Park Hotels & Resorts Inc. 10-Q

Item 1. Financial Statements. PARK HOTELS & RESORTS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except share and per share data) June 30, 2020 December 31, 2019 (unaudited) ASSETS Property and equipment, net $ 9,323 $ 9,594 Assets held for sale, net — 71 Investments in affiliates 23 35 Goodwill — 607 Intangibles, net 45 46 Cash and cash equivalents 1,274 346 Restricted cash 35 40 Accounts receivable, net of allowance for doubtful accounts of $ 7 and $ 2 31 180 Prepaid expenses 43 83 Other assets 46 40 Operating lease right-of-use assets 239 248 TOTAL ASSETS (variable interest entities - $ 231 and $ 242 ) $ 11,059 $ 11,290 LIABILITIES AND EQUITY Liabilities Debt $ 5,118 $ 3,871 Accounts payable and accrued expenses 129 217 Due to hotel managers 74 159 Deferred income tax liabilities 36 50 Other liabilities 123 282 Operating lease liabilities 253 260 Total liabilities (variable interest entities - $ 215 and $ 219 ) 5,733 4,839 Commitments and contingencies - refer to Note 13 Stockholders' Equity Common stock, par value $ 0.01 per share, 6,000,000,000 shares authorized, 235,900,906 shares issued and 235,604,979 shares outstanding as of June 30, 2020 and 239,589,639 shares issued and 239,386,877 shares outstanding as of December 31, 2019 2 2 Additional paid-in capital 4,508 4,575 Retained earnings 871 1,922 Accumulated other comprehensive loss ( 6 ) ( 3 ) Total stockholders' equity 5,375 6,496 Noncontrolling interests ( 49 ) ( 45 ) Total equity 5,326 6,451 TOTAL LIABILITIES AND EQUITY $ 11,059 $ 11,290 Refer to the notes to the unaudited condensed consolidated financial statements. 2 PARK HOTELS & RESORTS INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited, in millions, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenues Rooms $ 21 $ 434 $ 383 $ 837 Food and beverage 3 195 164 378 Ancillary hotel 15 55 72 110 Other 3 19 22 37 Total revenues 42 703 641 1,362 Operating expenses Rooms 20 113 132 220 Food and beverage 14 130 137 254 Other departmental and support 60 151 232 300 Other property-level 56 49 116 98 Management fees — 36 25 69 Impairment loss and casualty gain, net — — 694 — Depreciation and amortization 75 61 150 123 Corporate general and administrative 14 22 30 39 Other 4 18 25 38 Total expenses 243 580 1,541 1,141 Gain (loss) on sales of assets, net 1 ( 12 ) 63 19 Operating (loss) income ( 200 ) 111 ( 837 ) 240 Interest income 1 2 2 3 Interest expense ( 50 ) ( 33 ) ( 90 ) ( 65 ) Equity in (losses) earnings from investments in affiliates ( 8 ) 10 ( 9 ) 15 Other loss, net ( 1 ) ( 1 ) ( 3 ) — (Loss) income before income taxes ( 258 ) 89 ( 937 ) 193 Income tax expense ( 3 ) ( 5 ) ( 13 ) ( 12 ) Net (loss) income ( 261 ) 84 ( 950 ) $ 181 Net loss (income) attributable to noncontrolling interests 2 ( 2 ) 3 ( 3 ) Net (loss) income attributable to stockholders $ ( 259 ) $ 82 $ ( 947 ) $ 178 Other comprehensive (loss) income, net of tax expense: Currency translation adjustment, net of tax expense of $ 0 ( 1 ) 1 ( 3 ) 1 Total other comprehensive (loss) income ( 1 ) 1 ( 3 ) 1 Comprehensive (loss) income ( 262 ) 85 ( 953 ) 182 Comprehensive loss (income) attributable to noncontrolling interests 2 ( 2 ) 3 ( 3 ) Comprehensive (loss) income attributable to stockholders $ ( 260 ) $ 83 $ ( 950 ) $ 179 (Loss) Earnings per share: (Loss) earnings per share - Basic $ ( 1.10 ) $ 0.40 $ ( 4.01 ) $ 0.88 (Loss) earnings per share - Diluted $ ( 1.10 ) $ 0.40 $ ( 4.01 ) $ 0.88 Weighted average shares outstanding - Basic 235 201 236 201 Weighted average shares outstanding - Diluted 235 202 236 202 Refer to the notes to the unaudited condensed consolidated financial statements. 3 PARK HOTELS & RESORTS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in millions) Six Months Ended June 30, 2020 2019 Operating Activities: Net (loss) income $ ( 950 ) $ 181 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 150 123 Gain on sales of assets, net ( 63 ) ( 19 ) Impairment loss and casualty gain, net 694 — Equity in loss (earnings) from investments in affiliates 9 ( 15 ) Other loss, net 3 — Share-based compensation expense 6 8 Amortization of deferred financing costs 3 2 Distributions from unconsolidated affiliates 5 13 Deferred income taxes 2 — Changes in operating assets and liabilities ( 17 ) ( 49 ) Net cash (used in) provided by operating activities ( 158 ) 244 Investing Activities: Capital expenditures for property and equipment ( 56 ) ( 120 ) Proceeds from asset dispositions, net 207 229 Contributions to unconsolidated affiliates ( 2 ) — Insurance proceeds for property damage claims 1 2 Net cash provided by investing activities 150 111 Financing Activities: Borrowings on Revolver 1,000 — Repayments of Revolver ( 319 ) — Proceeds from issuance of Senior Secured Notes 652 — Repayment of 2016 Term Loan ( 69 ) — Repayment of mortgage debt ( 4 ) — Debt issuance costs ( 15 ) — Dividends paid ( 241 ) ( 291 ) Distributions to noncontrolling interests, net ( 1 ) ( 3 ) Tax withholdings on share-based compensation ( 6 ) ( 6 ) Repurchase of common stock ( 66 ) — Net cash provided by (used in) financing activities 931 ( 300 ) Net increase in cash and cash equivalents and restricted cash 923 55 Cash and cash equivalents and restricted cash, beginning of period 386 425 Cash and cash equivalents and restricted cash, end of period $ 1,309 $ 480 Supplemental Disclosures Non-cash financing activities: Dividends declared but unpaid $ — $ 90 Refer to the notes to the unaudited condensed consolidated financial statements. 4 PARK HOTELS & RESORTS INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited, in millions) Accumulated Additional Other Non- Common Stock Paid-in Retained Comprehensive controlling Shares Amount Capital Earnings (Loss) Income Interests Total Balance as of December 31, 2019 239 $ 2 $ 4,575 $ 1,922 $ ( 3 ) $ ( 45 ) $ 6,451 Share-based compensation, net — — ( 5 ) 1 — — ( 4 ) Net loss — — — ( 688 ) — ( 1 ) ( 689 ) Other comprehensive loss — — — — ( 2 ) ( 2 ) Dividends and dividend equivalents (1) — — — ( 106 ) — — ( 106 ) Distributions to noncontrolling interests — — — — — ( 1 ) ( 1 ) Repurchase of common stock ( 4 ) — ( 66 ) — — — ( 66 ) Balance as of March 31, 2020 235 2 4,504 1,129 ( 5 ) ( 47 ) 5,583 Share-based compensation, net 1 — 4 1 — — 5 Net loss — — — ( 259 ) — ( 2 ) ( 261 ) Other comprehensive loss — — — — ( 1 ) — ( 1 ) Balance as of June 30, 2020 236 $ 2 $ 4,508 $ 871 $ ( 6 ) $ ( 49 ) $ 5,326 Accumulated Additional Other Non- Common Stock Paid-in Retained Comprehensive controlling Shares Amount Capital Earnings Loss Interests Total Balance as of December 31, 2018 201 $ 2 $ 3,589 $ 2,047 $ ( 6 ) $ ( 46 ) $ 5,586 Share-based compensation, net — — ( 1 ) — — — ( 1 ) Net income — — — 96 — 1 97 Dividends and dividend equivalents (1) — — — ( 91 ) — — ( 91 ) Distributions to noncontrolling interests — — — — — ( 3 ) ( 3 ) Cumulative effect of change in accounting principle — — — ( 8 ) — — ( 8 ) Balance as of March 31, 2019 201 2 3,588 2,044 ( 6 ) ( 48 ) 5,580 Share-based compensation, net 1 — 3 — — — 3 Net income — — — 82 — 2 84 Other comprehensive income — — — — 1 — 1 Dividends and dividend equivalents (1) — — — ( 92 ) — — ( 92 ) Balance as of June 30, 2019 202 $ 2 $ 3,591 $ 2,034 $ ( 5 ) $ ( 46 ) $ 5,576 (1) Dividends declared per common share were $ 0.45 for the three months ended March 31, 2020, March 31, 2019 and June 30, 2019, respectively. Refer to the notes to the unaudited condensed consolidated financial statements. 5 PARK HOTELS & RESORTS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1: Organization and Recent Events Organization Park Hotels & Resorts Inc. (“we,” “us,” “our” or the “Company”) is a Delaware corporation that owns a portfolio of premium-branded hotels and resorts primarily located in prime city center and resort locations. On January 3, 2017, Hilton Worldwide Holdings Inc. (“Hilton”) completed the spin-off of a portfolio of hotels and resorts that established Park Hotels & Resorts Inc. as an independent, publicly traded company. 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 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”) and 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 our 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. We are treated as a real estate investment trust (“REIT”) for United States (“U.S.”) federal income tax purposes, and we believe we have been organized and operated, and expect to continue to be organized and operate in a manner to qualify as a REIT. From the date of our spin-off from Hilton, Park Intermediate Holdings LLC (our “Operating Company”), directly or indirectly, has held all our assets and has conducted all of our operations. We own 100 % of the interests in our Operating Company. Recent Events The novel strain of coronavirus and the disease it causes (“COVID-19”) have had a significant effect on the hospitality industry and our business. The effects of COVID-19, including government restrictions such as mandated closings of non-essential businesses and travel restrictions, have severely reduced overall lodging demand. Since the beginning of March, we have experienced a significant decline in occupancy and Revenue per Available Room (“RevPAR”) associated with COVID-19 throughout our portfolio, which resulted in a decline in our operating cash flow. We expect that COVID-19 will continue to negatively affect our operating results for at least the remainder of 2020, as well as the debt and equity capital markets, which in the near-term could make obtaining financing or refinancing debt obligations more challenging. During the first quarter of 2020, we and our hotel managers took various actions to mitigate the effects of COVID-19, including temporarily suspending operations at 38 of our 60 hotels, limiting capacity at our hotels that remained open, deferring approximately $ 150 million of capital expenditures planned for 2020, suspending our dividend after the first quarter of 2020, and as a precautionary measure to increase liquidity and preserve financial flexibility, fully drawing our $ 1 billion revolving credit facility (“Revolver”). We have since commenced a phased reopening of 20 of our hotels as restrictions are removed and demand returns. The timing of fully reopening these and the remainder of our hotels will depend primarily on government restrictions imposed or re-imposed, recommendations of health officials and market demand. Additionally, in May 2020, in order to maintain compliance under our credit and term loan facilities in future quarters, 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 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 intend to 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. In May 2020, our Operating Company, PK Domestic and PK Finance Co-Issuer Inc. (“PK Finance”), an indirect, wholly-owned subsidiary of the Company, issued an aggregate of $ 650 million of senior secured notes due 2025 (“Senior Secured Notes”). We set aside $ 350 million of the net proceeds for general corporate purposes, further increasing our liquidity, and used the remainder of the net proceeds to repay portions of our Revolver and the term loan we entered into in December 2016 (“2016 Term Loan”). We are committed to using our liquidity to support our hotels’ operations during the COVID-19 pandemic and subsequent recovery, while being focused on continuing to maintain and enhance our stockholders’ value. 6 Note 2: Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation Principles of Consolidation The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows, in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All significant intercompany transactions and balances within the financial statements have been eliminated. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on February 27, 2020. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim results are not necessarily indicative of full year performance. Reclassifications Certain line items on the condensed consolidated statements of comprehensive (loss) income for the three and six months ended June 30, 2019 have been reclassified to conform to the current period presentation. Summary of Significant Accounting Policies Our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 27, 2020, contains a discussion of the significant accounting policies. There have been no significant changes to our significant accounting policies since December 31, 2019. Recently Issued Accounting Pronouncements Adopted Accounting Standards In January 2017, the FASB issued ASU No. 2017-04 (“ASU 2017-04”), Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . This ASU eliminates Step 2 from goodwill impairment testing. The goodwill impairment test will now consist of one step which compares the fair value of the reporting unit to the carrying value of the reporting unit and we would recognize an impairment loss if the carrying value exceeds the fair value but only to the extent of the amount of the goodwill allocated to the reporting unit. We adopted the provisions of this ASU effective January 1, 2020. In June 2016, the FASB issued ASU No. 2016-13 , “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the existing “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For trade and other receivables, the forward looking “expected loss” model will generally result in the earlier recognition of allowances for losses. In November 2018, the FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which clarified that operating lease receivables accounted for under ASC 842 are not in the scope of ASU No. 2016-13. We adopted the provisions of ASU 2016-13 and the related ASUs as of January 1, 2020 using a modified retrospective approach, which resulted in no cumulative effect adjustment to retained earnings as of January 1, 2020. An allowance for doubtful accounts is provided on accounts receivable for the expected credit loss over the life of the receivable based on historical credit losses, current business conditions, and reasonable and supportable forecasts. In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” to provide optional expedients and exceptions for applying generally accepted accounting principles if certain criteria are met to contract modifications, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The ASU is effective from March 12, 2020 through December 31, 2022 and did not have a material effect on our consolidated financial statements. 7 Note 3: Acquisitions and Dispositions Acquisitions Merger with Chesapeake As a result of the Merger, we acquired a 100 % ownership interest in the following 18 hotels: Hotel Location Rooms Hilton Denver City Center Denver, CO 613 W Chicago – Lakeshore Chicago, IL 520 Hyatt Regency Boston Boston, MA 502 Hyatt Regency Mission Bay Spa and Marina San Diego, CA 438 Boston Marriott Newton Newton, MA 430 Le Meridien New Orleans (1) New Orleans, LA 410 W Chicago – City Center Chicago, IL 403 Royal Palm South Beach Miami, a Tribute Portfolio Resort Miami Beach, FL 393 Le Meridien San Francisco San Francisco, CA 360 JW Marriott San Francisco Union Square San Francisco, CA 344 Hyatt Centric Fisherman’s Wharf San Francisco, CA 316 Hotel Indigo San Diego Gaslamp Quarter San Diego, CA 210 Courtyard Washington Capitol Hill/Navy Yard Washington, DC 204 Homewood Suites by Hilton Seattle Convention Center Pike Street Seattle, WA 195 Hilton Checkers Los Angeles Los Angeles, CA 193 Ace Hotel Downtown Los Angeles (1) Los Angeles, CA 182 Hotel Adagio, Autograph Collection San Francisco, CA 171 W New Orleans – French Quarter New Orleans, LA 97 5,981 (1) Hotels were subsequently sold in December 2019. The total consideration for the Merger was approximately $ 2 billion, which included the issuance of approximately 37.8 million shares of common stock valued at $ 25.88 per share to Chesapeake common shareholders based on the closing price of our common stock on September 17, 2019. We accounted for the Merger using the acquisition method of accounting. We preliminarily allocated the purchase price, consisting of $ 978 million of common stock issued and cash of $ 1,013 million as follows: (in millions) Investment in hotel properties, net $ 2,220 Intangibles, net 45 Cash and cash equivalents 62 Restricted cash 38 Accounts receivable, net 26 Prepaid expenses 9 Other assets 2 Operating lease right-of-use asset 65 Debt ( 311 ) Accounts payable and accrued expenses ( 47 ) Due to hotel managers ( 15 ) Other liabilities ( 15 ) Operating lease liability ( 88 ) Total consideration $ 1,991 8 The estimated fair values for the assets acquired and the liabilities assumed are preliminary and are subject to change during the one-year measurement period as additional information related to the inputs and assumptions used in determining the fair value of the assets and liabilities becomes available. We will continue to review the underlying inputs and assumptions. Therefore, the purchase price allocation is not yet complete as of t he date of this filing. Once the allocation is complete, an additional adjustment to the allocation may occur. We used the following valuation methodologies, inputs and assumptions to estimate the fair value of the assets acquired and liabilities assumed: • Investment in hotel properties – We estimated the fair values of the land and improvements, buildings and improvements, and furniture, fixtures and equipment at the hotel properties by using a combination of the market, cost and income approaches. These valuation methodologies are based on significant Level 3 inputs in the fair value hierarchy, such as estimates of future income growth, capitalization rates, discount rates, capital expenditures and cash flow projections at the respective hotel properties. • Intangible assets – We estimated the fair value of the air rights contract acquired as part of the Hyatt Regency Boston by calculating the present value of the difference between the contractual rental amounts according to the contract and the market rental rates for similar contracts, measured over a period equal to the remaining non-cancellable term of the contract. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. The intangible asset is amortized using the straight-line method over the remaining term of the contract. • Above and below market lease liabilities – We estimated the fair value of our above and below market lease liabilities by calculating the present value of the difference between the contractual rental amounts paid according to the in-place lease agreements and the market rental rates for similar leased space, measured over a period equal to the remaining non-cancellable terms of the leases. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. The above and below market lease liabilities are included as adjustments to the right-of-use asset in the accompanying condensed consolidated balance sheet. The above and below market lease liabilities are amortized as adjustments to ground rent expense over the remaining terms of the respective leases. • Operating lease right-of-use-asset and Operating lease liability – We estimated the fair value of the operating lease right-of-use asset and operating lease liability by calculating the present value of the fixed contractual rental amounts due over a period equal to the remaining non-cancellable terms of the leases. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. • Debt – We estimated the fair value of the mortgage loans by calculating the present value of the remaining loan payments due over the term of the loans. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. • Restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses, due to hotel managers and other liabilities – The amounts constitute the carrying amounts of the assets acquired and the liabilities assumed, which we believe approximate fair value because of their short-term nature. The following unaudited condensed pro-forma financial information presents the results of operations as if the Merger had taken place on January 1, 2019. The unaudited condensed pro-forma financial information is not necessarily indicative of what our actual results of operations would have been assuming the Merger had taken place on January 1, 2019, nor is it indicative of the results of operations for future periods. The unaudited condensed pro-forma financial information is as follows: Three Months Ended June 30, 2019 Six Months Ended June 30, 2019 (unaudited) (in millions) Total revenues $ 854 $ 1,642 Operating income 145 291 Net income 106 208 Dispositions During the six months ended June 30, 2020, we sold the Embassy Suites Washington DC Georgetown and our interests in the entity that owns the Hilton São Paulo Morumbi for total gross proceeds of $ 208 million and recognized a gain, net of selling costs, of $ 64 million on these hotels, which is included in gain (loss) on sales of assets, net in our condensed consolidated statements of comprehensive (loss) income. Additionally, the net gain includes the reclassification of a currency translation adjustment of $ 7 million from accumulated other comprehensive loss into earnings concurrent with the sale of the Hilton São Paulo Morumbi. 9 During the six months ended June 30, 2019, we sold our ownership interests in five consolidated hotels listed in the table below for total gross proceeds of $ 235 million and recognized a gain, net of selling costs, of $ 19 million on these hotels which is included in gain (loss) on sales of assets, net in our condensed consolidated statements of comprehensive (loss) income. Hotel Location Month Sold Pointe Hilton Squaw Peak Resort Phoenix, Arizona February 2019 Hilton Nuremberg Nuremberg, Germany March 2019 Hilton Atlanta Airport Atlanta, Georgia June 2019 Hilton New Orleans Airport (1) New Orleans, Louisiana June 2019 Embassy Suites Parsippany (1) Parsippany, New Jersey June 2019 (1) Hotels were sold as a portfolio in the same transaction. Note 4: Property and Equipment Property and equipment were: June 30, 2020 December 31, 2019 (1) (in millions) Land $ 3,429 $ 3,512 Buildings and leasehold improvements 6,944 6,978 Furniture and equipment 1,092 1,059 Construction-in-progress 48 134 11,513 11,683 Accumulated depreciation and amortization ( 2,190 ) ( 2,089 ) $ 9,323 $ 9,594 (1) Excludes $ 62 million of property and equipment, net, classified as held for sale as of December 31, 2019. Depreciation of property and equipment was $ 75 million and $ 60 million, respectively, during the three months ended June 30, 2020 and 2019, respectively, and $ 149 million and $ 122 million during the six months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020, we recognized $ 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. Refer to Note 8: “Fair Value Measurements” for additional information. Note 5: Consolidated Variable Interest Entities ("VIEs") and Investments in Affiliates Consolidated VIEs We consolidate three VIEs that own hotels in the U.S. We are the primary beneficiary of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our VIEs are only available to settle the obligations of these entities. Our condensed consolidated balance sheets include the following assets and liabilities of these entities: June 30, 2020 December 31, 2019 (in millions) Property and equipment, net $ 220 $ 221 Cash and cash equivalents 7 13 Restricted cash 2 1 Accounts receivable, net 1 5 Prepaid expenses 1 2 Debt 207 207 Accounts payable and accrued expenses 6 8 Due to hotel manager — 2 Other liabilities 2 2 10 Unconsolidated Entities Investments in affiliates were: Ownership % June 30, 2020 December 31, 2019 (in millions) Hilton San Diego Bayfront 25 % $ 13 $ 18 All others (6 hotels) 20 % - 50 % 10 17 $ 23 $ 35 The affiliates in which we own investments accounted for under the equity method had total debt of approximately $ 943 million as of June 30, 2020 and December 31, 2019. Substantially all the debt is secured solely by the affiliates’ assets or is guaranteed by other partners without recourse to us. Note 6: Goodwill Hilton allocated goodwill to us recorded as part of the acquisition of Hilton by Blackstone in 2007. We typically evaluate the carrying value of our goodwill annually. However, due to the effects of COVID-19, including (i) the significant decline in our common stock price, (ii) negative operating cash flows in the first quarter of 2020, (iii) the suspension of operations at certain of our hotels, and (iv) significant declines in occupancy and demand, we assessed goodwill during the first quarter of 2020. We determined that the carrying value of our consolidated and unconsolidated hotel reporting units exceeded their respective estimated fair value and fully impaired our remaining goodwill balance, recognizing an impairment loss of $ 607 million in the first quarter of 2020. Refer to Note 8: “Fair Value Measurements” for additional information. Goodwill Accumulated Impairment Losses Balance (in millions) Balance as of December 31, 2019 $ 2,709 $ ( 2,102 ) $ 607 Impairment loss — ( 607 ) ( 607 ) Balance as of June 30, 2020 $ 2,709 $ ( 2,709 ) $ — Note 7: Debt Debt balances and associated interest rates as of June 30, 2020 were: Principal balance as of Interest Rate at June 30, 2020 Maturity Date June 30, 2020 December 31, 2019 (in millions) SF CMBS Loan (1) 4.11 % November 2023 $ 725 $ 725 HHV CMBS Loan (1) 4.20 % November 2026 1,275 1,275 Mortgage loans Average rate of 4.17% 2020 to 2026 (2) 511 515 2016 Term Loan (3)(4) L + 2.95% December 2021 631 700 2019 Term Facility (4) L + 2.65% September 2024 670 670 Revolver (4)(5) L + 3.00% December 2021 681 — Senior Secured Notes 7.50 % June 2025 650 — Finance lease obligations 3.07 % 2021 to 2022 1 1 5,144 3,886 Add: unamortized premium 4 3 Less: unamortized deferred financing costs and discount ( 30 ) ( 18 ) $ 5,118 $ 3,871 (1) In October 2016, we entered into a $ 725 million CMBS loan secured by the Hilton San Francisco Union Square and the Parc 55 Hotel San Francisco (“SF CMBS Loan”) and a $ 1.275 billion CMBS loan secured by the Hilton Hawaiian Village Waikiki Beach Resort (“HHV CMBS Loan”). (2) Assumes the exercise of all extensions that are exercisable solely at our option. The only 2020 debt maturity is the $ 12 million Doubletree Spokane JV mortgage loan which matures in October. 11 (3) In June 2 020, we repaid $ 69 million of the 2016 Term Loan . (4) In May 2020, we amended our credit and term loan facilities which added a LIBOR floor of 25 basis points . (5) During the second quarter of 2020, we repaid $ 319 million of the Revolver. CMBS and Mortgage Loans We are required to deposit with lenders certain cash reserves for restricted uses. As of June 30, 2020 and December 31, 2019, our condensed consolidated balance sheets included $ 7 million and $ 13 million of restricted cash, respectively, related to our CMBS loans and mortgage loans. During the second quarter of 2020, we amended certain mortgage loan agreements to defer interest or interest and principal payments for three to six months and temporarily suspend required cash reserves. Credit Facilities 2019 Term Facility In advance of the Merger, in August 2019, the Company, our Operating Company and PK Domestic entered into a delayed draw term loan agreement (the “2019 Term Facility”). In September 2019, the 2019 Term Facility was fully drawn to fund the Merger and was partially repaid in December 2019. To hedge the interest rate risk on a portion of the 2019 Term Facility, we assumed an interest rate swap from Chesapeake in connection with the Merger, which is designated as a cash flow hedge. The interest rate swap requires us to pay fixed interest of 1.86 % per annum maturing on April 21, 2022 on a notional amount of $ 225 million, in exchange for floating rate interest equal to one-month LIBOR. Revolver In March 2020, we fully drew down our $ 1 billion Revolver as a precautionary measure to increase liquidity and preserve financial flexibility in connection with the economic effect of COVID-19. During the second quarter of 2020, we repaid $ 319 million of the Revolver using $ 219 million of the proceeds from the issuance of the Senior Secured Notes and $ 100 million of existing cash. In May 2020, in order to maintain compliance under our credit and term loan facilities in future quarters, 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 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 capitalized approximately $ 6 million of fees related to these amendments during the three months ended June 30, 2020. Senior Secured Notes In May 2020, our Operating Company, PK Domestic and PK Finance issued an aggregate of $ 650 million of Senior Secured Notes. We set aside $ 219 million of the net proceeds to partially repay the Revolver, $ 69 million to partially repay the 2016 Term Loan and the remainder was used for general corporate purposes. The Senior Secured Notes bear interest at a rate of 7.50 0% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The Senior Secured Notes will mature on June 1, 2025 . We capitalized $ 13 million of issuance costs during the three months ended June 30, 2020. The Senior Secured Notes are guaranteed by us and by the subsidiaries of our Operating Company that also guarantee indebtedness under our credit facilities and the guarantees are full and unconditional and joint and several. The Senior Secured Notes are secured, subject to permitted liens, by a first priority security interest in all of the capital stock of certain wholly-owned subsidiaries of certain of the guarantors and PK Domestic, which collateral also secures the obligations under our credit and term loan facilities on a first priority basis. The indenture governing the Senior Secured Notes contains customary covenants that limit the issuers’ ability and, in certain instances, the ability of the issuers’ subsidiaries, to borrow money, create liens on assets, make distributions and pay dividends on or redeem or repurchase stock, make certain types of investments, sell stock in certain subsidiaries, enter into agreements that restrict dividends or other payments from subsidiaries, enter into transactions with affiliates, issue guarantees of indebtedness, and sell assets or merge with other companies. These covenants are subject to a number of exceptions and qualifications, including the ability to declare or pay any cash dividend or make any cash distribution to us to the extent necessary for us to fund a dividend or distribution by us that it believes is necessary to maintain our status as a REIT or to avoid payment of any tax for any calendar year that could be avoided by reason of such distribution, and the ability to make certain restricted payments not to 12 exceed $ 100.0 million , plus 95 % of our cumulative Funds From Operations (as defined in the indenture), plus the aggregate net proceeds from (i) the sale of certain equity interests in, (ii) capital contributions to, and (iii) certain convertible indebtedness of the Operating Company. In addition, the indenture requires our Operating Company to maintain total unencumbered assets as of each fiscal quarter of at least 150 % of total unsecured indebtedness, in each case calculated on a consolidated basis. We may redeem the Senior Secured Notes at any time prior to June 1, 2022, in whole or in part, at a redemption price equal to 100 % of the accrued principal amount thereof plus unpaid interest, if any, to the redemption date plus a make-whole premium. On or after June 1, 2022, we may redeem the Senior Secured Notes, in whole or in part, at the applicable redemption prices set forth in the indenture. On or after June 1, 2024 , we may redeem the Senior Secured Notes at 100 % of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Debt Maturities The contractual maturities of our debt, assuming the exercise of all extensions that are exercisable solely at our option, as of June 30, 2020 were: Year (in millions) 2020 $ 16 2021 1,321 2022 97 2023 827 2024 676 Thereafter (1) 2,207 $ 5,144 (1) Assumes the exercise of all extensions that are exercisable solely at our option. Note 8: Fair Value Measurements We did not elect the fair value measurement option for our financial assets or liabilities. The fair values of our other financial instruments not included in the table below are estimated to be equal to their carrying amounts. The fair value of our debt and the hierarchy level we used to estimate fair values are shown below: June 30, 2020 December 31, 2019 Hierarchy Level Carrying Amount Fair Value Carrying Amount Fair Value (in millions) Liabilities: SF CMBS Loan 3 $ 725 $ 653 $ 725 $ 740 HHV CMBS Loan 3 1,275 1,040 1,275 1,316 2016 Term Loan 3 631 617 700 698 2019 Term Facility 3 670 600 670 667 Revolver 3 681 666 — — Senior Secured Notes 1 651 668 — — Mortgage loans 3 512 436 516 516 13 During the six months ended June 30, 2020 , we recognized impairment losses for goodwill and for certain assets resulting from a significant decline in market value of those assets. The estimated fair values of these assets that were measured on a nonrecurring basis were: June 30, 2020 Fair Value Impairment Loss (in millions) Property and equipment (1) $ 24 $ 88 Goodwill (2) — 607 Total $ 24 $ 695 (1) Fair value of our property and equipment as of June 30, 2020 was measured using significant unobservable inputs (Level 3). We estimated fair value of the assets using discounted cash flow analyses, with an estimated stabilized growth rate of 3 %, a discounted cash flow term between 1.7 to 10 years, terminal capitalization rate ranging from 7.25 % to 7.75 %, and discount rates ranging from 9.5 % to 12.5 %. The discount and terminal capitalization rates used for the fair value of the assets reflected the risk profile of the markets where these properties are located. (2) Fair value of our consolidated and unconsolidated hotel reporting units was measured using significant unobservable inputs (Level 3), which included discounted cash flows, terminal capitalization rates, and discount rates. Note 9: Income Taxes We are a REIT for U.S. federal income tax purposes, and we have been organized and operated, and expect to continue to be organized and operate in a manner to qualify as a REIT. To qualify as a REIT, we must satisfy requirements related to, among other things, the real estate qualification of sources of our income, the real estate composition and values of our assets, the amounts we distribute to our stockholders annually and the diversity of ownership of our stock. To the extent we continue to remain qualified as a REIT, we generally will not be subject to U.S. federal income tax on taxable income generated by our REIT activities that we distribute annually to our stockholders. Accordingly, no provision for U.S. federal income taxes has been included in our accompanying condensed consolidated financial statements for the three and six months ended June 30, 2020 and 2019 related to our REIT activities, other than taxes associated with built-in gains related to our assets owned at the date of our spin-off. We will be subject to U.S. federal income tax on taxable sales of built-in gain property (representing property held by us with an excess of fair value over tax basis on January 4, 2017) during the five-year period following the date of our spin-off. In addition, we are subject to non-U.S. income tax on foreign held REIT activities and certain sales of foreign investments. Further, our taxable REIT subsidiaries (“TRSs”) are generally subject to U.S. federal, state and local, and foreign income taxes (as applicable). The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) includes several tax provisions that may impact us and our subsidiaries. These changes include: • the ability for our TRSs to carry back net operating losses (“NOLs”) arising in 2020 to all post spin-off taxable years preceding the taxable year of the loss; • an increase of the business interest limitation under section 163(j) from 30 percent to 50 percent of adjusted taxable income for taxable years beginning in 2019 and 2020 and addition of an election by taxpayers to use their 2019 adjusted taxable income as their adjusted taxable income in 2020 for purposes of applying the limitation; • a “technical correction” amending section 168(e)(3)(E) to add “qualified improvement property” to “15-year property” and assigning a class life of 20-years under section 168(g)(3)(B) to qualified improvement property under section 168(e)(3)(E)(vii), and • the elimination of the taxable income limit for NOLs for all taxable years beginning before January 1, 2021, thereby permitting corporate taxpayers to use NOLs to fully offset taxable income (although as a REIT we will continue to only be able to use NOLs against taxable income remaining after taking into account any dividends paid deduction). During the six months ended June 30, 2020, we recognized $ 13 million of income tax expense, which is comprised of $ 12 million of built-in gains tax expense from assets sold during the six months ended June 30, 2020 and $ 14 million of non-U.S. income tax expense on the gain from the entity that owns the Hilton São Paulo Morumbi that was sold during the six months ended June 30, 2020, partially offset by a TRS income tax benefit of $ 16 million from utilizing the NOL carryback provisions of the CARES Act. We expect $ 23 million of refunds related to the carryback of 2020 NOLs of our TRSs to prior years, as provided by the CARES Act. During the three and six months ended June 30, 2019, we recognized $ 5 million and $ 12 million of income tax expense, respectively, primarily related to taxable income from our TRSs. 14 Note 10: Share-Based Compensation We issue equity-based awards to our employees pursuant to the 2017 Omnibus Incentive Plan (“2017 Employee Plan”) and our non-employee directors pursuant to the 2017 Stock Plan for Non-Employee Directors (“2017 Director Plan”). The 2017 Employee Plan provides that a maximum of 8,000,000 shares of our common stock may be issued, and as of June 30, 2020, 4,513,582 shares of common stock remain available for future issuance. The 2017 Director Plan provides that a maximum of 450,000 shares of our common stock may be issued, and as of June 30, 2020, 94,478 shares of common stock remain available for future issuance. For both the three months ended June 30, 2020 and 2019, we recognized $ 4 million of share-based compensation expense, and $ 6 million and $ 8 million, respectively, for the six months ended June 30, 2020 and 2019. As of June 30, 2020, unrecognized compensation expense was $ 26 million, which is expected to be recognized over a weighted-average period of 1.8 years. The total fair values of shares vested (calculated as the number of shares multiplied by the vesting date share price) during the six months ended June 30, 2020 and 2019 were $ 17 million and $ 19 million, respectively. Restricted Stock Awards Restricted Stock Awards (“RSAs”) generally vest in annual installments between one and three years from each grant date. The following table provides a summary of RSAs for the six months ended June 30, 2020: Number of Shares Weighted-Average Grant Date Fair Value Unvested at January 1, 2020 557,245 $ 29.10 Granted 650,511 18.40 Vested ( 295,120 ) 26.33 Forfeited ( 59,702 ) 29.11 Unvested at June 30, 2020 852,934 $ 21.90 Performance Stock Units Performance Stock Units (“PSUs”) generally vest at the end of a three-year performance period and are subject to the achievement of a market condition based on a measure of our total shareholder return relative to the total shareholder return of the companies that comprise the FTSE Nareit Lodging Resorts Index (that have a market capitalization in excess of $ 1 billion as of the first day of the applicable performance period). The number of PSUs that may become vested ranges from zero to 200 % of the number of PSUs granted to an employee, based on the level of achievement of the foregoing measure. Additionally, in February 2020, we granted special awards with a one-year performance period that are subject to the achievement of a total shareholder return similar to the three-year awards, and, in addition, are subject to the achievement of a performance condition for certain cost synergies associated with the Merger. The number of PSUs that may become vested are zero if neither goal is achieved, 100% if one performance goal is achieved and 200% if both goals are achieved. The following table provides a summary of PSUs for the six months ended June 30, 2020: Number of Shares Weighted-Average Grant Date Fair Value Unvested at January 1, 2020 574,797 $ 32.82 Granted 605,535 24.93 Vested ( 456,121 ) 32.39 Forfeited ( 52,114 ) 33.14 Unvested at June 30, 2020 672,097 $ 25.98 The grant date fair values of the awards that are subject to the achievement of market conditions based on total shareholder return were determined using a Monte Carlo simulation valuation model with the following assumptions: Expected volatility (1) 22.0% - 23.0% Dividend yield (2) — Risk-free rate 1.2% - 1.5% Expected term 1 - 3 years (1) The weighted average expected volatility was 22.5 %. 15 (2) Dividends are assumed to be reinvested in shares of our common stock and dividends will not be paid unless shares vest. As of June 30, 2020, the achievement of the performance condition associated with the special one-year awards was not probable and thus no compensation expense was recognized for the three and six months ended June 30, 2020. Note 11: Earnings Per Share The following table presents the calculation of basic and diluted earnings per share (“EPS”): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in millions, except per share amounts) (in millions, except per share amounts) Numerator: Net (loss) income attributable to stockholders $ ( 259 ) $ 82 $ ( 947 ) $ 178 Earnings allocated to participating securities — ( 1 ) — ( 1 ) Net (loss) income attributable to stockholders, net of earnings allocated to participating securities $ ( 259 ) $ 81 $ ( 947 ) $ 177 Denominator: Weighted average shares outstanding – basic 235 201 236 201 Unvested restricted shares — 1 — 1 Weighted average shares outstanding – diluted 235 202 236 202 (Loss) earnings per share - Basic $ ( 1.10 ) $ 0.40 $ ( 4.01 ) $ 0.88 (Loss) earnings per share - Diluted $ ( 1.10 ) $ 0.40 $ ( 4.01 ) $ 0.88 (1) Per share amounts are calculated based on unrounded numbers and are calculated independently for each period presented. Certain of our outstanding equity awards were excluded from the above calculation of EPS for the three and six months ended June 30, 2020 and 2019 because their effect would have been anti-dilutive. Note 12: Business Segment Information As of June 30, 2020, we have two operating segments, our consolidated hotels and unconsolidated hotels. Our unconsolidated hotels operating segment does not meet the definition of a reportable segment, thus our consolidated hotels is our only reportable segment. We evaluate our consolidated hotels primarily based on hotel adjusted earnings (loss) before interest expense, taxes and depreciation and amortization (“EBITDA”). Hotel Adjusted EBITDA is calculated as EBITDA from hotel operations, adjusted to exclude: • Gains or losses on sales of assets for both consolidated and unconsolidated investments; • Costs associated with hotel acquisitions or dispositions expensed during the period; • Severance expense; • Share-based compensation expense; • Casualty gains or losses; • Impairment losses; and • Other items that we believe are not representative of our current or future operating performance. 16 The following table presents revenues for our consolidated hotels reconciled to our consolidated amounts and Hotel Adjusted EBITDA to net (loss) income: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in millions) Revenues: Total consolidated hotel revenue $ 39 $ 684 $ 619 $ 1,325 Other revenues 3 19 22 37 Total revenues $ 42 $ 703 $ 641 $ 1,362 Hotel Adjusted EBITDA $ ( 108 ) $ 209 $ ( 17 ) $ 390 Other revenues 3 19 22 37 Depreciation and amortization expense ( 75 ) ( 61 ) ( 150 ) ( 123 ) Corporate general and administrative expense ( 14 ) ( 22 ) ( 30 ) ( 39 ) Impairment loss and casualty gain, net — — ( 694 ) — Other operating expenses ( 4 ) ( 18 ) ( 25 ) ( 38 ) Gain (loss) on sales of assets, net 1 ( 12 ) 63 19 Interest income 1 2 2 3 Interest expense ( 50 ) ( 33 ) ( 90 ) ( 65 ) Equity in (losses) earnings from investments in affiliates ( 8 ) 10 ( 9 ) 15 Income tax expense ( 3 ) ( 5 ) ( 13 ) ( 12 ) Other loss, net ( 1 ) ( 1 ) ( 3 ) — Other items ( 3 ) ( 4 ) ( 6 ) ( 6 ) Net (loss) income $ ( 261 ) $ 84 $ ( 950 ) $ 181 The following table presents total assets for our consolidated hotels, reconciled to consolidated amounts: June 30, 2020 December 31, 2019 (in millions) Consolidated hotels $ 11,022 $ 11,236 All other 37 54 Total $ 11,059 $ 11,290 Note 13: Commitments and Contingencies As of June 30, 2020, we had outstanding commitments under third-party contracts of approximately $ 29 million for capital expenditures at certain hotels. Our contracts contain clauses that allow us to cancel all or some portion of the work. If cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract. We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums, and may make certain indemnifications or guarantees to select buyers of our hotels as part of the sale process. We are also involved in claims and litigation that is not in the ordinary course of business in connection with the spin-off from Hilton. The spin-off agreements indemnify us from certain of these claims as well as require us to indemnify Hilton for other claims. In addition, losses related to certain contingent liabilities could be apportioned to us under the spin-off agreements. In connection with our obligation to indemnify Hilton under the spin-off agreements, we have reserved approximately $ 7 million related to ongoing claims as of June 30, 2020 with respect to an audit by the Australian Tax Office (“ATO”) related to the sale of the Hilton Sydney in June 2015. This amount could change as more information becomes available about the progress of Hilton’s defense against the ATO’s claim. 17