What changed in this filing

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Item 1. Financial Statements

2020-11-06 compared with 2020-08-06 · 158 added, 117 removed, 455 unchanged (38% of the section changed)

3 unchanged sentences

(in millions, except share and per share data)

June 30, 2020

September 30, 2020

December 31, 2019

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235,914,952 shares issued and 235,613,445 shares outstanding as of

June 30, 2020 and 239,589,639 shares issued and 239,386,877

September 30, 2020 and 239,589,639 shares issued and 239,386,877

shares outstanding as of December 31, 2019

9 unchanged sentences

(unaudited, in millions, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Food and beverage

6 unchanged sentences

Management fees

Impairment loss and casualty gain, net

Impairment and casualty loss, net

Depreciation and amortization

Corporate general and administrative

Acquisition costs

Total expenses

Gain (loss) on sales of assets, net

(Loss) gain on sales of assets, net

Operating (loss) income

8 unchanged sentences

Net (loss) income attributable to stockholders

Other comprehensive (loss) income, net of tax expense:

Other comprehensive income (loss), net of tax expense:

Currency translation adjustment, net of tax expense of $ 0

Total other comprehensive (loss) income

Change in fair value of interest rate swap, net of tax expense

Total other comprehensive income (loss)

Comprehensive (loss) income

Comprehensive loss (income) attributable to noncontrolling

Comprehensive (income) loss attributable to noncontrolling

Comprehensive (loss) income attributable to stockholders

8 unchanged sentences

(unaudited, in millions)

Six Months Ended

Nine Months Ended

September 30,

Operating Activities:

3 unchanged sentences

Gain on sales of assets, net

Impairment loss and casualty gain, net

Equity in loss (earnings) from investments in affiliates

Impairment and casualty loss, net

Equity in losses (earnings) from investments in affiliates

Other loss, net

6 unchanged sentences

Investing Activities:

Acquisitions, net of cash and restricted cash acquired

Capital expenditures for property and equipment

2 unchanged sentences

Insurance proceeds for property damage claims

Net cash provided by investing activities

Net cash provided by (used in) investing activities

Financing Activities:

Borrowings on Revolver

Repayments of Revolver

Proceeds from issuance of Senior Secured Notes

Repayment of 2016 Term Loan

Borrowings from credit facilities

Repayments of credit facilities

Repayment of mortgage debt

4 unchanged sentences

Repurchase of common stock

Net cash provided by (used in) financing activities

Net increase in cash and cash equivalents and restricted cash

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents and restricted cash

Cash and cash equivalents and restricted cash, beginning of period

2 unchanged sentences

Non-cash financing activities:

Issuance of common shares in connection with the acquisition of Chesapeake

Lodging Trust

Assumption of mortgage loans in connection with acquisitions

Dividends declared but unpaid

15 unchanged sentences

Balance as of June 30, 2020

Share-based compensation, net

Other comprehensive income

Balance as of September 30, 2020

Comprehensive

(Loss) Income

Balance as of December 31, 2018

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Balance as of June 30, 2019

Dividends declared per common share were $ 0.45 for the three months ended March 31, 2020, March 31, 2019 and June 30, 2019, respectively.

Issuance of common stock

Share-based compensation, net

Other comprehensive loss

Dividends and dividend equivalents (1)

Distributions to noncontrolling

Balance as of September 30, 2019

Dividends declared per common share were $ 0.45 for the three months ended March 31, 2020, March 31, 2019, June 30, 2019 and September 30, 2019, respectively.

Refer to the notes to the unaudited condensed consolidated financial statements.

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Since the beginning of March 2020, 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 expect that COVID-19 will continue to negatively affect our operating results for the remainder of 2020 and the early part of 2021.

During the first-half 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, drawing on our $ 1 billion revolving credit facility (“Revolver”).

We have since commenced a phased reopening of 26 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.

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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”).

In September 2020, our Operating Company, PK Domestic and PK Finance issued an aggregate of $ 725 million of senior secured notes due 2028 (“2028 Senior Secured Notes”).

Net proceeds were used to repay the $ 631 million remaining balance outstanding under the 2016 Term Loan in full and to repay $ 80 million of our outstanding balance under the Revolver, which may be redrawn.

Additionally, in September 2020, we further amended our credit facilities to, among other things, increase borrowing capacity of the Revolver, extend the maturity date with respect to $ 901 million of the aggregate commitments of the Revolver, extend the waiver period for the testing of the financial covenants and place certain additional restrictions on us.

Refer to Note 7:

“Debt” for additional information.

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.

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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.

Certain line items on the condensed consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2019 have been reclassified to conform to the current period presentation.

Summary of Significant Accounting Policies

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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.

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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 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.

We adopted the provisions of this ASU effective January 1, 2020.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848):

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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:

We allocated the purchase price, consisting of $ 978 million of common stock issued and cash of $ 1,013 million, as follows:

(in millions)

11 unchanged sentences

Total consideration

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.

Investment in hotel properties – The fair values of the land and improvements, buildings and improvements, and furniture, fixtures and equipment at the hotel properties were determined 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.

Intangible assets – The fair value of the air rights contract acquired as part of the Hyatt Regency Boston were determined using 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.

Above and below market lease liabilities – The fair value of our above and below market lease liabilities were determined using 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.

1 unchanged sentence

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.

Operating lease right-of-use-asset and Operating lease liability – The fair value of the operating lease right-of-use asset and operating lease liability were determined using 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.

Debt – The fair value of the mortgage loans were determined using 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.

For the three months ended September 30, 2020, we incurred an additional $ 9 million in acquisition costs in connection with the Merger, primarily related to transfer taxes based on new information received during the period.

For the three and nine months ended September 30, 2019, we incurred $ 59 million and $ 65 million, respectively, in acquisition costs in connection with the Merger primarily related to severance, transfer tax and fees for financial advisors, legal, accounting, tax and other professional services.

The Merger-related costs noted above are included in acquisition costs in our condensed consolidated statements of comprehensive (loss) income.

The following unaudited condensed pro-forma financial information presents the results of operations as if the Merger had taken place on January 1, 2019.

1 unchanged sentence

The unaudited condensed pro-forma financial information is as follows:

Three Months Ended

June 30, 2019

Six Months Ended

June 30, 2019

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

(in millions)

1 unchanged sentence

Operating income

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.

From the date of the Merger through September 30, 2019, we recognized $ 23 million of total revenues, $ 5 million of operating income and $ 4 million of net income related to the hotels acquired in connection with the Merger.

During the nine months ended September 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 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.

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.

During the nine months ended September 30, 2019, we sold our ownership interests in five consolidated hotels listed in the table below for total gross proceeds of $ 236 million and recognized a gain, net of selling costs, of $ 20 million on these hotels which is included in gain on sales of assets, net in our condensed consolidated statements of comprehensive (loss) income.

Pointe Hilton Squaw Peak Resort

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Property and equipment were:

June 30, 2020

September 30, 2020

December 31, 2019 (1)

5 unchanged sentences

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.

Depreciation of property and equipment was $ 75 million and $ 60 million during the three months ended September 30, 2020 and 2019, respectively, and $ 224 million and $ 182 million during the nine months ended September 30, 2020 and 2019, respectively.

For the nine months ended September 30, 2020, we recognized $ 90 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.

Hurricanes Irma and Maria

In September 2017, Hurricanes Irma and Maria caused damage and disruption at certain of our hotels in Florida and the Caribe Hilton in Puerto Rico.

The Caribe Hilton remained closed throughout 2018 and reopened on May 15, 2019.

Our insurance coverage provides us with reimbursement for the replacement cost for the damage to these hotels, which includes certain clean-up and repair costs, exceeding the applicable deductibles, in addition to loss of business.

During the nine months ended September 30, 2019 , w e recognized $ 23 million of insurance recoveries, of which $ 12 million related to property damage, $ 8 million related to business interruption, and $ 3 million related to expense reimbursements.

Business interruption proceeds are included within ancillary hotel revenue in our condensed consolidated statements of comprehensive (loss) income.

Additionally, we recognized a net loss of $ 7 million within impairment and casualty loss, net in our condensed consolidated statements of comprehensive (loss) income for amounts not expected to be recovered from insurance .

Consolidated Variable Interest Entities ("VIEs") and Investments in Affiliates

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Our condensed consolidated balance sheets include the following assets and liabilities of these entities:

June 30, 2020

September 30, 2020

December 31, 2019

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Investments in affiliates were:

June 30, 2020

September 30, 2020

December 31, 2019

2 unchanged sentences

All others (6 hotels)

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.

The affiliates in which we own investments accounted for under the equity method had total debt of approximately $ 943 million as of September 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.

8 unchanged sentences

Impairment loss

Balance as of June 30, 2020

Debt balances and associated interest rates as of June 30, 2020 were:

Balance as of September 30, 2020

Debt balances and associated interest rates as of September 30, 2020 were:

Principal balance as of

Interest Rate

at June 30, 2020

at September 30, 2020

Maturity Date

June 30, 2020

September 30, 2020

December 31, 2019

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September 2024

Revolver (4)(5)

December 2021

2021 to 2023 (6)

2025 Senior Secured Notes

2028 Senior Secured Notes

Finance lease obligations

3 unchanged sentences

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.

In June 2 020, we repaid $ 69 million of the 2016 Term Loan .

The mortgage loan for Hilton Denver City Center matures in 2042 but is callable by the lender beginning August 2022 .

We are actively negotiating a one-year maturity date extension for the $ 12 million loan secured by the Doubletree Spokane to October 2021 .

The loan was not paid in full at its originally scheduled maturity date in October 2020 due to current market conditions.

Failure to pay off the loan constitutes an event of default;

however, we have not received, nor do we expect to receive, notice of the lenders’ intent to foreclose.

In September 2020, the 2016 Term Loan was fully repaid .

In May 2020, we amended our credit and term loan facilities which added a LIBOR floor of 25 basis points .

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.

In September 2020, we increased our aggregate commitments under the Revolver by $ 75 million to $ 1.075 billion and extended the maturity date with respect to $ 901 million of the aggregate commitments for two years to December 2023 , including all $ 75 million of the increased Revolver commitments.

The maturity date for the remaining $ 174 million of commitments under the Revolver is December 2021 .

Credit Facilities

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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.

2016 Term Loan and 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.

We subsequently repaid $ 399 million of the Revolver using $ 299 million of the proceeds from the issuance of the 2025 Senior Secured Notes and 2028 Senior Secured Notes and $ 100 million of existing cash.

We also used $ 631 million of the proceeds from the issuance of the 2028 Senior Secured Notes to repay all of the amounts outstanding under our 2016 Term Loan.

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.

We capitalized approximately $ 6 million of fees related to these amendments during the three months ended June 30, 2020.

In September 2020, we further amended our Revolver and 2019 Term Facility to extend the waiver period for the testing of the financial covenants to the date the financial statements are delivered for the quarter ended March 31, 2022.

As part of the amendment process, we (i) increased commitments under the Revolver by $ 75 million to $ 1.075 billion and extended the maturity date with respect to $ 901 million of the aggregate commitments for two years to December 2023 , including all $ 75 million of the increased Revolver commitments, (ii) extended the temporary periods for which certain financial covenants are adjusted once quarterly testing of financial covenants resumes, (iii) increased the mandatory repayment carve out for equity issuances from $ 500 million to $ 1 billion, so long as proceeds from the issuances are used for capital expenditures and hotel acquisitions that become part of the unencumbered pool, (iv) maintained the existing guarantees by certain Park-affiliated entities until repayment of the Revolver and 2019 Term Facility and existing pledges of equity interests in Park-affiliated entities owning certain unencumbered assets during the extended waiver period and until the ratio of net debt to EBITDA falls below 6.50x for two consecutive quarters, (v) extended the minimum liquidity covenant through December 2022 and increased the minimum liquidity required to be maintained through December 24, 2021 from $ 200 million to $200 million plus 50 % of the Revolver commitments that mature in December 2021 (which minimum liquidity covenant amount as of September 30, 2020 was $ 287 million), (vi) obtained the ability to pay a $ 0.01 per share per fiscal quarter dividend during the extended waiver period and (vii) modified certain restrictions and covenants for the duration of the extended waiver period, including certain mandatory prepayments.

We incurred $ 6 million of fees related to these amendments during the nine months ended September 30, 2020 that were recognized as deferred financing costs.

Senior Secured Notes

2025 Senior Secured Notes

In May 2020, our Operating Company, PK Domestic and PK Finance issued an aggregate of $ 650 million of 2025 Senior Secured Notes.

3 unchanged sentences

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.

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.

We may redeem the 2025 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 principal amount thereof plus accrued and unpaid interest, if any, to the redemption date plus a make-whole premium.

On or after June 1, 2022, we may redeem the 2025 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 2025 Senior Secured Notes at 100 % of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

In addition, before June 1, 2022, we may redeem up to 40 % of the 2025 Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price of 107.500 % of the principal amount redeemed.

2028 Senior Secured Notes

In September 2020, our Operating Company, PK Domestic LLC and the PK Finance issued an aggregate of $ 725 million of 2028 Senior Secured Notes.

The 2028 Senior Secured Notes bear interest at a rate of 5.875 % per annum, payable semi-annually in arrears on April 1 and October 1 of each year beginning April 1, 2021.

Net proceeds were used to repay the 2016 Term Loan in full and to repay $ 80 million of our outstanding balance under the Revolver, which may be redrawn.

We capitalized $ 13 million of issuance costs during the three months ended September 30, 2020.

We may redeem the 2028 Senior Secured Notes at any time prior to October 1, 2023 , in whole or in part, at a redemption price equal to 100 % of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date plus a make-whole premium.

On or after October 1, 2023, we may redeem the 2028 Senior Secured Notes, in whole or in part, at the applicable redemption prices set forth in the indenture.

On or after October 1, 2025 , we may redeem the 2028 Senior Secured Notes at 100 % of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

In addition, before October 1, 2023, we may redeem up to 40 % of the 2028 Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price of 105.875 % of the principal amount redeemed.

Both the 2025 Senior Secured Notes and the 2028 Senior Secured Notes (collectively, 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 indentures governing the Senior Secured Notes contain 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 we believe 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 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.

CMBS and Mortgage Loans

We are required to deposit with lenders certain cash reserves for restricted uses.

As of September 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 and third quarters 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.

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:

The contractual maturities of our debt, assuming the exercise of all extensions that are exercisable solely at our option, as of September 30, 2020 were:

(in millions)

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The fair value of our debt and the hierarchy level we used to estimate fair values are shown below:

June 30, 2020

September 30, 2020

December 31, 2019

4 unchanged sentences

2025 Senior Secured Notes

2028 Senior Secured Notes

Mortgage loans

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.

During the nine months ended September 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

September 30, 2020

Impairment Loss

1 unchanged sentence

Property and equipment (1)

Fair value of our property and equipment as of June 30, 2020 was measured using significant unobservable inputs (Level 3).

Fair value of our property and equipment as of September 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 %.

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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.

federal income tax purposes.

We have been organized and operated, and we 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.

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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.

federal income taxes has been included in our accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 related to our REIT activities, other than taxes related to our built-in gain property (representing property held by us with an excess of fair value over tax basis on January 4, 2017).

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.

federal income tax on taxable sales of built-in gain property during the five-year period following the date of our spin-off.

In addition, we are subject to non-U.S.

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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 Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) included several tax provisions that may impact us and our subsidiaries, including:

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

an increase of the business interest limitation under Internal Revenue Code (“Code”) section 163(j) from 30 percent to 50 percent of adjusted taxable income for taxable years beginning in 2019 and 2020 and the 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 Code 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.

During the nine months ended September 30, 2020, we recognized $ 14 million of income tax expense, which is comprised of $ 14 million of built-in gains tax expense from assets sold during the nine months ended September 30, 2020 and $ 16 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 nine months ended September 30, 2020, partially offset by a TRS income tax benefit of $ 20 million from utilizing the NOL carryback provisions of the CARES Act.

We expect $ 24 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.

During the nine months ended September 30, 2019, we recognized $ 12 million of income tax expense primarily related to taxable income from our TRSs.

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.

The 2017 Employee Plan provides that a maximum of 8,000,000 shares of our common stock may be issued, and as of September 30, 2020, 4,512,900 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 September 30, 2020, 80,530 shares of common stock remain available for future issuance.

For both the three months ended September 30, 2020 and 2019, we recognized $ 4 million of share-based compensation expense, and $ 10 million and $ 12 million, respectively, for the nine months ended September 30, 2020 and 2019.

As of September 30, 2020, unrecognized compensation expense was $ 22 million, which is expected to be recognized over a weighted-average period of 1.6 years.

The total fair values of shares vested (calculated as the number of shares multiplied by the vesting date share price) during the nine months ended September 30, 2020 and 2019 were $ 17 million and $ 21 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:

The following table provides a summary of RSAs for the nine months ended September 30, 2020:

Number of Shares

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Unvested at January 1, 2020

Unvested at June 30, 2020

Unvested at September 30, 2020

Performance Stock Units

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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:

The following table provides a summary of PSUs for the nine months ended September 30, 2020:

Number of Shares

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Unvested at January 1, 2020

Unvested at June 30, 2020

Unvested at September 30, 2020

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:

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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.

As of September 30, 2020, the achievement of the performance condition associated with the Merger cost synergies element of the special one-year awards was not probable and thus no compensation expense was recognized for the Merger cost synergies element for the three and nine months ended September 30, 2020.

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,

Three Months Ended September 30,

Nine Months Ended September 30,

(in millions, except per share amounts)

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Net (loss) income attributable to stockholders

Earnings allocated to participating securities

Loss allocated to participating securities

Net (loss) income attributable to stockholders, net of earnings

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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.

Certain of our outstanding equity awards were excluded from the above calculation of EPS for the three and nine months ended September 30, 2020 and 2019 because their effect would have been anti-dilutive.

Business Segment Information

As of June 30, 2020, we have two operating segments, our consolidated hotels and unconsolidated hotels.

As of September 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.

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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,

Three Months Ended September 30,

Nine Months Ended September 30,

(in millions)

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Corporate general and administrative expense

Impairment loss and casualty gain, net

Impairment and casualty loss, net

Acquisition costs

Other operating expenses

Gain (loss) on sales of assets, net

(Loss) gain on sales of assets, net

Interest income

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Other loss, net

Severance expense

Net (loss) income

The following table presents total assets for our consolidated hotels, reconciled to consolidated amounts:

June 30, 2020

The following table presents total assets for our consolidated hotels, reconciled to total assets:

September 30, 2020

December 31, 2019

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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.

As of September 30, 2020, we had outstanding commitments under third-party contracts of approximately $ 23 million for capital expenditures at certain hotels.

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

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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.

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 September 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.

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 1. Financial Statements