recession associated with COVID-19 will continue to significantly affect our business.

We believe demand will remain significantly reduced as a result of ongoing mandatory travel restrictions, “social distancing,” and cost-saving measures, as companies continue to reduce non-essential travel and as conferences and events are cancelled and postponed.

We do not expect to realize a material improvement in our results until medical advances (e.g., therapeutics, vaccines) are made available that will allow business traveler and general consumer confidence related to risks associated with the COVID-19 pandemic to improve and various government restrictions on travel, freedom of movement and the operations of our hotels are lifted.

Although we were able to recommence operations at reduced capacity at certain of our previously suspended hotels during the second quarter, there remains considerable uncertainty as to both the time it will take to see travel and demand for lodging and travel-related experiences increase and the long-term impacts on consumer attitudes to travel, and we cannot predict whether our reopened hotels will be forced to suspend operations again or decrease capacity in the future, including as a result of government regulation, an increase in the number of COVID-19 cases or changes in business and other consumer preferences for travel.

The pandemic has had a prolonged effect on travel within and to the United States, where all of our properties are located.

In addition, due to the effects of COVID-19, during the six months ended June 30, 2020, we recognized $607 million of impairment losses for goodwill and $88 million of impairment losses primarily related to one of our hotels resulting from a significant decline in market value.

Further, economic uncertainty generally will make it more difficult to execute on our external growth strategy.

These factors lead us to believe that our operating results for at least the second and third quarters of 2020 will be more adversely affected by COVID-19 than our results for the quarter ended March 31, 2020.

These factors lead us to believe that our operating results will continue to be adversely affected by COVID-19 through at least the remainder of 2020.

We and our hotel managers have taken various actions to mitigate the effect on our business including cost saving initiatives to reduce costs at our hotels.

In addition to temporarily suspending operations at 38 of our 60 hotels, we have deferred approximately $150 million of the $200 million in capital expenditures previously budgeted for 2020, reducing expected 2020 capital spending to approximately $50 million, and suspended dividend payments following the payment of the first quarter 2020 dividend, which was paid on April 15, 2020.

Our remaining hotels are expected to remain open under reduced operations so long as incremental savings are achieved, but the operating results of these remaining hotels, including RevPAR and occupancy, have been, and we expect will continue to be, significantly and adversely affected by COVID-19.

We continue to proactively pursue alternative sources of revenue from applicable government authorities and hospitals, such as providing temporary lodging for first responders, other medical personnel, military personnel, displaced guests and residents of communities where Park’s hotels are located.

Additionally, during the first quarter of 2020, we fully drew our $1 billion revolving credit facility (the “Revolver”) as a precautionary measure to increase liquidity and preserve financial flexibility in light of the current uncertainty resulting from COVID-19.

In addition, the operating environment for us and our hotel managers could remain challenging if an economic recession extends beyond the lifting of government restrictions and reopening of our hotels.

Historically, economic indicators such as GDP growth, corporate earnings, consumer confidence and employment are highly correlated with lodging demand, and we expect these factors to see significant deterioration in 2020, although the exact amount or duration of any such deterioration or the magnitude of any economic recession is unknown at this time.

We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results and the economic slowdown, to be dictated by, among other things, its duration, the success of efforts to contain it and the effect of actions taken in response (such as travel advisories and restrictions and social distancing), including the extent and duration of such actions.

During the first quarter of 2020, we temporarily suspended operations at 38 of our 60 hotels, deferred approximately $150 million of the $200 million in capital expenditures previously budgeted for 2020, reduced expected 2020 capital spending to approximately $50 million, suspended dividend payments following the payment of the first quarter 2020 dividend, which was paid on April 15, 2020, and fully drew our $1 billion revolving credit facility (the “Revolver”) as a precautionary measure to increase liquidity and preserve financial flexibility in light of the current uncertainty resulting from the COVID-19 pandemic.

In May 2020, despite headwinds in the debt market, Park Intermediate Holdings LLC (our “ Operating Company”), PK Domestic Property LLC (“PK Domestic”) and PK Finance Co-Issuer Inc.

(“PK Finance”) issued an aggregate of $650 million 7.500% senior secured

notes due 2025 (“Senior Secured Notes”).

We used $219 million of the net proceeds to partially repay the Revolver and $69 million of the net proceeds to partially repay th e term loan we entered into in December 2016 (“2016 Term Loan”).

We also repaid an additional $100 million of the Revolver with existing cash.

Since originally suspending operations, we have commenced the phased reopening of 20 of our hotels at limited capacity.

The timing of fully reopening our hotels will depend primarily on government restrictions imposed or re-imposed, health official recommendations and market demand.

The status of our hotels as of August 5, 2020 is as follows:

Consolidated Hotels

Percentage of

Operations suspended

Unconsolidated Hotels

Percentage of

Operations suspended

We are also pursuing potential opportunities with colleges and universities to house students for their upcoming school year as they look to mitigate potential COVID-19 exposures within their student population.

In addition, the operating environment for us and our hotel managers could remain challenging if the current economic recession extends beyond the lifting of government restrictions and reopening of our hotels.

Historically, economic indicators such as GDP growth, corporate earnings, consumer confidence and employment are highly correlated with lodging demand, and although these factors have seen improvement, these metrics remain significantly below levels prior to the COVID-19 pandemic.

The exact impact, magnitude and duration of the economic recession is unknown at this time.

We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results and the economic recession, to be dictated by, among other things, its duration, the success of efforts to contain it and the effect of actions taken in response (such as travel advisories and restrictions and social distancing), including the extent and duration of such actions.

For instance, recent government action to provide substantial financial support to affected industries could provide helpful assistance to the travel and hospitality industry, including our operators.

2 unchanged sentences

Despite cost reduction initiatives, we do not expect to be able to fully, or even materially, offset revenue losses from the COVID-19 pandemic.

In addition, as states and cities begin to develop strategies to lift quarantines, "shelter in place" orders or other similar restrictions, the timing and approach is likely to differ in different locations.

In addition, as states and cities have begun to lift quarantines, "shelter in place" orders and other similar restrictions, the timing and approach differs in different locations and we cannot predict whether our reopened hotels will be forced to suspend operations again in the future.

These uncertainties make it difficult to predict operating results for our hotels for the remainder of 2020.

1 unchanged sentence

For more information, see Part II – Item 1A.

Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.

In February 2020, we sold our interests in the entity that owns the Hilton São Paulo Morumbi and the Embassy Suites Washington DC Georgetown for gross proceeds of $208 million.

Refer to Note 3:

“Acquisitions and Dispositions” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information.

Risk Factors” included in this Quarterly Report on Form 10-Q.

Key Business Metrics Used by Management

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.

Room nights available to guests have not been adjusted for suspended or reduced operations at certain of our hotels as a result of COVID-19.

Occupancy measures the utilization of our hotels’ available capacity.

1 unchanged sentence

Occupancy levels also help us determine achievable ADR levels as demand for rooms increases or decreases.

Average Daily Rate

Average Da ily Rate

ADR represents rooms revenue divided by total number of room nights sold in a given period.

3 unchanged sentences

RevPAR represents rooms revenue divided by the total number of room nights available to guests for a given period.

Room nights available to guests have not been adjusted for suspended or reduced operations at certain of our hotels as a result of COVID-19.

We consider RevPAR to be a meaningful indicator of our performance as it provides a metric correlated to two primary and key factors of operations at a hotel or group of hotels:

1 unchanged sentence

RevPAR is also a useful indicator in measuring performance over comparable periods for comparable hotels.

References to RevPAR, ADR and occupancy are presented on a comparable basis and references to RevPAR and ADR are presented on a currency neutral basis (prior periods are reflected using current period exchange rates), unless otherwise noted.

References to RevPAR, ADR and occupancy are presented on a currency neutral basis (prior periods are reflected using current period exchange rates), unless otherwise noted.

Comparable Hotels Data

2 unchanged sentences

(i) were active and operating in our portfolio since January 1st of the previous year;

and (ii) have not sustained substantial property damage or business interruption, have not undergone large-scale capital

projects or for which comparable results are not available.

and (ii) have not sustained substantial property damage or business interruption, have not undergone large-scale capital projects or for which comparable results are not available.

We presented comparable hotel results to help us and our investors evaluate the ongoing operating performance of our comparable hotels.

However, given the significant effect of COVID-19 on most of our hotels and the lack of comparability to prior periods, we do not believe this supplemental information is useful to us or our investors at this time.

Under “Results of Operations” below, we have provided information on the effects from acquisitions, dispositions and other factors to our results of operations for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

Under “Results of Operations” below, we have provided information on the effects from acquisitions, dispositions and other factors to our results of operations for the three and six months ended June 30, 2020 as compared to the three and six months ended June 30, 2019.

Change from other factors primarily relates to the effects of COVID-19.

3 unchanged sentences

EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA

EBITDA, presented herein, reflects net income excluding depreciation and amortization, interest income, interest expense, income taxes and also interest expense, income tax and depreciation and amortization included in equity in earnings from investments in affiliates.

EBITDA, presented herein, reflects net income (loss) excluding depreciation and amortization, interest income, interest expense, income taxes and also interest expense, income tax and depreciation and amortization included in equity in earnings (losses) from investments in affiliates.

Adjusted EBITDA, presented herein, is calculated as EBITDA, further adjusted to exclude:

Gains or losses on sales of assets for both consolidated and unconsolidated investments;

Gains or losses on foreign currency transactions;

Costs associated with hotel acquisitions or dispositions expensed during the period;

27 unchanged sentences

Because of these limitations, EBITDA, Adjusted EBITDA and Hotel 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.

The following table provides a reconciliation of Net income to Hotel Adjusted EBITDA:

Three Months Ended March 31,

The following table provides a reconciliation of Net (loss) income to Hotel Adjusted EBITDA:

Three Months Ended June 30,

Six Months Ended June 30,

(in millions)

7 unchanged sentences

investments in affiliates

Gain on sales of assets, net

Loss on foreign currency transactions

(Gain) loss on sales of assets, net

Acquisition costs

Severance expense

8 unchanged sentences

We present Nareit FFO attributable to stockholders and Nareit FFO per diluted share (defined as set forth below) as non-GAAP measures of our performance.

We calculate funds from operations (“FFO”) attributable to stockholders for a given operating period in accordance with standards established by the National Association of Real Estate Investment Trusts (“Nareit”), as net income or loss attributable to stockholders (calculated in accordance with U.S.

We calculate funds from (used in) operations (“FFO”) attributable to stockholders for a given operating period in accordance with standards established by the National Association of Real Estate Investment Trusts (“Nareit”), as net income or loss attributable to stockholders (calculated in accordance with U.S.

GAAP), excluding depreciation and amortization, gains or losses on sales of assets, impairment, and the cumulative effect of changes in accounting principles, plus adjustments for unconsolidated joint ventures.

9 unchanged sentences

We adjust Nareit FFO attributable to stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to stockholders:

Gains or losses on foreign currency transactions;

Costs associated with hotel acquisitions or dispositions expensed during the period;

2 unchanged sentences

Other items that we believe are not representative of our current or future operating performance.

The following table provides a reconciliation of net income attributable to stockholders to Nareit FFO attributable to stockholders and Adjusted FFO attributable to stockholders:

(unaudited, in millions, except per share data)

Three Months Ended March 31,

The following table provides a reconciliation of net (loss) income attributable to stockholders to Nareit FFO attributable to stockholders and Adjusted FFO attributable to stockholders:

Three Months Ended June 30,

Six Months Ended June 30,

(in millions, except per share amounts)

Net (loss) income attributable to stockholders

2 unchanged sentences

noncontrolling interests

Gain on sales of assets, net

(Gain) loss on sales of assets, net

Gain on sale of investments in affiliates (1)

Impairment loss

3 unchanged sentences

Nareit FFO attributable to stockholders

Loss on foreign currency transactions

Acquisition costs

Severance expense

4 unchanged sentences

Adjusted FFO per share - Diluted (3)

For the three months ended March 31, 2020, includes $26 million of tax expense on hotels sold during the period.

Included in other loss, net .

For the six months ended June 30, 2020, includes $26 million of tax expense on hotels sold during the period.

Per share amounts are calculated based on unrounded numbers.

2 unchanged sentences

Property Acquisitions:

On May 5, 2019, the Company, PK Domestic Property LLC, an indirect subsidiary of the Company (“PK Domestic”), and PK Domestic Sub LLC, a wholly-owned subsidiary of PK Domestic (“Merger Sub”) entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Chesapeake Lodging Trust (“Chesapeake”).

On May 5, 2019, the Company, PK Domestic and PK Domestic Sub LLC, a wholly-owned subsidiary of PK Domestic (“Merger Sub”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Chesapeake Lodging Trust (“Chesapeake”).

On September 18, 2019, pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Chesapeake merged with and into Merger Sub (the “Merger”).

As a result of the Merger, we acquired 18 hotels, two of which were disposed of in December 2019.

The results of operations of these hotels for the three months ended March 31, 2019 are not included in our consolidated results.

The results of operations of these hotels for the three and six months ended June 30, 2019 are not included in our consolidated results.

Property Dispositions:

Since January 1, 2019, we disposed of 8 consolidated hotels excluding the 2 hotels acquired in the Merger that were subsequently sold.

As a result of these dispositions, our revenues and operating expenses decreased for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

As a result of these dispositions, our revenues and operating expenses decreased for the three and six months ended June 30, 2020 as compared to the same periods in 2019.

The results of operations during our period of ownership of these hotels are included in our consolidated results.

Beginning in March 2020, we experienced a significant decline in occupancy and RevPAR due to COVID-19.

The economic recession resulting from the spread of COVID-19 has and is expected to significantly affect our business.

Certain of our hotels have temporarily suspended all operations, while our other hotels are operating in a limited capacity.

Consequently, the results of our portfolio during the three months ended March 31, 2020 will not be comparable to the same period in 2019.

Beginning in March 2020, we experienced a significant decline in ADR, occupancy and RevPAR due to COVID-19.

The economic recession resulting from the spread of COVID-19 has and is expected to continue to significantly affect our business.

Consequently, the results of our portfolio during the three and six months ended June 30, 2020 will not be comparable to the same periods in 2019.

Hotel Revenues and Operating Expenses

Three months ended March 31,

Three Months Ended June 30,

(in millions)

8 unchanged sentences

Change from other factors primarily relates to the effects of COVID-19.

The net increase in other departmental and support expense of $3 million from other factors includes $13 million of furlough costs for employees at certain of our hotels, which is offset by a decrease from the other effects of COVID-19.

Six Months Ended June 30,

(in millions)

Rooms revenue

Food and beverage revenue

Ancillary hotel revenue

Rooms expense

Food and beverage expense

Other departmental and support

Other property-level expense

Management fees expense

Change from other factors primarily relates to the effects of COVID-19.

Other Revenue and Operating Expenses

The decrease in other revenue and other operating expense primarily relates to the effects of COVID-19.

Other Revenue

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Percent Change

(in millions)

Laundry revenue

2 unchanged sentences

Other Expense

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Percent Change

(in millions)

Laundry expense

2 unchanged sentences

Corporate general and administrative

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Percent Change

(in millions)

General and administrative expenses

Share-based compensation expense

Acquisition costs

Disposition costs

Severance expense

Total corporate general and administrative

Acquisition costs of $6 million for both the three and six months ended June 30, 2019 primarily relate to costs incurred in connection with the entry into the Merger Agreement with Chesapeake.

Impairment loss and casualty gain, net

During the three months ended March 31, 2020, we recognized a net loss of $694 million primarily as a result of $607 million of impairment losses related to our goodwill and $88 million of impairment losses primarily related to one of our hotels, and our inability to recover the carrying value of the asset because of COVID-19.

During the six months ended June 30, 2020, we recognized a net loss of $694 million primarily as a result of $607 million of impairment losses related to our goodwill and $88 million of impairment losses primarily related to one of our hotels, and our inability to recover the carrying value because of COVID-19.

Gain on sales of assets, net

During the three months ended March 31, 2020, we recognized a net gain of $62 million primarily as a result of the $63 million gain recognized on the sale of two of our consolidated hotels.

During the six months ended June 30, 2020, we recognized a net gain of $63 million primarily as a result of the sale of two of our consolidated hotels.

Refer to Note 3:

“Acquisitions and Dispositions” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information.

During the three months ended March 31, 2019, we recognized a gain of $31 million, as a result of the sale of two of our consolidated hotels.

During the three and six months ended June 30, 2019, we recognized a loss of $12 million and a net gain of $19 million, respectively, as a result of the sale of five of our consolidated hotels.

Non-operating Income and Expenses

Interest expense

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Percent Change

(in millions)

3 unchanged sentences

2019 Term Facility (3)

Senior Secured Notes

Total interest expense

1 unchanged sentence

The 2016 Term Loan was entered into in December 2016, with a maturity date of December 2021.

We repaid the 2016 Term Loan by $50 million and $69 million in December 2019 and June 2020, respectively.

In August 2019, the Company, Park Intermediate Holdings LLC and PK Domestic entered into a credit agreement with Bank of America, N.A.

1 unchanged sentence

The $100 million, two-year delayed draw term loan tranche was unfunded and the commitments thereunder terminated on September 18, 2019.

On December 31, 2019, we prepaid $180 million of the 2019 Term Facility.

Interest expense increased as a result of $310 million in mortgage loans assumed in connection with the Merger, borrowings under the 2019 Term Facility to fund the Merger and the $1 billion drawn under the Revolver in March 2020.

On December 31, 2019, we repaid $180 million of the 2019 Term Facility.

During the second quarter of 2020, we repaid $319 million of the Revolver.

Interest expense increased during three and six months ended June 30, 2020 as compared to the same periods in 2019 as a result of $310 million in mortgage loans assumed in connection with th e Merger, borrowings under the 2019 Term Facility to fund the Merger, the $1 billion drawn under the Revolver in March 2020 (of which $319 million was repaid during the second quarter of 2020), and the issuance of our $650 million Senior Secured Notes.

Income tax expense

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Percent Change

(in millions)

Income tax expense

Income tax expense for the three months ended March 31, 2020 includes $12 million of built-in gains tax from assets sold during the period and $14 million of non-U.S.

income tax expense on the gain from the entity sold during the period, partially offset by a TRS income tax benefit of $17 million from utilizing the NOL carryback provisions of the CARES Act.

During the three months ended March 31, 2019, we recognized $7 million of income tax expense, which includes $1 million of tax recognized on the gain from assets sold during the period.

Income tax expense for the six months ended June 30, 2020 includes $26 million of income tax expense from hotels sold during the period, partially offset by a TRS income tax benefit of $16 million from utilizing the NOL carryback provisions of the CARES Act.

Refer to Note 9:

“Income Taxes” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information

Income tax expense for the three and six months ended June 30, 2019 includes $4 million and $10 million, respectively, of income tax liabilities associated with our taxable operations.

Liquidity and Capital Resources

We seek to maintain sufficient amounts of liquidity with an appropriate balance of cash, debt and equity to provide financial flexibility.

As of March 31, 2020, we had total cash and cash equivalents of approximately $1.3 billion and $38 million of restricted cash.

On April 15, 2020, $105 million of such amount was paid to stockholders in connection with our first quarter 2020 dividend.

As of June 30, 2020, we had total cash and cash equivalents of approximately $1.3 billion and $35 million of restricted cash.

Restricted cash primarily consists of cash restricted as to use by our debt agreements and reserves for capital expenditures in accordance with certain of our management agreements.

As a result of the economic uncertainty resulting from the effects of COVID-19 including decreased occupancy, ADR and RevPAR at our hotels, as described above under “Recent Events–COVID-19 Effect on Our Business”, we expect our cash flow from operations to be significantly lower than in the past.

We have taken several steps to preserve capital and increase liquidity, including fully drawing $1 billion from our Revolver, suspending our dividend following the payment of the first quarter 2020 dividend and implementing various cost saving initiatives at our hotels including:

We have taken several steps to preserve capital and increase liquidity, including fully drawing $1 billion from our Revolver in March 2020, issuing $650 million of Senior Secured Notes in May 2020 (a portion of which was used to partially repay amounts outstanding under our Revolver and 2016 Term Loan), suspending our dividend following the payment of the first quarter 2020 dividend and implementing various cost saving initiatives at our hotels including:

temporary suspension of operations at certain hotels and selected restaurants and other businesses and outlets and deferrals of approximately $150 million of the $200 million in capital expenditures budgeted for 2020.

We will continue to assess when the deferred capital expenditures will resume or if any of the deferred expenditures will be cancelled.

While operations have been suspended at most of our hotels, and significantly reduced at the remaining hotels, the duration and extent of the effects of COVID-19 are unknown at this time.

Assuming that our hotel suspensions of operations expand such that hotel operations are suspended at all 60 of our hotels (including restaurants and other business and outlets) and room and other revenues were also zero between the months of May and December of 2020, we currently estimate that our average monthly cash burn for the period would be approximately $70 million, of which $50 million consists of the estimated average monthly hotel funding for hotel expenses and $20 million consists of the estimated average monthly corporate level expenses.

While operations have been suspended or significantly reduced at most of our hotels, the duration and extent of the effects of COVID-19 remain unknown, and we cannot predict whether our reopened hotels will be forced to suspend operations again in the future.

Assuming that our hotel suspensions of operations were to expand such that hotel operations were suspended at all 60 of our hotels (including restaurants and other business and outlets) and room and other revenues were also zero between the months of August and December of 2020, we currently estimate that our average monthly cash burn for that period would be approximately $65 million, of which $42 million consists of the estimated average monthly hotel funding for hotel expenses and $23 million consists of the estimated average monthly corporate-level expenses.

The estimated hotel-level cash burn rate approximates working capital funding needs and includes hotel fixed costs at each of our hotels while activities are suspended.

The estimated corporate-level cash burn consists primarily of principal and interest payments on outstanding debt and corporate general and administrative expenses, such as salary, wages and benefits.

This estimate does not take into account any possible alternative sources of revenue that may arise or any hotel property dispositions for the remainder of the year or payment of cash dividends or other distributions not already declared and paid in 2020, if any.

This estimate does not take into account capital expenditures or any possible alternative sources of revenue that may arise or any hotel property dispositions for the remainder of the year or payment of future cash dividends, if any.

The estimated cash burn amount has not been reduced by any amount available to us under existing or future debt facilities, or proceeds from issuance of any additional debt, equity or equity-linked securities.

We currently believe, as a result of the above-mentioned cost-reduction efforts and the overall strength of our balance sheet, based on the estimated cash burn rates described above, we would expect to have sufficient liquidity to withstand the suspension of operations at all our hotels for the next 17 months.

With $1 billion from our Revolver borrowing and the proceeds from the sales of two consolidated hotels during the first quarter of 2020, we currently believe we have sufficient liquidity to pay our 2020 debt maturities and fund other short-term liquidity obligations.

We currently believe, as a result of the above-mentioned cost-reduction efforts and the overall strength of our balance sheet, based on the estimated cash burn rates described above and absent any debt required to be repaid in the event of default, we would expect to have sufficient liquidity to withstand the suspension of operations at all our hotels for two years.

With the net proceeds from our Revolver borrowing s during 2020, net proceeds from the offering of our Senior Secured Notes and the proceeds from the sales of two consolidated hotels during the first quarter of 2020, we currently believe we have sufficient liquidity to pay our 2020 debt maturities and fun d other short-term liquidity obligations.

We are maintaining higher than historical cash levels due to the continued uncertainty surrounding COVID-19, and we intend to do so until markets stabilize and demand in the lodging industry begins to recover.

In addition, we also may take other actions to improve our liquidity, such as the issuance of additional debt, equity or equity-linked securities, if we determine that doing so would be beneficial to us.

In a ddition, we also may take other actions to improve our liquidity, such as the issuance of additional debt, equity or equity-linked securities, if we determine that doing so would be beneficial to us.

However, there can no assurance as to the timing of any such issuance, which may be in the near term, or that any such additional financing will be completed on favorable terms, or at all.

Additionally, we were in compliance with our debt covenants under our credit and term loan facilities as of March 31, 2020.

H owever, in order to maintain compliance under our credit and term loan facilities in future quarters, we have amended our credit and term loan facilities to suspend compliance with all existing financial covenants tested through and including March 31, 2021 and to adjust the levels of particular financial covenants after such period.

Additionally, in May 2020, we amended our credit and term loan facilities to suspend compliance with all existing financial covenants tested through and including March 31, 2021 and to adjust the levels of particular financial covenants after such period.

As part of the amendment process, we (i) agreed to comply with a monthly minimum liquidity covenant, to pledge equity in certain subsidiaries to secure the facilities, and for certain subsidiaries to become guarantors under the facilities, and (ii) exercised our two six-month extension options on our Revolver to extend its maturity to December 24, 2021.

The amendment also added additional covenants that restrict our ability to make dividend and distribution payments (except to the extent required to maintain REIT status) and stock repurchases, make prepayments of other indebtedness, make capital expenditures, conduct asset dispositions or transfers and make investments, including acquisitions or mergers, in each case subject to various exceptions.

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including reimbursements to our hotel manager for payroll and related benefits, costs associated with the operation of our hotels, interest and scheduled principal payments on our outstanding indebtedness, capital expenditures for renovations and maintenance at our hotels (to the extent not deferred for 2020), corporate general and administrative expenses, and, when resumed, dividends to our stockholders.

The amendments also added additional covenants that restrict our ability to make dividend and distribution payments (except to the extent required to maintain REIT status) and stock repurchases, make prepayments of other indebtedness, make capital expenditures, conduct asset dispositions or transfers and make investments, including acquisitions or mergers, in each case subject to various exceptions.

We expect to be in compliance with financial covenants for the quarter ended June 30, 2021 (the first quarter for which compliance is required following the amendments).

If we are unable to comply with such covenants for the quarter ended June 30, 2021, we will negotiate with our lenders to amend such covenants as needed and believe we will be able to reach an agreement in advance as we did with the previous amendments.

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including reimbursements to our hotel manager for payroll and related benefits, costs associated with the operation of our hotels, interest and scheduled principal payments on our outstanding indebtedness (including the Senior Secured Notes), capital expenditures for renovations and maintenance at our hotels (to the extent not deferred for 2020), corporate general and administrative expenses, and, when resumed, dividends to our stockholders.

Many of the other expenses associated with our hotels are relatively fixed, including portions of rent expense, property taxes and insurance.

Since we generally are unable to decrease these costs significantly or rapidly when demand for our hotels decreases, the resulting decline in our revenues can have a greater adverse effect on our net cash flow, margins and profits.

Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements at our hotels, and costs associated with potential acquisitions.

In the near term, the impact of COVID-19 on the global economy, including any sustained decline in our performance, may make it more difficult or costly for us to raise debt or equity capital to fund long-term liquidity requirements.

Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements at our hotels (to the extent not cancelled or deferred), and costs associated with potential acquisitions.

Despite the impact of COVID-19 on the global economy, including a sustained decline in our performance, we were able to access the debt capital markets during the second quarter of 2020 and complete our inaugural senior secured notes offering.

However, it may be difficult or costly for us to raise additional debt or equity capital in the future to fund long-term liquidity requirements.

Our commitments to fund capital expenditures for renovations and maintenance at our hotels will be funded by cash and cash equivalents, restricted cash to the extent permitted by our lending agreements and cash flow from operations.

4 unchanged sentences

Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments.

Merger with Chesapeake

On September 18, 2019, the Merger was completed pursuant to the terms and subject to the conditions set forth in the Merger Agreement, and Chesapeake merged with and into Merger Sub.

Each of Chesapeake’s common shares of beneficial interest, $0.01 par value per share, was converted into $11.00 in cash and 0.628 of a share of our common stock.

No fractional shares of common stock were issued in the Merger.

The value of any fractional interests to which a Chesapeake shareholder would otherwise have been entitled was paid in cash.

In August 2019, we entered into the 2019 Term Facility, which provided a $950 million Term Facility, with the $850 million, five-year delayed draw term loan tranche under the 2019 Term Facility fully drawn on September 18, 2019 to fund the Merger.

The $100 million, two-year delayed draw term loan tranche under the 2019 Term Facility was not funded and the commitments thereunder terminated on September 18, 2019.

In December 2019, we prepaid $180 million of the 2019 Term Facility.

Refer to Note 1:

“Organization and Recent Events” and Note 7:

“Debt” in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.

Stock Repurchase Program

3 unchanged sentences

During the three months ended March 31, 2020 , we repurchased 4.6 million shares of our common stock for a total purchase price of $66 million.

As of March 31, 2020, approximately $234 million remained available for stock repurchases.

No common stock was repurchased during the three months ended June 30, 2020.

As of June 30, 2020 , approximately $234 million remained available for stock repurchases.

The timing of stock repurchases and the number of shares to be repurchased will depend upon prevailing market conditions and other factors, and we may suspend the repurchase program at any time.

2 unchanged sentences

The following tables summarize our net cash flows and key metrics related to our liquidity:

Six Months Ended June 30,

Percent Change

5 unchanged sentences

Operating Activities

Cash flow from operating activities are primarily generated from the operating income generated at our hotels.

The $85 million decrease in net cash provided by operating activities for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 was primarily due to a decrease in cash from operations related to the effects of COVID-19 coupled with an increase in cash from interest paid of $7 million, partially offset by an increase in cash from the hotels acquired in the Merger.

Cash flow from operating activities are primarily generated from the operating income or losses generated at our hotels.

The $402 million decrease in net cash provided by operating activities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to a decrease in cash from operations related to the effects of COVID-19 coupled with an increase in cash paid for interest of $19 million.

Investing Activities

The $180 million in net cash provided by investing activities for the three months ended March 31, 2020 was primarily attributable to $205 million in net proceeds received from the sale of hotels, partially offset by $26 million in capital expenditures.

The $2 million in net cash provided by investing activities for the three months ended March 31, 2019 was primarily attributable to the $65 million in net proceeds received from the sale of hotels, partially offset by $64 million used for capital expenditures for property and equipment at our hotels.

The $150 million in net cash provided by investing activities for the six months ended June 30, 2020 was primarily attributable to $207 million in net proceeds received from the sale of hotels, partially offset by $56 million in capital expenditures.

The $111 million in net cash provided by investing activities for the six months ended June 30, 2019 was primarily attributable to the $229 million in net proceeds received from the sale of hotels, partially offset by $120 million used for capital expenditures for property and equipment at our hotels.

Financing Activities

The $789 million in net cash provided by financing activities for the three months ended March 31, 2020 is primarily attributable to borrowings of $1 billion from our Revolver as a result of COVID-19, partially offset by $136 million in dividends paid and the repurchase of 4.5 million shares of our common stock for $66 million.

The $209 million in net cash used in financing activities for the three months ended March 31, 2019 is primarily attributable to $201 million in dividends paid.

The $931 million in net cash provided by financing activities for the six months ended June 30, 2020 is primarily attributable to borrowings of $1 billion from our Revolver as a result of COVID-19, the issuance of our $650 million Senior Secured Notes, partially offset by $392 million of debt repayments, $241 million in dividends paid and the repurchase of 4.5 million shares of our common stock for $66 million.

The $300 million in net cash used in financing activities for the six months ended June 30, 2019 is primarily attributable to $291 million in dividends paid.

As a REIT, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders on an annual basis.

1 unchanged sentence

Instead, we will need to meet these needs from external sources of capital and amounts, if any, by which our cash flow generated from operations exceeds taxable income.

However, as a precautionary measure in light of COVID-19, after the payment of the first quarter dividend, we have suspended our quarterly dividend until such time that our Board of Directors determines our year-end dividend, if any.

However, as a precautionary measure in light of COVID-19, after the payment of the first quarter dividend, we suspended our quarterly dividend until such time that our Board of Directors determines our year-end dividend, if any.

We declared the following dividends to holders of our common stock during 2020:

2 unchanged sentences

April 15, 2020

As of March 31, 2020, our total indebtedness was approximately $ 4.9 billion, including $1 billion of borrowings from our Revolver as disclosed above, and excluding approximately $225 million of our share of debt of investments in affiliates.

As of June 30, 2020, our total indebtedness was approximately $5.1 billion, including $681 million of borrowings from our Revolver and $650 million of Senior Secured Notes, as disclosed above, and excluding approximately $225 million of our share of debt of investments in affiliates.

Substantially all the debt of such unconsolidated affiliates is secured solely by the affiliates’ assets or is guaranteed by other partners without recourse to us.

2 unchanged sentences

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of March 31, 2020 included construction contract commitments of approximately $47 million for capital expenditures at our properties.

Our off-balance sheet arrangements as of June 30, 2020 included construction contract commitments of approximately $29 million for capital expenditures at our properties.

Our contracts contain clauses that allow us to cancel all or some portion of the work.

9 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis