NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization and Recent Events
Organization
Park Hotels & Resorts Inc. (“we,” “us,” “our” or the “Company” and, exclusive of any subsidiaries, "Park Parent") is a Delaware corporation that owns a portfolio of premium-branded hotels and resorts primarily located in prime city center and resort locations. On January 3, 2017, Hilton Worldwide Holdings Inc. (“Hilton” or "Parent") completed the spin-off of a portfolio of hotels and resorts that established Park Hotels & Resorts Inc. as an independent, publicly traded company.
On May 5, 2019, the Company, PK Domestic Property LLC, an indirect subsidiary of the Company (“PK Domestic”), and PK Domestic Sub LLC, a wholly owned subsidiary of PK Domestic (“Merger Sub”) entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Chesapeake Lodging Trust (“Chesapeake”). On September 18, 2019, pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Chesapeake merged with and into Merger Sub (the “Merger”) and each of Chesapeake’s common shares of beneficial interest, $0.01 par value per share, was converted into $11.00 in cash and 0.628 of a share of our common stock. No fractional shares of our common stock were issued in the Merger. The value of any fractional interests to which a Chesapeake shareholder would otherwise have been entitled was paid in cash.
We are a real estate investment trust (“REIT”) for United States (“U.S.”) 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. From the date of our spin-off from Hilton, Park Intermediate Holdings LLC (our “Operating Company”), directly or indirectly, has held all our assets and has conducted all of our operations. Park Parent owned 100% of the interests of our Operating Company until December 31, 2021 when the business undertook an internal reorganization transitioning our structure to a traditional umbrella partnership REIT ("UPREIT") structure . Effective January 1, 2022, Park Parent became the managing member of our Operating Company and PK Domestic REIT Inc., a direct subsidiary of Park Parent, became a member of our Operating Company. We may, in the future, issue interests in (or from) our Operating Company in connection with acquiring hotels, financings, issuance of equity compensation or other purposes.
Recent Events
In October 2023, the trustee for the $725 million non-recourse CMBS loan ("SF Mortgage Loan") secured by two of our San Francisco hotels – the 1,921-room Hilton San Francisco Union Square and the 1,024-room Parc 55 San Francisco – a Hilton Hotel (collectively, the "Hilton San Francisco Hotels") filed a lawsuit against the borrowers under the SF Mortgage Loan. In connection with the lawsuit, the court appointed a receiver to take control of the Hilton San Francisco Hotels and their operations, and thus, we have no further economic interest in the operations of the hotels. The receiver will operate and has authority over the hotels and, until no later than November 1, 2024, has the ability to sell the hotels. The court order contemplates that the receivership will end with a non-judicial foreclosure by December 2, 2024, if the hotels are not sold within the predetermined sale period.
Note 2: Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, our wholly owned subsidiaries and entities in which we have a controlling financial interest, including variable interest entities (“VIEs”) where we are the primary beneficiary. The consolidated financial statements reflect our financial position, results of operations and cash flows, in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). All significant intercompany transactions and balances within these consolidated financial statements have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain line items on the consolidated balance sheet as of December 31, 2022 and consolidated statements of comprehensive income (loss) for the year ended December 31, 2022 and 2021 have been reclassified to conform to the current period presentation.
Summary of Significant Accounting Policies
Property and Equipment
Property and equipment are recorded at cost, and interest applicable to major construction or development projects is capitalized. Costs of improvements that extend the economic life or improve service potential are also capitalized. Capitalized costs are depreciated over their estimated useful lives. Costs for normal repairs and maintenance are expensed as incurred.
Depreciation is recorded using the straight-line method over the assets’ estimated useful lives, which are generally as follows: buildings and improvements (8 to 40 years); furniture and equipment (3 to 8 years); and computer equipment and acquired software (3 years). Leasehold improvements are depreciated over the shorter of the estimated useful life, based on the estimates above, or the lease term.
We evaluate the carrying value of our property and equipment if there are indicators of potential impairment. We perform an analysis to determine the recoverability of the asset’s carrying value by comparing the expected undiscounted future cash flows to the net book value of the asset. If it is determined that the expected undiscounted future cash flows are less than the net book value of the asset, the excess of the net book value over the estimated fair value is recorded in our consolidated statements of comprehensive income (loss) within impairment losses. Fair value is generally estimated using valuation techniques that consider the discounted cash flows of the asset using discount and capitalization rates deemed reasonable for the type of asset, as well as prevailing market conditions, appraisals, recent similar transactions in the market and, if appropriate and available, current estimated net sales proceeds from pending offers.
If sufficient information exists to reasonably estimate the fair value of a conditional asset retirement obligation, including environmental remediation liabilities, we recognize the fair value of the obligation when the obligation is incurred, which is generally upon acquisition, construction or development and/or through the normal operation of the asset.
Assets Held for Sale
We classify a property as held for sale when we commit to a plan to sell the asset, the sale of the asset is probable within one year, and it is unlikely that action to complete the sale will change or that the sale will be withdrawn. When we determine that classification of an asset as held for sale is appropriate, we cease recording depreciation for the asset and value the property at the lower of depreciated cost or fair value, less costs to dispose. Further, the related assets and liabilities of the held for sale property will be classified as assets held for sale in our consolidated balance sheets. Any gains on sales of properties are recognized at the time of sale or deferred and recognized in net income (loss) in subsequent periods as any relevant conditions requiring deferral are satisfied.
Investments in Affiliates
The consolidated financial statements include entities in which we have a controlling financial interest, including VIEs where we are the primary beneficiary. The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of rights held by other interests. If the entity is considered to be a VIE, we determine whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interests in the entity. We consolidate entities when we own more than 50 percent of the voting shares of a company or otherwise have a controlling financial interest. References in these financial statements to net income (loss) attributable to stockholders do not include non-controlling interests, which represent the outside ownership interests of our consolidated, non-wholly owned entities and are reported separately.
We hold investments in affiliates that primarily own or lease hotels. Investments in affiliates over which we exercise significant influence, but lack a controlling financial interest, are accounted for using the equity method. We account for investments using the equity method when we have the ability to exercise significant influence over the entity, typically through a more than minimal investment.
Our proportionate share of earnings (losses) from our equity method investments is presented as equity in earnings (losses) from investments in affiliates in our consolidated statements of comprehensive income (loss). Distributions from investments in affiliates are presented as an operating activity in our consolidated statements of cash flows when such distributions are a return on investment. Distributions from investments in affiliates are recorded as an investing activity in our consolidated statements of cash flows when such distributions are a return of investment.
We assess the recoverability of our equity method investments if there are indicators of potential impairment. If an identified event or change in circumstances requires an evaluation to determine if an investment may have an other-than-temporary impairment, we assess the fair value of the investment based on accepted valuation methodologies, which include discounted cash flows, estimates of sales proceeds and external appraisals. If an investment’s fair value is below its carrying value and the decline is considered to be other-than-temporary, we will recognize an impairment loss in equity in earnings (losses) from investments in affiliates in our consolidated statements of comprehensive income (loss).
Non-controlling Interests
We present the portion of any equity that we do not own in entities that we have a controlling financial interest (and thus consolidate) as non-controlling interests and classify those interests as a component of total equity, separate from total stockholders’ equity, on our consolidated balance sheets. For consolidated joint ventures with pro rata distribution allocations, net income or loss is allocated between the joint venture partners based on their respective stated ownership percentages. In addition, we include net income (loss) attributable to the noncontrolling interest in net income (loss) in our consolidated statements of comprehensive income (loss).
Intangible Assets
Intangible assets with finite useful lives primarily include an air rights contract. The air rights contract value is based on the present value of the difference between the contractual rental amounts and the market rental rates for similar contracts, measured over a period equal to the remaining non-cancellable term of the contract. Intangible assets are amortized using the straight-line method over the remaining term of the contract.
We review all finite lived intangible assets for impairment when circumstances indicate that their carrying amounts may not be recoverable. If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of the carrying value over the fair value in our consolidated statements of comprehensive income (loss).
Asset Acquisitions
We consider an asset acquisition to occur when substantially all the fair value of an acquisition is concentrated in a single identifiable asset or a group of similar identifiable assets. In an acquisition of assets, we are not required to expense our acquisition-related costs, and goodwill is not assigned. We will account for the properties purchased as asset acquisitions by allocating the total cash consideration, including transaction costs, to the individual assets acquired and liabilities assumed, respectively, on a relative fair value basis.
Business Combinations
We consider a business combination to occur when we take control of a business by acquiring its net assets or equity interests. We record the assets acquired, liabilities assumed and non-controlling interests at fair value as of the acquisition date, including any contingent consideration. We evaluate factors, including market data for similar assets, expected future cash flows discounted at risk-adjusted rates and replacement cost for the assets to determine an appropriate fair value of the assets. Acquisition-related costs, such as due diligence, legal and accounting fees, are expensed in the period incurred and are not capitalized or applied in determining the fair value of the acquired assets.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities, when purchased, of three months or less.
Restricted Cash
Restricted cash includes cash balances established as lender reserves required by our debt agreements and reserves for capital expenditures in accordance with certain of our management agreements.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is provided on accounts receivable when losses are probable based on historical collection activity and current business conditions.
Leases
We consider an arrangement to contain a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for compensation. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent the present value of our fixed payment obligations. Leases with a term of 12 months or less are not recorded on the balance sheet. We use our estimated incremental borrowing rate to determine the present value of our lease obligations. Our operating leases may require fixed payments, variable payments based on a percentage of revenue or income, or payments equal to the greater of a fixed or variable payment. Variable payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation is incurred. Operating lease expense is recognized on a straight-line basis over the lease term. Our lease terms include renewal options that we are reasonably certain to exercise, and renewal options controlled by the lessor.
Fair Value Measurements—Valuation Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (an exit price). We use the three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-level hierarchy of inputs is summarized below:
•Level 1—Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2—Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.
•Level 3—Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety at the end of each reporting period.
Derivative Instruments
We may use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates. We will regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. Under the terms of certain loan agreements, we may be required to maintain derivative financial instruments to manage interest rates. We do not enter into derivative financial instruments for trading or speculative purposes.
We record all derivatives at fair value. On the date the derivative contract is entered, we designate the derivative as one of the following: a hedge of a forecasted transaction or the variability of cash flows to be paid (“cash flow hedge”); a hedge of the fair value of a recognized asset or liability (“fair value hedge”); or an undesignated hedge instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge or net investment hedge are recorded in other comprehensive income in the consolidated statements of comprehensive income (loss) until they are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged in the consolidated statements of cash flows. Cash flows from undesignated derivative financial instruments are included as an investing activity in our consolidated statements of cash flows.
If we determine that we qualify for and will designate a derivative as a hedging instrument, at the designation date we formally document all relationships between hedging activities, including the risk management objective and strategy for undertaking various hedge transactions. This process includes matching all derivatives that are designated as cash flow hedges to specific forecasted transactions and linking all derivatives designated as fair value hedges to specific assets and liabilities in our consolidated balance sheets.
To the extent we have designated a derivative as a hedging instrument, each reporting period we assess the effectiveness of our designated hedges in offsetting the variability in the cash flows or fair values of the hedged assets or obligations using the Hypothetical Derivative Method. This method compares the cumulative change in fair value of each hedging instrument to the cumulative change in fair value of a hypothetical hedging instrument, which has terms that identically match the critical terms of the respective hedged transactions. Thus, the hypothetical hedging instrument is presumed to perfectly offset the hedged cash flows. Ineffectiveness results when the cumulative change in the fair value of the hedging instrument exceeds the cumulative change in the fair value of the hypothetical hedging instrument. We discontinue hedge accounting prospectively, when the derivative is not highly effective as a hedge, the underlying hedged transaction is no longer probable, or the hedging instrument expires, is sold, terminated or exercised.
Revenue Recognition
Our results of operations primarily consist of room rentals, food and beverage sales and other ancillary goods and services from hotel properties. Other revenues primarily relate to support services we provide to Hilton Grand Vacations (“HGV”). Hotel operating revenues are disaggregated into room revenue, food and beverage revenue, ancillary hotel revenue and other revenue on the consolidated statements of comprehensive income (loss) to illustrate how economic factors affect the nature, amount and timing, and uncertainty of revenue and cash flows. Rooms revenue is recognized over time when rooms are occupied and food and beverage revenue is recognized at a point in time when goods and services have been delivered or rendered. Ancillary hotel revenue and other revenue is generally recognized at a point in time as goods and services are delivered or rendered.
We assess if we are the principal or agent for certain ancillary services provided by third parties. If we are the principal, we recognize revenue based on the gross sales price. If we are the agent, we recognize revenue net of costs paid to service providers. Payment received for a future stay or event is recognized as an advance deposit, which is included in other liabilities on our consolidated balance sheets. Advance deposits are recognized as revenue when rooms are occupied or goods or services have been delivered or rendered to our customer. Our advance deposit balance as of December 31, 2023 and 2022 was $107 million and $103 million, respectively, and are generally recognized as revenue within a one-year period. Additionally, we collect sales, use, occupancy and similar taxes at our hotels, which we present on a net basis (excluded from revenues) in our consolidated statements of comprehensive income (loss).
Share-based Compensation
We recognize the cost of services received in share-based payment transactions with employees and non-employee directors as services are received and recognize a corresponding increase in additional paid-in capital for equity classified awards. We account for any forfeitures when they occur.
The measurement objective for these equity awards is the estimated fair value at the grant date of the equity instruments that we will be obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The compensation expense for an award classified as an equity instrument is recognized ratably over the requisite service period. The requisite service period is the period during which an employee is required to provide service in exchange for an award.
Income Taxes
We are a REIT for U.S. 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. To the extent we continue to remain qualified as a REIT, we generally will not be subject to U.S. federal income tax on taxable income generated by our REIT activities that we distribute annually to our stockholders. Accordingly, no provision for U.S. federal income taxes has been included in our accompanying consolidated financial statements for the years ended December 31, 2023, 2022 and 2021 related to our REIT activities other than taxes related to our sale of built-in gain property (representing property held by us with an excess of fair value over tax basis on January 4, 2017). We were subject to U.S. federal income tax on taxable sales of built-in gain property during the five-year period following the date of our
spin-off, which ended in January 2022. We remain subject to California income tax on taxable sales of built-in-gain property until January 2027. In addition, we are subject to non-U.S. income tax on foreign held REIT activities and certain sales of foreign investments. Further, our taxable REIT subsidiaries (“TRSs”) are generally subject to U.S. federal, state and local, and foreign income taxes (as applicable).
We account for income taxes using the asset and liability method. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year, to recognize the deferred tax assets and liabilities that relate to tax consequences in future years, which result from differences between the respective tax basis of assets and liabilities and their financial reporting amounts, and to recognize tax loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the respective temporary differences or operating loss or tax credit carry forwards are expected to be recovered or settled. The realization of deferred tax assets and tax loss and tax credit carry forwards is contingent upon the generation of future taxable income and other restrictions that may exist under the tax laws of the jurisdiction in which a deferred tax asset exists. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.
We use a prescribed recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. For all income tax positions, we first determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If it is determined that a position meets the more-likely-than-not recognition threshold, the benefit recognized in the financial statements is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.
Recently Issued Accounting Pronouncements
Accounting Standards Not Yet Adopted
In November 2023, the FASB issued Accounting Standards Update ("ASU") No. 2023-07 ("ASU 2023-07"), Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures, which enhances segment disclosures, including disclosures about significant segment expenses. We expect to adopt ASU 2023-07 on a retrospective basis when the requirements become effective for the year-ended December 31, 2024. We are currently evaluating the effect that ASU 2023-07 will have on our consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-08 ("ASU 2023-08"), Income Taxes (Topic 740) - Improvements to Income Tax Disclosures, which enhances income tax disclosures, including disclosures about the existing rate reconciliation and income taxes paid information. We expect to adopt ASU 2023-08 when the requirements become effective for the year-ended December 31, 2025. ASU 2023-08 is required to be adopted on a prospective basis, but retrospective adoption is permitted. We are currently evaluating the effect that ASU 2023-08 will have on our consolidated financial statements.
Note 3: Acquisitions and Dispositions
Acquisitions
In March 2023, we acquired two parcels of land, adjacent to the Hilton Hawaiian Village Waikiki Beach Resort, for a purchase price of approximately $18 million, including transaction costs. We accounted for the purchase as an acquisition of an asset, and the entire purchase price was allocated to land.
Dispositions
In February 2023, we sold the Hilton Miami Airport hotel for gross proceeds of $118.25 million. We recognized a net gain of approximately $15 million, which is included in gain (loss) on sales of assets, net in our consolidated statements of comprehensive income (loss).
Additionally, in June 2023, the ground lessor terminated the ground lease for the Embassy Suites Phoenix Airport hotel and, pursuant to an agreement, we received an early termination fee of approximately $4 million, which is included in other gain (loss), net in our consolidated statements of comprehensive income (loss).
During the year ended December 31, 2022, we sold the five consolidated hotels listed in the table below and received total gross proceeds of approximately $149 million. We recognized a net gain of approximately $15 million, which is included in gain (loss) on sales of assets, net in our consolidated statements of comprehensive income (loss).
| | | | | | | | | | | | | | |
| Hotel | | Location | | Month Sold |
| Hampton Inn & Suites Memphis – Shady Grove | | Memphis, Tennessee | | April 2022 |
| Hilton Chicago/Oak Brook Suites | | Chicago, Illinois | | May 2022 |
| Homewood Suites by Hilton Seattle Convention Center Pike Street | | Seattle, Washington | | June 2022 |
| Hilton Garden Inn Chicago/Oakbrook Terrace | | Chicago, Illinois | | July 2022 |
| Hilton Garden Inn LAX/El Segundo | | El Segundo, California | | September 2022 |
In June 2022, we sold our ownership interests in the joint ventures that own and operate the Hilton San Diego Bayfront for gross proceeds of $157 million. Our gross proceeds were reduced by $55 million for our share of the mortgage debt in the joint venture. We recognized a gain of approximately $92 million, net of selling costs, which is included in other gain (loss), net in our consolidated statements of comprehensive income (loss). Additionally, in October 2022, the joint ventures that own and operate the DoubleTree Hotel Las Vegas Airport sold the hotel for gross proceeds of approximately $22 million, and our pro-rata share of the gross proceeds was approximately $11 million. We recognized a gain of approximately $9 million, which is included in equity in earnings (losses) from investments in affiliates in our consolidated statements of comprehensive income (loss).
During the year ended December 31, 2021, we sold the five consolidated hotels listed in the table below, received total gross proceeds of approximately $477 million and recognized a net $5 million loss due to selling costs, which is included in gain (loss) on sales of assets, net in our consolidated statements of comprehensive income (loss). In addition, we recognized a $5 million impairment loss from the classification of the Hotel Adagio, Autograph Collection, as held for sale at June 30, 2021, as the selling costs reduced the gross proceeds to less than the net book value of the property, which is included in impairment and casualty loss in our consolidated statements of comprehensive income (loss).
| | | | | | | | | | | | | | |
| Hotel | | Location | | Month Sold |
W New Orleans – French Quarter | | New Orleans, Louisiana | | April 2021 |
Hotel Indigo San Diego Gaslamp Quarter(1) | | San Diego, California | | June 2021 |
Courtyard Washington Capitol Hill Navy Yard(1) | | Washington, D.C. | | June 2021 |
| Hotel Adagio, Autograph Collection | | San Francisco, California | | July 2021 |
| Le Meridien San Francisco | | San Francisco, California | | August 2021 |
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(1)Sold as a portfolio in the same transaction.
Note 4: Property and Equipment
Property and equipment were:
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| | | |
| (in millions) |
| Land | $ | 2,990 | | | $ | 3,317 | |
| Buildings and leasehold improvements | 5,814 | | | 6,512 | |
| Furniture and equipment | 947 | | | 994 | |
| Construction-in-progress | 341 | | | 201 | |
| 10,092 | | | 11,024 | |
| Accumulated depreciation and amortization | (2,633) | | | (2,723) | |
| $ | 7,459 | | | $ | 8,301 | |
Depreciation of property and equipment was $286 million, $268 million and $281 million during the years ended December 31, 2023, 2022 and 2021, respectively.
For the year ended December 31, 2023, we recognized an impairment loss of approximately $202 million related to one of the hotels securing our $725 million SF Mortgage Loan as a result of a decision to cease making debt service payments. In October 2023, the Hilton San Francisco Hotels that secure the SF Mortgage Loan were placed into receivership. Refer to Note 7: "Debt" and Note 8: "Fair Value Measurements" for additional information.
For the year ended December 31, 2021, we recognized $5 million of impairment losses related to one of our hotels classified as held for sale as of June 30, 2021, which was subsequently sold in July 2021, as the estimated selling costs were expected to reduce the gross proceeds below the net book value of the property.
Note 5: Consolidated Variable Interest Entities ("VIEs") and Investments in Affiliates
Consolidated VIEs
We consolidate VIEs that own three hotels in the U.S. We are the primary beneficiary of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our VIEs are only available to settle the obligations of these entities. Our consolidated balance sheets include the following assets and liabilities of these entities:
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| (in millions) |
| Property and equipment, net | $ | 209 | | | $ | 208 | |
| Cash and cash equivalents | 17 | | | 21 | |
| Restricted cash | 2 | | | 2 | |
| Accounts receivable, net | 5 | | | 4 | |
| Prepaid expenses | 3 | | | 2 | |
| Debt | 202 | | | 205 | |
| Accounts payable and accrued expenses | 11 | | | 8 | |
| Due to hotel manager | 2 | | | 2 | |
| Other liabilities | 3 | | | 4 | |
Unconsolidated Entities
Four of our hotels are owned by unconsolidated joint ventures in which we hold an interest. These hotels are accounted for using the equity method and had total debt of approximately $702 million and $721 million as of December 31, 2023 and 2022, respectively. Substantially all the debt is secured solely by the affiliates' assets or is guaranteed by other partners without recourse to us.
Note 6: Intangibles
Intangible assets were:
| | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| | (in millions) |
| Air rights contract | 45 | | | 45 | |
| Other | 4 | | | 7 | |
| Accumulated amortization | (7) | | | (9) | |
| $ | 42 | | | $ | 43 | |
As of December 31, 2023, we estimated our future amortization expense for our intangible assets to be:
| | | | | |
| Year | (in millions) |
| 2024 | $ | 1 | |
| 2025 | 1 | |
| 2026 | 1 | |
| 2027 | 1 | |
| 2028 | 1 | |
| Thereafter | 37 | |
| $ | 42 | |
Note 7: Debt
Debt balances and associated interest rates as of December 31, 2023 were:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Principal balance as of |
| Interest Rate
at December 31, 2023 | | Maturity Date | | December 31, 2023 | | December 31, 2022 |
| | | | | | | |
| | | | | (in millions) |
| HHV Mortgage Loan | 4.20% | | November 2026 | | $ | 1,275 | | | $ | 1,275 | |
Other mortgage loans(1) | Average rate of 4.37% | | 2024 to 2027(2) | | 385 | | | 469 | |
Revolver(3) | SOFR + 2.10% | | December 2026 | | — | | | 50 | |
| 2025 Senior Notes | 7.50% | | June 2025 | | 650 | | | 650 | |
| 2028 Senior Notes | 5.88% | | October 2028 | | 725 | | | 725 | |
| 2029 Senior Notes | 4.88% | | May 2029 | | 750 | | | 750 | |
| Finance lease obligations | 7.66% | | 2024 to 2028 | | 1 | | | — | |
| | | | | 3,786 | | | 3,919 | |
| Add: unamortized premium | | | | | 1 | | | 3 | |
| Less: unamortized deferred financing costs and discount | | | | (22) | | | (30) | |
| | | | | $ | 3,765 | | | $ | 3,892 | |
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(1)In June 2023, we fully repaid the $75 million mortgage loan secured by the W Chicago – City Center.
(2)Assumes the exercise of all extensions that are exercisable solely at our option. The mortgage loan for Hilton Denver City Center matures in 2042 but is callable by the lender with six months of notice. As of December 31, 2023, Park had not received notice from the lender.
(3)In February 2023, we fully repaid the $50 million outstanding balance under our amended and restated revolving credit facility ("Revolver"). The Revolver permits one or more standby letters of credit, up to a maximum aggregate outstanding balance of $50 million, to be issued on behalf of us. As of December 31, 2023, we had approximately $4 million outstanding on a standby letter of credit and $946 million of available capacity under our Revolver.
Mortgage Loans
In October 2016, we entered into a $1.275 billion CMBS loan secured by the Hilton Hawaiian Village (“HHV Mortgage Loan”). The HHV Mortgage Loan bears interest at a fixed-rate and requires interest-only payments through its maturity date. The HHV Mortgage Loan may be partially or fully prepaid, subject to prepayment penalties.
Our mortgage loans, which are associated with our three consolidated VIEs and mortgage loans acquired through the Merger, bear interest at fixed-rates. Certain of our mortgage loans require interest-only loan payments through their respective maturity dates, and the remaining mortgage loans require payments of both principal and interest on a monthly basis.
We are required to deposit with lenders certain cash reserves for restricted uses. As of December 31, 2023 and 2022, our consolidated balance sheets included $1 million and $6 million of restricted cash, respectively, related to our mortgage loans.
Credit Facilities
2016 Term Loan and Revolver
In December 2016, we entered into a credit agreement (“Original Credit Agreement”) with Wells Fargo Bank, National Association as administrative agent, and certain others financial institutions party thereto as lenders. The facility included a $1 billion Revolver, and a term loan due December 2021 ("2016 Term Loan"). We used proceeds from the issuance of the $725 million senior notes due 2028 ("2028 Senior Notes") to repay all amounts outstanding under our 2016 Term Loan.
In December 2022, we amended and restated the Original Credit Agreement ("Credit Agreement"). The Credit Agreement provides aggregate commitments of $950 million for the Revolver, which can be increased by up to $500 million with lender approval, and matures on December 1, 2026, with the ability to extend its maturity by one year as (i) a one-year extension or (ii) two six-month extensions. Borrowings under the Revolver bear interest based upon the secured overnight financing rate ("SOFR") plus a credit spread adjustment of 0.1%, plus an applicable margin based on our leverage ratio. We incur an unused facility fee on the Revolver of between 0.2% and 0.3%, based on our level of usage. The Credit Agreement also contains certain financial covenants including a maximum leverage ratio, minimum fixed charge coverage ratio, maximum secured leverage ratio, maximum unsecured indebtedness to unencumbered asset value ratio and minimum unencumbered adjusted net operating income to unsecured interest coverage ratio, certain of which were adjusted to revised levels through the end of the first quarter of 2024. The Credit Agreement allows us to conduct share repurchases, subject to compliance with the financial covenants, and released all collateral securing the Revolver and Senior Notes. The Credit Agreement restricts activities of the Company, including our ability to grant liens on certain properties, mergers, affiliate transactions, asset sales and the payment of dividends and distributions (except to the extent required to maintain REIT status and certain other agreed exceptions). Additionally, the Revolver permits one or more standby letters of credit, up to a maximum aggregate outstanding balance of $50 million, to be issued on behalf of us. Any outstanding standby letters of credit reduce the available borrowings on the Revolver by a corresponding amount. As of December 31, 2023, we had approximately $4 million outstanding on a standby letter of credit. In February 2023, we fully repaid the $50 million balance on our Revolver with a portion of the net proceeds from the sale of the Hilton Miami Airport hotel. We capitalized $9 million of issuance costs during the year ended December 31, 2022.
Senior Notes
2025 Senior Notes
In May 2020, our Operating Company, PK Domestic and PK Finance issued an aggregate of $650 million of senior notes due 2025 ("2025 Senior Notes"). We used $219 million of the net proceeds to repay a portion of the then outstanding balance under our Revolver, $69 million to partially repay the 2016 Term Loan and the remainder was used for general corporate purposes. The 2025 Senior Notes bear interest at a rate of 7.500% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning December 1, 2020. The 2025 Senior Notes will mature on June 1, 2025.
We may redeem the 2025 Senior 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 Notes at 100% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
2028 Senior Notes
In September 2020, our Operating Company, PK Domestic LLC and the PK Finance issued an aggregate of $725 million of 2028 Senior Notes. The 2028 Senior 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 the then outstanding balance under our Revolver.
We may redeem the 2028 Senior 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 Notes at 100% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
2029 Senior Notes
In May 2021, our Operating Company, PK Domestic and PK Finance issued an aggregate of $750 million of senior notes due 2029 ("2029 Senior Notes"). Net proceeds were used to repay $564 million of the then outstanding balance under our Revolver and $173 million of the 2019 Term Facility. The 2029 Senior Notes bear interest at a rate of 4.875% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, beginning November 15, 2021. The 2029 Senior Notes will mature on May 15, 2029. We capitalized $13 million of issuance costs during the year ended December 31, 2021.
We may redeem the 2029 Senior Notes at any time prior to May 15, 2024, 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 May 15, 2024, we may redeem the 2029 Senior Notes, in whole or in part, at the applicable redemption prices set forth in the indenture. On or after May 15, 2026, we may redeem the 2029 Senior Notes at 100% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, before May 15, 2024, we may redeem up to 40% of the 2029 Senior Notes with the net cash proceeds from certain equity offerings at a redemption price of 104.875% of the principal amount redeemed.
Indentures
The 2025 Senior Notes, 2028 Senior Notes and 2029 Senior Notes (collectively, the “Senior Notes”) are guaranteed by us and by the subsidiaries of our Operating Company that also guarantee indebtedness under our credit facility. The guarantees are full and unconditional and joint and several. The Senior Notes are no longer secured following the amendment and restatement of the Original Credit Agreement in December 2022, at which time all collateral securing the Revolver and Senior Notes was released. The indentures governing the Senior 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 million, plus 95% of our cumulative Funds From Operations (as defined in the indentures), 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 indentures require 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.
Debt Maturities
The contractual maturities of our debt, assuming the exercise of all extensions that are exercisable solely at our option, as of December 31, 2023 were:
| | | | | |
| Year | (in millions) |
2024(1) | $ | 61 | |
| 2025 | 657 | |
| 2026 | 1,563 | |
| 2027 | 30 | |
| 2028 | 725 | |
Thereafter(2) | 750 | |
| $ | 3,786 | |
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(1)Excludes the SF Mortgage Loan.
(2)Assumes the exercise of all extensions that are exercisable solely at our option.
Debt Associated with Hotels in Receivership
In June 2023, we ceased making debt service payments towards the $725 million SF Mortgage Loan, which was due November 2023, and we received a notice of default from the servicer. The stated rate on the loan is 4.11%; however,
beginning June 1, 2023, the default interest rate on the loan is 7.11%. Additionally, beginning June 1, 2023, the loan accrues a monthly late payment administrative fee of 3% of the monthly amount due. In October 2023, the trustee for the SF Mortgage Loan filed a lawsuit against the borrowers under the SF Mortgage Loan. In connection with the lawsuit, the court appointed a receiver to take control of the Hilton San Francisco Hotels, which serve as security for the SF Mortgage Loan, and their operations, and thus, we have no further economic interest in the operations of the hotels. The receiver will operate and has authority over the hotels and, until no later than November 1, 2024, has the ability to sell the hotels. The court order contemplates that the receivership will end with a non-judicial foreclosure by December 2, 2024, if the hotels are not sold within the predetermined sale period.
We derecognized the Hilton San Francisco Hotels from our consolidated balance sheet in October 2023, when the receiver took control of the hotels, and accordingly recognized a gain of $221 million which is included in gain on derecognition of assets in our consolidated statements of comprehensive income (loss) and recorded a contract asset of $760 million, which represents the liabilities we expect to be released from upon final resolution with the lender on the SF Mortgage Loan in exchange for the transfer of ownership of the Hilton San Francisco Hotels. The $725 million SF Mortgage Loan will remain a liability until final resolution with the lender is concluded, and thus is included in debt associated with hotels in receivership on our consolidated balance sheet.
Note 8: Fair Value Measurements
We did not elect the fair value measurement option for our financial assets or liabilities. The fair values of our other financial instruments not included in the table below are estimated to be equal to their carrying amounts.
The fair value of our debt and the hierarchy level we used to estimate fair values are shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2023 | | December 31, 2022 |
| Hierarchy Level | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | | | | | | | |
| | | (in millions) |
| Liabilities: | | | | | | | | | |
| HHV Mortgage Loan | 3 | | $ | 1,275 | | | $ | 1,195 | | | $ | 1,275 | | | $ | 1,142 | |
| Other mortgage loans | 3 | | 385 | | | 365 | | | 469 | | | 435 | |
| Revolver | 3 | | — | | | — | | | 50 | | | 50 | |
| 2025 Senior Notes | 1 | | 650 | | | 652 | | | 650 | | | 652 | |
| 2028 Senior Notes | 1 | | 725 | | | 713 | | | 725 | | | 661 | |
| 2029 Senior Notes | 1 | | 750 | | | 702 | | | 750 | | | 635 | |
The fair value of the SF Mortgage Loan, which has a carrying value of $725 million as of both December 31, 2023 and 2022, and categorized as Level 3 of the fair value hierarchy, was $718 million and $692 million, respectively, as of December 31, 2023 and 2022. Refer to Note 7: "Debt" for additional information.
During the year ended December 31, 2023, we recognized an impairment loss related to one of our hotels. In October 2023, this hotel, along with the other hotel securing our SF Mortgage Loan, were placed into receivership. Refer to Note 7: "Debt" for additional information. The estimated value of the asset that was measured on a nonrecurring basis was:
| | | | | | | | | | | |
| December 31, 2023 |
| Fair Value | | Impairment Loss |
| (in millions) |
Property and equipment(1) | $ | 234 | | | $ | 202 | |
| Total | $ | 234 | | | $ | 202 | |
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(1)Fair value as of December 31, 2023 was measured using significant unobservable inputs (Level 3). We estimated fair value of the asset using a discounted cash flow analysis, with an estimated stabilized growth rate of 3%, a discounted cash flow term of 10 years, terminal capitalization rate of 6.3%, and discount rate of 9.5%. The discount and terminal capitalization rates used for the fair values of the asset reflected the risk profile of the market where the property is located.
Note 9: Leases
We lease hotel properties, land and equipment under operating and financing leases. We are subject to ground leases on 13 of our consolidated properties. Our leases expire, including options under lessor control, at various dates through 2083, with varying renewal options, and the majority expire before 2034.
Our operating leases may require minimum rent payments, variable rent payments based on a percentage of revenue or income or rent payments equal to the greater of a minimum rent or variable rent. In addition, we may be required to pay some, or all, of the capital costs for property and equipment in the hotel during the term of the lease.
The future minimum rent payments under our current leases, due in each of the next five years and thereafter as of December 31, 2023, were:
| | | | | |
| | Operating Leases |
| Year | (in millions) |
| 2024 | $ | 24 | |
| 2025 | 27 | |
| 2026 | 18 | |
| 2027 | 19 | |
| 2028 | 19 | |
| Thereafter | 326 | |
| Total minimum rent payments | 433 | |
| Less: imputed interest | 210 | |
| Total operating lease liabilities | $ | 223 | |
As of both December 31, 2023 and 2022, the weighted average remaining operating lease term was 26.0 years, and the weighted average discount rate used to determine the operating lease liabilities was 5.7% and 5.6%, respectively.
The components of rent expense, which are primarily included in other property expenses in our consolidated statements of comprehensive income (loss), as well as supplemental cash flow and non-cash information for all operating leases were:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 | | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| | | | | |
| (in millions) |
| Operating lease expense | $ | 23 | | | $ | 28 | | | $ | 29 | |
| Variable lease expense | 16 | | | 13 | | | 4 | |
| Operating cash flows for operating leases | 24 | | | 29 | | | 30 | |
Operating lease right-of-use asset reassessment(1) | — | | | (4) | | | — | |
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(1)For the year ended December 31, 2022, amount represents a reduction to our right-of-use assets and lease liability due to a change in discount rate upon a lease remeasurement.
Note 10: Income Taxes
We are a REIT for U.S. 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. To the extent we continue to remain qualified as a REIT, we generally will not be subject to U.S. federal (and state) income tax on taxable income generated by our REIT activities that we distribute annually to our stockholders. Accordingly, no provision for U.S. federal income taxes has been included in our accompanying consolidated financial statements for the years ended December 31, 2023, 2022 and 2021 related to our REIT activities other than taxes related to our sale of built-in gain property.
The components of our provision for income taxes were:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (in millions) |
| Current: | | | | | |
| U.S. Federal | $ | 5 | | | $ | 1 | | | $ | 5 | |
| State | 19 | | | 1 | | | (2) | |
| | | | | |
| Total current | 24 | | | 2 | | | 3 | |
| Deferred: | | | | | |
| U.S. Federal | 4 | | | — | | | (1) | |
| State | 10 | | | (2) | | | — | |
| | | | | |
| Total deferred | 14 | | | (2) | | | (1) | |
| Total provision for income taxes | $ | 38 | | | $ | — | | | $ | 2 | |
For the year ended December 31, 2023, the total provision for income taxes includes $28 million of income taxes associated with the effective exit from the Hilton San Francisco Hotels.
Reconciliations of our tax provision at the U.S. statutory rate to the provision for income taxes were:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | (in millions) |
| Statutory U.S. federal income tax provision (benefit) | $ | 30 | | | $ | 36 | | | $ | (94) | |
| State income taxes, net of U.S. federal tax benefit | 29 | | | 1 | | | — | |
| | | | | |
| Change in deferred tax asset valuation allowance | — | | | 4 | | | (22) | |
| | | | | |
| REIT income not subject to tax | (23) | | | (39) | | | 116 | |
| Derecognition and remeasurement of deferred taxes | — | | | (2) | | | (1) | |
| | | | | |
| Other | 2 | | | — | | | 3 | |
| Provision for income taxes | $ | 38 | | | $ | — | | | $ | 2 | |
Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities plus carryforward items. The composition of net deferred tax balances were as follows:
| | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| | (in millions) |
Deferred income tax assets(1) | $ | 1 | | | $ | — | |
Deferred income tax liabilities(2) | (24) | | | (9) | |
| Net deferred tax liability | $ | (23) | | | $ | (9) | |
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(1)Included within other assets in our consolidated balance sheets, net of valuation allowance.
(2)Included within other liabilities in our consolidated balance sheets.
The tax effects of the temporary differences and carryforwards that give rise to our net deferred tax liability were:
| | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| | (in millions) |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 49 | | | $ | 53 | |
| Deferred income | — | | | 4 | |
| Investments | 5 | | | 3 | |
| Interest expense limitation | 4 | | | — | |
| Other | 7 | | | 6 | |
| Total gross deferred tax assets | 65 | | | 66 | |
| Less: valuation allowance | (59) | | | (59) | |
| Deferred tax assets | 6 | | | 7 | |
| Deferred tax liabilities: | | | |
| Property and equipment | (16) | | | (3) | |
| Investments | (10) | | | (9) | |
| Accrued compensation | (2) | | | (4) | |
| Other | (1) | | | — | |
| Deferred tax liabilities | (29) | | | (16) | |
| Net deferred tax liability | $ | (23) | | | $ | (9) | |
As of December 31, 2023, we had U.S. federal and state net operating loss carryforwards of approximately $673 million, which resulted in deferred tax assets of $49 million. Our U.S. federal net operating loss carryforwards of approximately $267 million are not subject to expiration. Our U.S. state net operating loss carryforwards of approximately $406 million will begin to expire in 2030.
We made no cash distributions to our stockholders in 2021. The cash distributions to stockholders in 2023 and 2022 are characterized, for U.S. federal income tax purposes, as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| Common distributions (per share): | | | |
| Ordinary dividends | $ | 0.000000 | | | $ | 0.000000 | |
Capital gain distributions(1) | 2.150000 | | | 0.280000 | |
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(1)Capital gain distribution disclosure pursuant to Treasury Regulation §1.1061-6(c). The following additional information relates to the capital gain distributions for calendar years 2023 and 2022, as reported on Park Hotels & Resorts Inc. Form 1099-DIV, Box 2a. For purposes of Internal Revenue Code Section 1061, which is generally applicable to direct and indirect holders of “applicable partnership interests”: (i) the “One Year Amounts” are $0.000000 per share, and (ii) the “Three Year Amounts” are $0.000000 per share, with respect to both the 2023 and 2022 capital gain distributions.