What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-06 · 113 added, 187 removed, 223 unchanged (57% of the section changed)

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This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”).

Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, the impact to our business and financial condition and that of our hotel management companies, and measures (including through potential alternative sources of revenue) being taken in response to, COVID-19, the effects of competition and the effects of future legislation or regulations and other non-historical statements.

Forward-looking statements include all statements that are not historical facts, and in some cases, can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.

Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, including the expected reopening dates for our hotels and dates that our hotels will break even or achieve positive Hotel Adjusted EBITDA, the impact to our business and financial condition and that of our hotel management companies, and measures (including through potential alternative sources of revenue) being taken in response to, COVID-19, the effects of competition and the effects of future legislation or regulations and other non-historical statements.

Forward-looking statements include all statements that are not historical facts, and in some cases, can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates”, “hopes” or the negative version of these words or other comparable words.

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

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

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

Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 and our Annual Report on Form 10-K for the year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.

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

COVID-19 has significantly affected our business, and the extent to which COVID-19 impacts us, our hotel managers, tenants and guests at our hotels will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its effect, the emergence of virus variants, the efficacy, availability and deployment of vaccinations and other treatments to combat COVID-19, including public adoption rates of COVID-19 vaccines, additional closures that may be mandated or advisable even after the reopening of certain of our hotels on a limited basis, whether due to an increased number of COVID-19 cases or otherwise, and the direct and indirect economic effects of the pandemic and containment measures, among others.

Moreover, investors are cautioned to interpret many of the risks identified in the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2020 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.

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

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

“Risk Factors” in this Quarterly Report on Form 10-Q, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 and our Annual Report on Form 10-K for the year ended December 31, 2019, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q.

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

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

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Our consolidated hotels operating segment is our only reportable segment.

Refer to No te 12 :

Refer to Note 12 :

“ Business Segment Information ” in our unaudited condensed consolidated financial statements included elsewhere within this Quarterly Report on Form 10-Q for additional information regarding our operating segments.

Recent Events

COVID-19 Effect on Our Business

The global outbreak of a novel strain of coronavirus and the disease it causes (“COVID-19”) have had a significant effect on the lodging industry and our company.

We cannot presently determine the extent or duration of the overall operational and financial effects that COVID-19 will have on our company.

The global outbreak of a novel strain of coronavirus and the disease it causes (“COVID-19”) have had and continue to have a significant effect on the lodging industry and our business.

We cannot presently determine the extent or duration of the overall operational and financial effects that COVID-19 will have on our business.

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

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

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

There continues to be significant cancellations of existing reservations, including the vast majority of group business and events throughout the remainder of 2020 and the first-half of 2021 and significant reductions in new reservations.

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

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

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

There continues to be significant cancellations of existing reservations, including the vast majority of group business and events throughout the first-half of 2021 and significant reductions in new reservations.

Since the beginning of March 2020, we have experienced a significant decline in occupancy, Average Daily Rate (“ADR”) and Revenue per Available Room (“RevPAR”) associated with the COVID-19 pandemic throughout our consolidated portfolio, which has resulted in a decline in our operating cash flow.

As distribution of the COVID-19 vaccine has accelerated, we have seen improvement in leisure traveler sentiment, and as a result, an improvement in occupancy, ADR and RevPAR in recent months.

Changes in our 2020 and 2021 pro-forma metrics, which exclude results from properties disposed of and include results from properties acquired as of May 7, 2021, as compared to the same periods in 2019 and 2020, respectively, and pro-forma occupancy are as follows:

Pro-forma ADR

Pro-forma Occupancy

Pro-forma RevPAR

Pro-forma Occupancy

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

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

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

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

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

In addition, due to the effects of COVID-19, during the nine months ended September 30, 2020, we recognized $607 million of impairment losses for goodwill and $90 million of impairment losses primarily related to one of our hotels resulting from a significant decline in market value.

November 2020

December 2020

February 2021

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

We believe demand will remain significantly reduced as long as mandatory travel restrictions, “social distancing,” and cost-saving measures, such as the postponing or cancelling of non-essential business travel, remain in place.

Although we were able to recommence operations at reduced capacity at most of our previously suspended hotels, there remains considerable uncertainty as to both the time it will take to see travel and demand for lodging and travel-related experiences to recover and the long-term impacts on consumer attitudes to travel.

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

These factors lead us to believe that our operating results will continue to be adversely affected by COVID-19 through the remainder of 2020 and at least the early part of 2021.

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

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

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

(“PK Finance”) issued an aggregate of $650 million 7.500% senior secured notes due 2025 (“2025 Senior Secured Notes”).

We used $219 million of the net proceeds to partially repay the Revolver and $69 million of the net proceeds to partially repay the term loan due December 2021 (“2016 Term Loan”).

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

In Septembe r 2020, we issued an aggregate of $725 million of senior secured notes due 2028 (“2028 Senior Secured Notes”).

Net proceeds from the 2028 Senior Secured Notes offering were used to repay the 2016 Term Loan in full and to repay $80 million of our outstandi ng balance under the Revolver, which may be redrawn.

Since originally suspending operations, we have commenced the phased reopening of 26 of our hotels at limited capacity.

These factors lead us to believe that our operating results will continue to be adversely affected by COVID-19 through at least the first-half of 2021.

The distribution of COVID-19 vaccines and the reports of their effectiveness appear to have resulted in an improvement in traveler and general consumer sentiment.

We believe that the distribution and acceptance by the public of COVID-19 vaccines will allow for a more widespread easing in government regulation and decrease the number of COVID-19 cases, as well as an improvement in business and other consumer preferences for travel.

Further, given that all adults in the U.S.

are now eligible for the COVID-19 vaccines, coupled with the stimulus package passed in March 2021 and significant pent-up demand, we believe we could experience accelerated growth beginning the second half of 2021.

However, the uncertainties surrounding the COVID-19 pandemic make it difficult to predict operating results for our hotels for the remainder of 2021, thus there can be no assurances that we will not experience further declines in hotel revenues or earnings at our hotels.

We and our hotel managers have taken various actions to mitigate the effects of COVID-19, including temporarily suspending operations at certain of our hotels in March 2020, limiting capacity at our open hotels, deferring approximately $150 million of capital expenditures planned for 2020, reducing budgeted capital expenditures for maintenance projects to approximately $40 million for 2021, suspending our dividend after the first quarter of 2020, and, as a precautionary measure to increase liquidity and preserve financial flexibility in 2020, drawing on our revolving credit facility (“Revolver”) and completing two corporate bond offerings totaling $1.4 billion, the proceeds of which were used, in part, to repay a portion of the Revolver borrowings.

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

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

The status of our hotels as of November 6, 2020 is as follows:

The status of our hotels as of May 7, 2021 is as follows:

Number of Hotels

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We cannot predict whether we will be able to resume operations at any of our other suspended hotels or whether our reopened hotels will be forced to suspend operations again in the future.

However, we currently expect to open an additional 2 hotels during the fourth quarter of 2020, which would bring the total open hotel count to 50 hotels and account for 74% of our total room count, with the remaining 10 suspended hotels expected to open by the first quarter of 2021.

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

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

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

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

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

However, we currently expect to open the remaining seven suspended hotels over the next couple of quarters as travel restrictions ease and demand recovers.

We continue to proactively pursue alternative sources of revenue from government authorities and hospitals, such as providing temporary lodging for first responders, other medical personnel, military personnel, displaced guests and residents of communities where our hotels are located, colleges and universities, professional sports associations, and other smaller group events.

In addition, the operating environment for us and our hotel managers could remain challenging if the current economic contraction or decline in demand for travel extends beyond the lifting of government restrictions and reopening of all of our hotels.

Historically, economic indicators such as GDP growth, corporate earnings, consumer confidence and employment are highly correlated with lodging demand, and although these factors have seen improvement over the last 9 months, these metrics remain significantly below levels prior to the COVID-19 pandemic.

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

We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results and the economic contraction, to be dictated by, among other things, its duration, the success of efforts to contain it, the emergence of virus variants, efficacy, availability and deployment of vaccinations and other treatments to combat COVID-19, including public adoption rates of COVID-19 vaccines, and the effect of actions taken in response (such as travel advisories and restrictions and social distancing), including the extent and duration of such actions.

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

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

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

These uncertainties make it difficult to predict operating results for our hotels for the remainder of 2021.

Therefore, there can be no assurances that we will not experience further declines in hotel revenues or earning at our hotels.

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

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

Key Business Metrics Used by Management

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occupancy and ADR.

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

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

Comparable Hotels Data

Historically, we have presented certain data for our hotels on a comparable hotel basis as supplemental information for investors.

We define our comparable hotels as those that:

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

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

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

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

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

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

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

Non-GAAP Financial Measures

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Share-based compensation expense;

Casualty gains or losses;

Impairment losses;

Impairment losses and casualty gains or losses;

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

Hotel Adjusted EBITDA measures hotel-level results before debt service, depreciation and corporate expenses for our consolidated hotels, including both comparable and non-comparable hotels but excluding hotels owned by unconsolidated affiliates, and is a key measure of our profitability.

Hotel Adjusted EBITDA measures hotel-level results before debt service, depreciation and corporate expenses for our consolidated hotels, which excludes hotels owned by unconsolidated affiliates, and is a key measure of our profitability.

We present Hotel Adjusted EBITDA to help us and our investors evaluate the ongoing operating performance of our consolidated hotels.

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Because of these limitations, EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

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

Three Months Ended September 30,

Nine Months Ended September 30,

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

Three Months Ended March 31,

(in millions)

Net (loss) income

Depreciation and amortization expense

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investments in affiliates

Loss (gain) on sales of assets, net

Acquisition costs

Gain on sales of assets, net

Severance expense

Share-based compensation expense

Impairment and casualty loss, net

Impairment loss and casualty gain, net

Adjusted EBITDA

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

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

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

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

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Share-based compensation expense;

Casualty gains or losses;

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

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

Three Months Ended March 31,

(in millions, except per share amounts)

Net (loss) income attributable to stockholders

Net loss attributable to stockholders

Depreciation and amortization expense

Depreciation and amortization expense attributable to

noncontrolling interests

Loss (gain) on sales of assets, net

Gain on sale of investments in affiliates (1)

Depreciation and amortization expense

attributable to noncontrolling interests

Gain on sales of assets, net

Impairment loss

Equity investment adjustments:

Equity in losses (earnings) from investments in affiliates

Equity in losses from investments in affiliates

Pro rata FFO of investments in affiliates

Nareit FFO attributable to stockholders

Casualty loss (gain), net

Acquisition costs

Severance expense

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Adjusted FFO per share - Diluted ( 2)

Included in other loss, net.

For the nine months ended September 30, 2020, includes $30 million of tax expense on hotels sold during the period.

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

Per share amounts are calculated based on unrounded numbers.

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The following items have had a significant effect on the year-over-year comparability of our operations and are illustrated further in the table of Hotel Revenues and Operating Expenses below:

Property Acquisitions:

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

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

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

The results of operations of these hotels prior to acquisition for the three and nine months ended September 30, 2019 are not included in our consolidated results.

Property Dispositions:

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

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

Since January 1, 2020, we disposed of two consolidated hotels.

As a result of these dispositions, our revenues and operating expenses decreased for the three months ended March 31, 2021 as compared to the same period in 2020.

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

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

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

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

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

Consequently, the results of our portfolio during the three months ended March 31, 2021 will not be comparable to the same period in 2020.

Hotel Revenues and Operating Expenses

Three Months Ended September 30,

Three Months Ended March 31,

(in millions)

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Food and beverage expense

Other departmental and support

Other departmental and support expense

Other property-level expense

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

Nine Months Ended September 30,

Group, transient, contract and other rooms revenue for the three months ended March 31, 2021, as well as the change for each segment compared to the same period in 2020 are as follows:

Three Months Ended March 31,

(in millions)

Group rooms revenue

Transient rooms revenue

Contract rooms revenue

Other rooms revenue

Rooms revenue

Food and beverage revenue

Ancillary hotel revenue

Rooms expense

Food and beverage expense

Other departmental and support

Other property-level expense

Management fees expense

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

Other revenue and Other expense

During the three months ended September 30, 2020, we permanently suspended operations at two of our three laundry facilities and expect to permanently suspend operations at our third laundry facility in the fourth quarter of 2020.

The decrease in support revenue is due to lower cost reimbursements as a result of these operations being suspended at most hotels that have a service arrangement with Hilton Grand Vacations (“HGV”).

Three Months Ended September 30,

Nine Months Ended September 30,

Percent Change

During the second half of 2020, we permanently closed operations at all three of our laundry facilities resulting in a decrease in both laundry revenue and laundry expense.

The decreases in support services revenue and expense are due to reductions in expenses as well as lower cost reimbursements as hotels that have a service arrangement with Hilton Grand Vacations (“HGV”) continue to suspend its operations or have reopened at limited capacity.

Three Months Ended March 31,

Percent Change

(in millions)

Laundry revenue

Support service revenue

Laundry revenue

Total other revenue

Three Months Ended September 30,

Nine Months Ended September 30,

Percent Change

Three Months Ended March 31,

Percent Change

(in millions)

Laundry expense

Support services expense

Laundry expense

Total other expense

Corporate general and administrative

Three Months Ended September 30,

Nine Months Ended September 30,

Percent Change

Three Months Ended March 31,

Percent Change

(in millions)

General and administrative expenses

Share-based compensation expense

Disposition costs

Severance expense

Total corporate general and administrative

Acquisition costs

During the nine months ended September 30, 2020, we incurred $10 million of acquisition costs, primarily as a result of $9 million of transfer tax in connection with the Merger Agreement with Chesapeake based on new information received during the period.

Acquisition costs of $59 million and $65 million for the three and nine months ended September 30, 2019, respectively, primarily related to costs incurred in connection with the entry into the Merger Agreement with Chesapeake.

Impairment and casualty loss, net

During the nine months ended September 30, 2020, we recognized a net loss of $696 million primarily as a result of $607 million of impairment losses related to our goodwill and $90 million of impairment losses primarily related to one of our hotels, and our inability to recover the carrying value because of COVID-19.

Impairment loss and casualty gain, net

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

Gain on sales of assets, net

During the nine months ended September 30, 2020, we recognized a net gain of $62 million primarily as a result of the sale of two of our consolidated hotels.

Refer to Note 3:

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

During the nine months ended September 30, 2019, we recognized a net gain of $20 million as a result of the sale of five of our consolidated hotels.

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

Non-operating Income and Expenses

Interest expense

Three Months Ended September 30,

Nine Months Ended September 30,

Percent Change

Three Months Ended March 31,

Percent Change

(in millions)

SF and HHV CMBS Loans ( 1)

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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”).

In September 2020, we fully repaid the term loan we entered into in December 2016, with a maturity date of December 2021 (“2016 Term Loan”).

In August 2019, the Company, Park Intermediate Holdings LLC (our “Operating Company”) and PK Domestic Property LLC, an indirect subsidiary of the Company (“PK Domestic”) entered into a term loan facility (the “2019 Term Facility”).

In May and September 2020, our Operating Company, PK Domestic and PK Finance Co-Issuer Inc.

(“PK Finance”) issued an aggregate of $650 million of senior secured notes due 2025 (“2025 Senior Secured Notes”) and an aggregate of $725 million of senior secured notes due 2028 (“2028 Senior Secured Notes”), respectively.

Percentage change is not meaningful.

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

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

The 2016 Term Loan was fully repaid in September 2020.

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

and certain other lenders, providing a $950 million unsecured delayed draw term loan facility (the “2019 Term Facility”), with the $850 million, five-year delayed draw term loan tranche fully drawn on September 18, 2019 to fund the Merger.

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

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

Interest expense increased during three and nine months ended September 30, 2020 as compared to the same periods in 2019 as a result of $310 million in mortgage loans assumed in conn ection with the Merger, borrowings under the 2019 Term Facility to fund the Merger, the $1 billion drawn under the Revolver in March 2020 (of which $319 million and $80 million was repaid during the second and third quarters of 2020, respectively), and the issuances of our $650 million 2025 Senior Secured Notes and $725 million 2028 Senior Secured Notes, partially offset by a decrease in interest expense as a result of the full repayment of the 2016 Term Loan in September 2020.

Interest expense increased in 2021 as a result of the $1 billion drawn under the Revolver in March 2020, of which $399 million was repaid during 2020, and the issuances of our $650 million 2025 Senior Secured Notes and $725 million 2028 Senior Secured Notes, partially offset by a decrease in interest expense as a result of the full repayment of the 2016 Term Loan in September 2020.

Income tax expense

Three Months Ended September 30,

Nine Months Ended September 30,

Percent Change

Three Months Ended March 31,

Percent Change

(in millions)

Income tax expense

Income tax expense for the nine months ended September 30, 2020 includes $30 million of income tax expense from hotels sold during the period, partially offset by a TRS income tax benefit of $20 million from utilizing the NOL carryback provisions of the CARES Act.

Refer to Note 9:

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

Income tax expense for the nine months ended September 30, 2019 includes $7 million of income tax liabilities associated with our taxable operations and $2 million of built-in gain tax recognized on hotels disposed during 2019, beyond that of our previously recognized deferred tax liabilities.

Income tax expense for the three months ended March 31, 2021 of $1 million is comprised primarily of an adjustment to the benefit recognized in 2020 from utilizing the NOL carryback provisions of the CARES Act.

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

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

Liquidity and Capital Resources

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

As of September 30, 2020, we had total cash and cash equivalents of approximately $1.1 billion and $35 million of restricted cash.

As of March 31, 2021, we had total cash and cash equivalents of $868 million and $32 million of restricted cash.

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

As a result of the economic uncertainty resulting from the effects of COVID-19 including decreased occupancy, ADR and RevPAR at our hotels, as described above under “Recent Events–COVID-19 Effect on Our Business”, we expect our cash flow from operations through the remainder of 2020 and the first-half of 2021 to be significantly lower than in the past.

We have taken several steps to preserve capital and increase liquidity, including drawing $1 billion from our Revolver in March 2020, issuing $650 million of 2025 Senior Secured Notes in May 2020 (a portion of which was used to partially repay amounts outstanding under our Revolver and 2016 Term Loan), issuing $725 million of 2028 Senior Secured Notes in September 2020 (a portion of which was used to repay the 2016 Term Loan in full as well as a portion of the Revolver), suspending our dividend following the payment of the first quarter 2020 dividend and implementing various cost saving initiatives at our hotels including:

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

As a result of the economic uncertainty resulting from the effects of COVID-19, including decreased occupancy, ADR and RevPAR at our hotels, as described above under “Recent Events”, we expect our cash flows through the first-half of 2021 to be significantly lower than prior to COVID-19.

We have taken several steps to preserve capital and increase liquidity, including drawing $1 billion from our Revolver in March 2020 (which we subsequently partially repaid), issuing $650 million of 2025 Senior Secured Notes in May 2020 (a portion of which was used to partially repay amounts outstanding under our Revolver and 2016 Term Loan), issuing $725 million of 2028 Senior Secured Notes in September 2020 (a portion of which was used to repay the 2016 Term Loan in full as well as a portion of the Revolver), suspending our dividend following the payment of the first quarter 2020 dividend and implementing various cost saving initiatives at our hotels including temporary suspension of operations at certain hotels and selected restaurants and other businesses and outlets and reductions in budgeted capital expenditures for maintenance projects to approximately $40 million for 2021.

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

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

Based on our average monthly burn rate of $50 million for the third quarter which takes into account current operations from both open and suspended hotels and uses an accrual-based methodology, and as a result of the above-mentioned cost-reduction efforts and the overall strength of our balance sheet, absent any debt required to be repaid, we currently expect to have over two and a half years of liquidity available to meet our financial obligations.

This estimate does not take into account capital expenditures (which were reduced by 75% in 2020 to approximately $4 million per month) or any possible alternative sources of revenue that may arise or any hotel property dispositions for the remainder of the year or payment of future cash dividends, if any.

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

With the net proceeds from our Revolver borrowings during 2020, net proceeds from the offering of our 2025 Senior Secured Notes and 2028 Senior Secured Notes and the proceeds from the sales of two consolidated hotels during the first quarter o f 2020, we have sufficient liquidity to pay our 2021 debt maturities and to fund other short-term liquidity obligations.

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

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

Based on our monthly burn rate in March 2021 of $26 million, which takes into account current operations from both open and suspended hotels and uses an accrual-based methodology, and as a result of the above-mentioned cost-reduction efforts and the overall strength of our balance sheet, absent any debt required to be repaid, we currently expect to have over 50 months of liquidity available to meet our financial obligations.

This estimate does not take into account planned capital expenditures, any possible alternative sources of revenue that may arise, any hotel property dispositions or payment of future cash dividends, if any, or continued improvement in operations.

The estimated burn rate amount does not take into account any amount available to us under existing or future debt facilities, or proceeds from issuance of any additional debt, equity or equity-linked securities.

With availability under our Revolver and existing cash and cash equivalents, including as a result of net proceeds from the offering of our 2025 Senior Secured Notes and 2028 Senior Secured Notes and the proceeds from the sales of two consolidated hotels during the first quarter of 2020 and the sale of one consolidated hotel in April 2021, we have sufficient liquidity to pay our 2021 debt maturities and to fund other short-term liquidity obligations.

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

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

Refer to Note 7:

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

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including reimbursements to our hotel manager for payroll and related benefits, costs associated with the operation of our hotels, interest and scheduled principal payments on our outstanding indebtedness (including the 2025 Senior Secured Notes and 2028 Senior Secured Notes), capital expenditures for renovations and maintenance at our hotels (to the extent not deferred for 2020), corporate general and administrative expenses, and, when resumed, dividends to our stockholders.

In May and September 2020, we amended our credit facilities, which in addition to providing enhanced liquidity, extending the maturity of the Revolver and extending the waiver period for the testing of the financial covenants, placed certain restrictions on the Company, including limitations on our ability to make dividends and distributions (except to the extent required to maintain REIT status, the ability to pay a $0.01 per share per fiscal quarter dividend and certain other agreed exceptions).

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including reimbursements to our hotel manager for payroll and related benefits, costs associated with the operation of our hotels, interest and scheduled principal payments on our outstanding indebtedness, capital expenditures for renovations and maintenance at our hotels, corporate general and administrative expenses, and, when resumed, dividends to our stockholders.

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

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Generally, these agreements require that we fund 4% of hotel revenues into an FF&E reserve, unless such amounts have been incurred.

As a result of COVID-19, our hotel managers have temporarily delayed contributions to the FF&E reserve accounts and in addition, have allowed our hotels to utilize, as needed, their FF&E reserve for operating expenses at the respective hotels, as long as the hotels remain in compliance with their lenders.

Our cash management objectives continue to be to maintain the availability of liquidity, minimize operational costs, make debt payments and fund our capital expenditure programs and future acquisitions.

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Stock Repurchase Program

In February 2019, our Board of Directors approved a stock repurchase program allowing us to repurchase up to $300 million of our common stock over a two-year period, ending in February 2021.

Stock repurchases, if any, would be made through open market purchases, including through Rule 10b5-1 trading programs, in privately negotiated transactions, or in such other manner that would comply with applicable securities laws.

The timing of future stock repurchases and the number of shares to be repurchased will depend upon prevailing market conditions and other factors.

In February 2019, our Board of Directors approved a stock repurchase program allowing us to repurchase up to $300 million of our common stock over a two-year period, which ended in February 2021.

We have not renewed the stock repurchase program at this time.

Stock repurchases were made through open market purchases, including through Rule 10b5-1 trading programs, in privately negotiated transactions, or in such other manner that complied with applicable securities laws.

The timing of stock repurchases and the number of shares repurchased were dependent upon prevailing market conditions and other factors.

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

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

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

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

In addition, our credit facility and term loan amendments impose restrictions surrounding our ability to repurchase stock until certain financial ratio metrics are achieved.

Sources and Uses of Our Cash and Cash Equivalents

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

Nine Months Ended September 30,

Percent Change

(in millions)

Net cash (used in) provided by operating activities

Net cash provided by (used in) investing activities

Net cash provided by financing activities

Net cash used in operating activities

Net cash (used in) provided by investing activities

Net cash (used in) provided by financing activities

Percentage change is not meaningful.

Operating Activities

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

The $623 million decrease in net cash provided by operating activities for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to a decrease in cash from operations related to the effects of COVID-19 coupled with an increase in cash paid for interest of $28 million.

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

The $58 million increase in net cash used in operating activities for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to a decrease in cash from operations related to the effects of COVID-19.

Investing Activities

The $136 million in net cash provided by investing activities for the nine months ended September 30, 2020 was primarily attributable to $207 million in net proceeds received from the sale of hotels, partially offset by $70 million in capital expenditures.

The $855 million in net cash used in investing activities for the nine months ended September 30, 2019 was primarily attributable to the $913 million used in the acquisition of Chesapeake and $182 million used for capital expenditures for property and equipment at our hotels, partially offset by $230 million in net proceeds received from the sale of hotels.

The $3 million in net cash used in investing activities for the three months ended March 31, 2021 was primarily attributable to $5 million in capital expenditures.

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

Financing Activities

The $921 million in net cash provided by financing activities for the nine months ended September 30, 2020 is primarily attributable to borrowings of $1 billion from our Revolver as a result of COVID-19, the issuance of our $650 million 2025 Senior Secured Notes and $725 million 2028 Senior Secured Notes, partially offset by $1.1 billion of debt repayments, $241 million in dividends paid and the repurchase of 4.5 million shares of our common stock for $66 million.

The $445 million in net cash provided by financing activities for the nine months ended September 30, 2019 is primarily attributable to borrowings of $850 million from the 2019 Term Facility entered into in September 2019 to fund the Merger, partially offset by $382 million in dividends paid.

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

The $7 million in net cash used in financing activities for the three months ended March 31, 2021 was primarily attributable to $6 million of tax withholdings on share-based compensation.

The $789 million in net cash provided by financing activities for the three months ended March 31, 2020 was primarily attributable to borrowings of $1 billion from our Revolver as a result of COVID-19, partially offset by $136 million in dividends paid and the repurchase of 4.6 million shares of our common stock for $66 million.

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

Therefore, as a general matter, it is unlikely that we will be able to retain substantial cash balances that could be used to meet our liquidity needs from our annual taxable income.

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

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

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

Dividend per Share

March 31, 2020

April 15, 2020

As of September 30, 2020, our total indebtedness was approximately $5.1 billion, including $601 million of borrowings from our Revolver, $650 million of 2025 Senior Secured Notes and $725 million of 2028 Senior Secured Notes, as disclosed above, and excluding approximately $225 million of our share of debt of investments in affiliates.

However, as a precautionary measure in light of COVID-19, after the payment of the first quarter dividend in 2020, we suspended our quarterly dividend.

As of March 31, 2021, our total indebtedness was approximately $5.1 billion, including approximately $601 million of borrowings from our Revolver, $650 million of 2025 Senior Secured Notes and $725 million of 2028 Senior Secured Notes, as disclosed above, and excluding approximately $225 million of our share of debt of investments in affiliates.

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

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Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of September 30, 2020 included construction contract commitments of approximately $23 million for capital expenditures at our properties.

Our off-balance sheet arrangements as of March 31, 2021 included construction contract commitments of approximately $52 million for capital expenditures at our properties.

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.

As a liquidity preservation initiative to mitigate the effects of COVID-19, we have deferred approximately $150 million of the originally budgeted $200 million of capital expenditures for 2020.

None of these deferred expenditures will affect the ability of the hotels to quickly resume operations once normal travel patterns return.

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

Critical Accounting Policies and Estimates

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis