Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements, related notes included thereto and Item 1A., “Risk Factors,” appearing elsewhere in this Annual Report on Form 10-K. For the discussion and analysis of our 2021 financial condition and results of operations compared to 2022, refer to Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.
Overview
We have a diverse portfolio of iconic and market-leading hotels and resorts with significant underlying real estate value. We currently have interests in 43 hotels consisting of premium-branded hotels and resorts with over 26,000 rooms, of which over 86% are luxury and upper upscale and are located in prime U.S. markets and its territories. Our high-quality portfolio currently includes hotels mostly in major urban and convention areas, such as New York City, Washington, D.C., Chicago, Boston, New Orleans and Denver; and premier resorts in key leisure destinations, including Hawaii, Orlando, Key West and Miami Beach; as well as hotels in select airport and suburban locations.
Our objective is to be the preeminent lodging real estate investment trust (“REIT”), focused on consistently delivering superior, risk-adjusted returns to stockholders through active asset management and a thoughtful external growth strategy while maintaining a strong and flexible balance sheet. As a pure-play real estate company with direct access to capital and independent financial resources, we believe our enhanced ability to implement compelling return on investment initiatives within our portfolio represents a significant embedded growth opportunity. Finally, given our scale and investment expertise, we believe we will be able to successfully execute single-asset and portfolio acquisitions and dispositions to further enhance the value and diversification of our assets throughout the lodging cycle, including potentially taking advantage of the economies of scale that could come from consolidation in the lodging REIT industry.
We operate our business through two operating segments, our consolidated hotels and unconsolidated hotels. Our consolidated hotels operating segment is our only reportable segment. Refer to Note 14: "Business Segment Information" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information regarding our operating segments.
Basis of Presentation
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”). Refer to Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information.
Outlook
Economic disruptions, including as a result of supply chain disruptions, elevated interest rates and elevated rates of inflation, may adversely affect our business. Inflationary concerns can affect both consumer sentiment and demand for travel, as well as increase labor or other costs to maintain or operate hotels that cannot be reduced without adversely affecting business growth or hotel value. However, we have relied on the performance of our hotels and active asset management to mitigate the effects of inflation, which is expected to continue to stabilize, and current macroeconomic uncertainty. During 2023, we continued to experience improvements in overall demand across our portfolio, although ADR growth has slowed as the industry recovery has stabilized and seasonal patterns have normalized. While there can be no assurances that we will not experience further fluctuations in hotel revenues or earnings at our hotels due to inflation and other macroeconomic factors, local economic factors and demand, a potential economic slowdown or a recession and geopolitical conflicts, we expect the positive momentum to continue for the remainder of 2024 based on current demand trends, expected increases in city-wide events and as demand from international travel continues to improve.
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. The effective exit from the Hilton San Francisco Hotels resulted in a required distribution. Thus, our Board of Directors (the "Board") declared a special cash dividend of $0.77 per share on October 27, 2023, which was paid on January 16, 2024 to stockholders of record as of December 29, 2023.
Principal Components of and Factors Affecting Our Results of Operations
Revenues
Revenues from our hotels are primarily derived from two categories of customers: transient and group, which historically have accounted for approximately two thirds and one third, respectively, of our rooms revenue. Transient guests are individual travelers who are traveling for business or leisure. Group guests are traveling for group events that reserve rooms for meetings, conferences or social functions sponsored by associations, corporate, social, military, educational, religious or other organizations. Group business usually includes a block of room accommodations, as well as other ancillary services, such as meeting facilities, catering and banquet services. A majority of our food and beverage sales and other ancillary services are provided to customers who also are occupying rooms at our hotels. As a result, occupancy affects all components of revenues from our hotels.
Principal Components
Rooms. Represents the sale of room rentals at our hotels and accounts for a substantial majority of our total revenue.
Food and beverage. Represents revenue from group functions, which may include both banquet revenue and audio and visual revenue, as well as revenue from outlets such as restaurants and lounges at our hotels.
Ancillary hotel. Represents revenue for guest services provided at our hotels, including parking, telecommunications, golf course and spa. Also includes tenant leases and other rental revenue.
Other. Primarily related to support services we provide to HGV timeshare properties that have a presence within or adjacent to certain of our hotels, which include cost reimbursements for the costs of providing housekeeping, landscaping, general maintenance and other services plus a fee representing a percentage of cost reimbursements.
Factors Affecting our Revenues
Consumer demand. Consumer demand for our products and services is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Leading indicators of demand include gross domestic product, non-residential fixed investment and the consumer price index. Declines in consumer demand due to adverse general economic conditions, reductions in travel patterns, lower consumer confidence, outbreaks of pandemic or contagious diseases, and adverse political conditions can lower the revenues and profitability of our hotels. Further, competition for guests and the supply of services at our hotels affect our ability to sustain or increase rates charged to customers at our hotels. As a result, changes in consumer demand and general business cycles have historically subjected and could in the future subject our revenues to significant volatility. In addition, leisure travelers currently make up the majority of our transient demand. Therefore, we will be significantly more affected by trends in leisure travel than trends in business travel.
Supply. New room supply is an important factor that can affect the lodging industry’s performance. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. The addition of new competitive hotels and resorts affects the ability of existing hotels and resorts to sustain or grow RevPAR, and thus profits. New development is determined largely by construction costs, the availability of financing and expected performance of existing hotels and resorts.
Expenses
Principal Components
Rooms. These costs include housekeeping, reservation systems, room supplies, laundry services at our hotels and front desk costs.
Food and beverage. These costs primarily include food, beverage and the associated labor and will correlate closely with food and beverage revenues.
Other departmental and support. These costs include labor and other costs associated with other ancillary revenue, such as parking, telecommunications, golf course and spa, as well as labor and other costs associated with administrative departments, sales and marketing, repairs and minor maintenance and utility costs. Additionally, these costs include franchise fees and are generally computed as a percentage of rooms revenues. Refer to Item 1: “Business – Our Principal Agreements,” included elsewhere in this Annual Report on Form 10-K for additional information on franchise fees.
Other property. These costs consist primarily of real and personal property taxes, other local taxes, ground rent, equipment rent and property insurance.
Management fees. Base management fees are computed as a percentage of gross revenue. Incentive management fees generally are paid if specified financial performance targets are achieved. Refer to Item 1: “Business – Our Principal Agreements,” included elsewhere in this Annual Report on Form 10-K for additional information.
Casualty and impairment gains or losses. Casualty losses are expenses that represent losses incurred resulting from property damage or destruction caused by any sudden, unexpected or unusual event such as a hurricane. Casualty gains are insurance proceeds for property damage claims that are in excess of any associated impairment loss recognized and clean-up and recovery costs incurred, less any insurance deductible. Impairment losses are non-cash expenses that are recognized when circumstances indicate that the carrying value of a long-lived asset is not recoverable. An impairment loss is recognized for the excess of the carrying value over the fair value of the asset.
Depreciation and amortization. These are non-cash expenses that primarily consist of depreciation of fixed assets such as buildings, furniture, fixtures and equipment at our hotels, as well as amortization of finite lived intangible assets.
Corporate general & administrative. These costs include general and administrative expenses, including costs associated with the potential disposition of hotels. General and administrative expenses consist primarily of compensation expense for our corporate staff and personnel supporting our business, professional fees, travel and entertainment expenses, and office administrative and related expenses.
Other. These costs include costs to provide support services to certain HGV timeshare properties located at some of our hotel properties.
Factors Affecting our Costs and Expenses
Variable expenses. Expenses associated with our room expense and food and beverage expense are mainly affected by occupancy and correlate closely with their respective revenues. These expenses can increase based on increases in salaries and wages, as well as on the level of service and amenities that are provided. Additionally, food and beverage expense is affected by the mix of business between banquet, catering and outlet sales.
Fixed expenses. Many of the other expenses associated with our hotels are relatively fixed. These expenses include portions of rent expense, property taxes and insurance. Since we generally are unable to decrease these costs significantly or rapidly when demand for our hotels decreases, any resulting decline in our revenues can have a greater adverse effect on our net cash flow, margins and profits. This effect can be especially pronounced during periods of economic contraction or slow economic growth. The effectiveness of any cost-cutting efforts is limited by the amount of fixed costs inherent in our business. As a result, we may not be able to successfully offset revenue reductions through cost cutting. The individuals employed at certain of our hotels are party to collective bargaining agreements with our hotel managers that may also limit the manager’s ability to make timely staffing or labor changes in response to declining revenues. In addition, any efforts to reduce costs, or to defer or cancel capital improvements, could adversely affect the economic value of our hotels. We have taken steps to reduce our fixed costs to levels we believe are appropriate to maximize profitability and respond to market conditions without jeopardizing the overall customer experience or the value of our hotels.
Changes in depreciation and amortization expense. Changes in depreciation expense are due to renovations of existing hotels, acquisition or development of new hotels, the disposition of existing hotels through sale or closure or
changes in estimates of the useful lives of our assets. As we place new assets into service, we will be required to recognize additional depreciation expense on those assets.
Key Business Metrics Used by Management
Occupancy
Occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels. Occupancy measures the utilization of our hotels’ available capacity. We use occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable ADR levels as demand for rooms increases or decreases.
Average Daily Rate
ADR represents rooms revenue divided by total number of room nights sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. ADR is a commonly used performance measure in the hotel industry, and we use ADR to assess pricing levels that we are able to generate by type of customer, as changes in rates have a more pronounced effect on overall revenues and incremental profitability than changes in occupancy, as described above.
Revenue per Available Room
RevPAR represents rooms revenue divided by the total number of room nights available to guests for a given period. We consider RevPAR to be a meaningful indicator of our performance as it provides a metric correlated to two primary and key factors of operations at a hotel or group of hotels: occupancy and ADR. RevPAR is also a useful indicator in measuring performance over comparable periods.
Comparable Hotels Data
We present certain data for our hotels on a comparable hotel basis as supplemental information for investors. We present comparable hotel results to help us and our investors evaluate the ongoing performance of our comparable hotels. Our comparable hotels data includes results from hotels that were active and operating in our portfolio since January 1st of the previous year and excludes results from property dispositions that have occurred through December 31, 2023.
Non-GAAP Financial Measures
We also evaluate the performance of our business through certain other financial measures that are not recognized under U.S. GAAP. Each of these non-GAAP financial measures should be considered by investors as supplemental measures to GAAP performance measures such as total revenues, operating profit and net income (loss).
EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA
EBITDA, presented herein, reflects net income (loss) excluding depreciation and amortization, interest income, interest expense, income taxes and also interest expense, income tax and depreciation and amortization included in equity in earnings (losses) from investments in affiliates.
Adjusted EBITDA, presented herein, is calculated as EBITDA, further adjusted to exclude the following items that are not reflective of our ongoing operating performance or incurred in the normal course of business, and thus, excluded from management's analysis in making day-to-day operating decisions and evaluations of our operating performance against other companies within our industry:
•Gains or losses on sales of assets for both consolidated and unconsolidated investments;
•Costs associated with hotel acquisitions or dispositions expensed during the period;
•Severance expense;
•Share-based compensation expense;
•Impairment losses and casualty gains or losses; and
•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, 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.
EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
We believe that EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA are among the measures used by our management team to make day-to-day operating decisions and evaluate our operating performance between periods and between REITs by removing the effect of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results; and (ii) EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.
EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss) or other methods of analyzing our operating performance and results as reported under U.S. GAAP. Some of these limitations are:
•EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect our interest expense;
•EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect our income tax expense;
•EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations; and
•other companies in our industry may calculate EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA differently, limiting their usefulness as comparative measures.
We do not use or present EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA as measures of our liquidity or cash flow. These measures have limitations as analytical tools and should not be considered either in isolation or as a substitute for cash flow or other methods of analyzing our cash flows and liquidity as reported under U.S. GAAP. Some of these limitations are:
•EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect the cash requirements necessary to service interest or principal payments, on our indebtedness;
•EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect the cash requirements to pay our taxes;
•EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; and
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA do not reflect any cash requirements for such replacements.
Because of these limitations, EBITDA, Adjusted EBITDA and Hotel Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
The following table provides a reconciliation of Net income to Hotel Adjusted EBITDA:
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 |
| | | |
| | (in millions) |
| Net income | $ | 106 | | | $ | 173 | |
| Depreciation and amortization expense | 287 | | | 269 | |
| Interest income | (38) | | | (13) | |
| Interest expense | 207 | | | 217 | |
| Interest expense associated with hotels in receivership | 45 | | | 30 | |
| Income tax expense | 38 | | | — | |
| Interest expense, income tax and depreciation and amortization included in equity in earnings from investments in affiliates | 8 | | | 9 | |
| EBITDA | 653 | | | 685 | |
Gain on sales of assets, net(1) | (15) | | | (22) | |
Gain on derecognition of assets(2) | (221) | | | — | |
Gain on sale of investments in affiliates(3) | (3) | | | (92) | |
| Share-based compensation expense | 18 | | | 17 | |
| Impairment and casualty loss | 204 | | | 6 | |
| Other items | 23 | | | 12 | |
| Adjusted EBITDA | 659 | | | 606 | |
| Less: Adjusted EBITDA from investments in affiliates | (24) | | | (25) | |
Add: All other(4) | 51 | | | 49 | |
| Hotel Adjusted EBITDA | $ | 686 | | | $ | 630 | |
____________________________________________________________________________________
(1)For the year ended December 31, 2022, includes a gain of $9 million on the sale of the DoubleTree Las Vegas Hotel included in equity in earnings (losses) from investments in affiliates.
(2)For the year ended December 31, 2023, represents the gain from derecognizing the Hilton San Francisco Hotels from our consolidated balance sheet in October 2023, when the receiver took control of the hotels.
(3)Included in other gain (loss), net.
(4)Includes other revenues and other expenses, non-income taxes on TRS leases included in other property expenses and corporate general and administrative expenses.
Nareit FFO attributable to stockholders and Adjusted FFO attributable to stockholders
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 (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. Adjustments for unconsolidated joint ventures are calculated to reflect our pro rata share of the FFO of those entities on the same basis. As noted by Nareit in its December 2018 “Nareit Funds from Operations White Paper – 2018 Restatement,” since real estate values historically have risen or fallen with market conditions, many industry investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. For these reasons, Nareit adopted the FFO metric in order to promote an industry-wide measure of REIT operating performance. We believe Nareit FFO provides useful information to investors regarding our operating performance and can facilitate comparisons of operating performance between periods and between REITs. Our presentation may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current Nareit definition, or that interpret the current Nareit
definition differently than we do. We calculate Nareit FFO per diluted share as our Nareit FFO divided by the number of fully diluted shares outstanding during a given operating period.
We also present Adjusted FFO attributable to stockholders and Adjusted FFO per diluted share when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance. Management historically has made the adjustments detailed below in evaluating our performance and in our annual budget process. We believe that the presentation of Adjusted FFO provides useful supplemental information that is beneficial to an investor’s complete understanding of our operating performance. We adjust Nareit FFO attributable to stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to stockholders:
•Costs associated with hotel acquisitions or dispositions expensed during the period;
•Severance expense;
•Share-based compensation expense;
•Casualty gains or losses; and
•Other items that we believe are not representative of our current or future operating performance.
The following table provides a reconciliation of Net income attributable to stockholders to Nareit FFO attributable to stockholders and Adjusted FFO attributable to stockholders: | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 |
| | | |
| | (in millions, except per share amounts) |
| Net income attributable to stockholders | $ | 97 | | | $ | 162 | |
| Depreciation and amortization expense | 287 | | | 269 | |
| Depreciation and amortization expense attributable to noncontrolling interests | (4) | | | (4) | |
| Gain on sales of assets, net | (15) | | | (13) | |
Gain on derecognition of assets(1) | (221) | | | — | |
Gain on sale of investments in affiliates(2) | (3) | | | (92) | |
| Impairment loss | 202 | | | — | |
| Equity investment adjustments: | | | |
| Equity in earnings from investments in affiliates | (11) | | | (15) | |
| Pro rata FFO of investments in affiliates | 14 | | | 12 | |
| Nareit FFO attributable to stockholders | 346 | | | 319 | |
| Casualty loss | 2 | | | 6 | |
| Share-based compensation expense | 18 | | | 17 | |
Interest expense associated with hotels in receivership(3) | 20 | | | — | |
Other items(4) | 53 | | | 10 | |
| Adjusted FFO attributable to stockholders | $ | 439 | | | $ | 352 | |
Nareit FFO per share – Diluted(5) | $ | 1.61 | | | $ | 1.40 | |
Adjusted FFO per share – Diluted(5) | $ | 2.04 | | | $ | 1.54 | |
____________________________________________________________________________________
(1)For the year ended December 31, 2023, represents the gain from derecognizing the Hilton San Francisco Hotels from our consolidated balance sheet in October 2023, when the receiver took control of the hotels.
(2)Included in other gain (loss), net.
(3)Reflects incremental default interest expense and late payment administrative fees associated with the default of the SF Mortgage Loan beginning in June 2023 and all interest expense that has accrued since the Hilton San Francisco Hotels were placed into receivership at the end of October 2023.
(4)For the year ended December 31, 2023, includes $28 million of income tax expense associated with the effective exit from the Hilton San Francisco Hotels.
(5)Per share amounts are calculated based on unrounded numbers.
Results of Operations
Property dispositions have had a significant effect on the year-over-year comparability of our operations as further illustrated in the table of Hotel Revenues and Operating Expenses below. Our non-comparable hotels consists of one hotel sold and one hotel returned to the lessor upon early termination of the ground lease during 2023, five consolidated hotels sold during 2022 and the two Hilton San Francisco Hotels, which were placed into receivership at the end of October 2023. The results of operations of these hotels are included in our consolidated results only during our period of ownership. Changes in our operating revenues and expenses from these non-comparable hotels are shown below.
Hotel Revenues and Operating Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | Change from Non-Comparable Hotels |
| | 2023 | | 2022 | | Change | | | | Change from Comparable Hotels(1) | | Change from the San Francisco Hotels | | Change from Other Non-Comparable Hotels |
| | (in millions) | | |
| Rooms revenue | $ | 1,653 | | | $ | 1,559 | | | $ | 94 | | | | | $ | 122 | | | $ | 14 | | | $ | (42) | |
| Food and beverage revenue | 696 | | | 606 | | | 90 | | | | | 98 | | | 2 | | | (10) | |
| Ancillary hotel revenue | 264 | | | 261 | | | 3 | | | | | 6 | | | (1) | | | (2) | |
| Rooms expense | 449 | | | 408 | | | 41 | | | | | 48 | | | 2 | | | (9) | |
| Food and beverage expense | 501 | | | 449 | | | 52 | | | | | 58 | | | — | | | (6) | |
| Other departmental and support expense | 635 | | | 613 | | | 22 | | | | | 40 | | | (1) | | | (17) | |
| Other property expense | 241 | | | 223 | | | 18 | | | | | 21 | | | 1 | | | (4) | |
| Management fees expense | 126 | | | 115 | | | 11 | | | | | 11 | | | 1 | | | (1) | |
____________________________________________________________________________________
(1)Change from our comparable hotels primarily relates to the market-specific conditions discussed below.
Group, transient, contract and other rooms revenue for the year ended December 31, 2023, as well as the change for each segment compared to 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | Change from Non-Comparable Hotels |
| | 2023 | | 2022 | | Change | | | | Change from Comparable Hotels(1) | | Change from the San Francisco Hotels | | Change from Non-Comparable Hotels |
| | (in millions) | | |
| Group rooms revenue | $ | 480 | | | $ | 403 | | | $ | 77 | | | | | $ | 67 | | | $ | 15 | | | $ | (5) | |
| Transient rooms revenue | 1,043 | | | 1,052 | | | (9) | | | | | 31 | | | (7) | | | (33) | |
| Contract rooms revenue | 92 | | | 71 | | | 21 | | | | | 19 | | | 5 | | | (3) | |
| Other rooms revenue | 38 | | | 33 | | | 5 | | | | | 5 | | | 1 | | | (1) | |
| Rooms revenue | $ | 1,653 | | | $ | 1,559 | | | $ | 94 | | | | | $ | 122 | | | $ | 14 | | | $ | (42) | |
____________________________________________________________________________________
(1)Change from our comparable hotels primarily relates to the market-specific conditions discussed below.
Market-Specific Conditions
The increases in hotel revenues and operating expenses from our comparable hotels were primarily a result of significant occupancy increases in certain of our largest markets. During the year ended December 31, 2023, our Hawaii, New York, Chicago, New Orleans, Washington, D.C. and Boston markets experienced the most significant changes compared to the same period in 2022. Combined occupancy and ADR at our two Hawaii hotels increased 5.8 percentage points and 3.8%, respectively, for the year ended December 31, 2023 compared to same period in 2022, driven by increases in group and domestic transient demand primarily at the Hilton Hawaiian Village Waikiki Beach Resort, which experienced increases in both occupancy and ADR of 5.4 percentage points and 5.0%, respectively. The New York Hilton Midtown benefited from increases in group and transient demand resulting in increases in occupancy of 18.9 percentage
points for the year ended December 31, 2023 compared to the same period in 2022. Combined occupancy at our Chicago hotels increased 6.5 percentage points for the year ended December 31, 2023 compared to the same period in 2022 due to increases in transient and group demand, which also drove a 25% increase in food and beverage revenue at the Hilton Chicago. Occupancy at our New Orleans hotel increased 4.3 percentage points for the year ended December 31, 2023 compared to the same period in 2022 driven by increases in group demand, which also resulted in an increase in food and beverage revenue of 25%. Combined occupancy and ADR at our Washington D.C. hotels increased 8.4 percentage points and 12.2%, respectively, for the year ended December 31, 2023 compared to the same period in 2022 driven by increases in both group and transient demand. Combined occupancy and ADR at our Boston hotels increased 4.4 percentage points and 7.1%, respectively for the year ended December 31, 2023 compared to the same period in 2022 driven by increases in both group and transient demand.
During the year ended December 31, 2023, hotel revenues and operating expenses for the Casa Marina Key West, Curio Collection, decreased $31 million and $11 million, respectively, for the year ended December 31, 2023 compared to the same period in 2022 as the hotel's operations were suspended, or partially suspended, due to renovations from May 2023 through December 2023.
Other revenue and Other operating expense
During the year ended December 31, 2023, other revenue increased by $10 million and other operating expense increased by $11 million due to an increase in business and related costs that are allocated to HGV pursuant to service arrangements with certain of our hotels.
Corporate general and administrative | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Percent Change |
| | (in millions) | | |
| General and administrative expenses | $ | 45 | | | $ | 43 | | | 4.7 | % |
| Share-based compensation expense | 18 | | | 17 | | | 5.9 | % |
| Other items | 2 | | | 3 | | | (33.3) | % |
| Total corporate general and administrative | $ | 65 | | | $ | 63 | | | 3.2 | % |
Impairment and casualty loss
During the year ended December 31, 2023, we recognized an impairment loss of approximately $202 million. Refer to Note 8: "Fair Value Measurements" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information.
In September 2022, Hurricanes Ian and Fiona caused minimal damage and disruption at our hotels in Florida and Puerto Rico, respectively, and we recognized a casualty loss of approximately $5 million for costs to repair and remediate damage at these hotels.
Gain (loss) on sales of assets, net
During the years ended December 31, 2023 and 2022, we recognized a net gain of $15 million and $13 million, respectively, primarily as a result of the sales of our consolidated hotels.
Gain on derecognition of assets
During the year ended December 31, 2023, we recognized a gain of $221 million from the derecognition of the Hilton San Francisco Hotels from our consolidated balance sheet in October 2023, when the receiver took control of the hotels. Refer to Note 7: "Debt" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information.
Non-operating Income and Expenses
Interest income
Interest income increased $25 million during the year ended December 31, 2023 compared to the same period in 2022 as a result of an increase in interest rates, which more than offset a decrease in average cash balances.
Interest expense
Interest expense decreased $10 million during the year ended December 31, 2023 compared to the same period in 2022 due to the full repayments in December 2022 of our unsecured delayed draw term loan facility ("2019 Term Facility") and the $26 million mortgage loan secured by the Hilton Checkers, as well as the full repayment of the $75 million mortgage loan secured by the W Chicago - City Center in June 2023, partially offset by $50 million of borrowings under our Revolver in December 2022, which was subsequently repaid in February 2023. Interest expense associated with our debt for the years ended December 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Percent Change |
| | (in millions) | | |
HHV Mortgage Loan(1) | $ | 55 | | | $ | 55 | | | — | % |
| Other mortgage loans | 19 | | | 21 | | | (9.5) | % |
| Revolver | 4 | | | 3 | | | 33.3 | % |
2019 Term Facility(2) | — | | | 3 | | | (100.0) | % |
2025 Senior Notes(3) | 49 | | | 49 | | | — | % |
2028 Senior Notes(3) | 43 | | | 43 | | | — | % |
2029 Senior Notes(3) | 36 | | | 36 | | | — | % |
| Other | 1 | | | 7 | | | (85.7) | % |
| Total interest expense | $ | 207 | | | $ | 217 | | | (4.6) | % |
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(1)In October 2016, we entered into a $1.275 billion CMBS loan secured by the Hilton Hawaiian Village Waikiki Beach Resort (“HHV Mortgage Loan”).
(2) In December 2022, we fully repaid our 2019 Term Facility.
(3)In May and September 2020, Park Intermediate Holdings LLC (our “Operating Company”), PK Domestic Property LLC, an indirect subsidiary of the Company (“PK Domestic”), and PK Finance Co-Issuer Inc. (“PK Finance”) issued an aggregate of $650 million of senior notes due 2025 (“2025 Senior Notes”) and an aggregate of $725 million of senior notes due 2028 (“2028 Senior Notes”), respectively. Additionally, in May 2021, our Operating Company, PK Domestic and PK Finance issued an aggregate of $750 million senior notes due 2029 ("2029 Senior Notes," collectively with the 2025 Senior Notes and 2028 Senior Notes, the "Senior Notes").
Our current debt outstanding is approximately $3.8 billion, excluding the SF Mortgage Loan, at a weighted average interest rate of 5.2%, all of which is fixed-rate debt, refer to Item 7A: “Interest Rate Risk” and Note 7: "Debt" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information.
Interest expense associated with hotels in receivership
Interest expense on the SF Mortgage Loan increased $15 million due to accrued default interest beginning in June 2023 when we ceased making payments on the loan. 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.
Other gain (loss), net
During the year ended December 31, 2023, we recognized a gain of approximately $4 million primarily due to an early termination fee received from the lessor to terminate the lease for the Embassy Suites Phoenix Airport hotel.
During the year ended December 31, 2022, we recognized a gain of $96 million, which is primarily due to the sale of our ownership interests in the joint ventures that own and operate the Hilton San Diego Bayfront. Refer to Note 3: "Acquisitions and Dispositions" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information.
Income tax expense
During the year ended December 31, 2023, we recognized income tax expense of $38 million, primarily related to the effective exit from the Hilton San Francisco Hotels in October 2023, which resulted in incremental income tax expense of $28 million. The remaining income tax expense is primarily related to our TRSs.
Liquidity and Capital Resources
Overview
We seek to maintain sufficient amounts of liquidity with an appropriate balance of cash, debt and equity to provide financial flexibility. As of December 31, 2023, we had total cash and cash equivalents of $717 million and $33 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.
Throughout 2023, we continued to experience improvements in overall demand across our portfolio and expect the improvement to continue through 2024 based on current demand trends, including an increase in city-wide events and from international travel. We continue to mitigate the effects of macroeconomic and inflationary pressures through active asset management.
With approximately $950 million available under our Revolver and $717 million in existing cash and cash equivalents, we have sufficient liquidity to pay our debt maturities and to fund other liquidity obligations over the next 12 months and beyond. We fully repaid the $75 million mortgage loan secured by the W Chicago - City Center in June 2023 and the $50 million of borrowings under our Revolver in February 2023. Excluding the SF Mortgage Loan for which we ceased to make debt service payments in June 2023 and is in default, we have no significant maturities until June 2025. Refer to Note 7: "Debt" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information on the SF Mortgage Loan. We may also take actions to improve our liquidity, such as the issuance of additional debt, equity or equity-linked securities, if we determine that doing so would be beneficial to us. However, there can be 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.
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 contractually due principal payments on our outstanding indebtedness, capital expenditures for in-progress renovations and maintenance at our hotels, corporate general and administrative expenses and dividends to our stockholders. During 2023, we declared dividends of $2.15 per share, including dividends of $1.70 per share during the fourth quarter of 2023, which was paid on January 16, 2024, consisting of a special cash dividend of $0.77 per share from the effective exit from the Hilton San Francisco Hotels and our fourth quarterly dividend of $0.93 based on 2023 operating results. In addition, we declared a first quarter dividend of $0.25 per share in February 2024 to be paid on April 15, 2024 to stockholders of record as of March 29, 2024. Many of the other expenses associated with our hotels are relatively fixed, including portions of rent expense, property taxes and insurance. Since we generally are unable to decrease these costs significantly or rapidly when demand for our hotels decreases, the resulting decline in our revenues can have a greater adverse effect on our net cash flow, margins and profits. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements at our hotels, and costs associated with potential acquisitions.
Our commitments to fund capital expenditures for renovations and maintenance at our hotels will be funded by cash and cash equivalents, restricted cash to the extent permitted by our lending agreements and cash flow from operations. We have construction contract commitments of approximately $90 million for capital expenditures at our properties, of which $16 million relates to projects at the Bonnet Creek complex, including the meeting space expansion project and renovation of guestrooms, existing meeting space, lobbies, golf course and other recreational amenities, and $10 million relates to the complete renovation of all guestrooms, public spaces, and certain hotel infrastructure at the Casa Marina Key West, Curio Collection. Our contracts contain clauses that allow us to cancel all or some portion of the work. Additionally, we have established reserves for capital expenditures (“FF&E reserve”) in accordance with our management and certain debt agreements. Generally, these agreements require that we fund 4% of hotel revenues into an FF&E reserve, unless such amounts have been incurred.
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. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments.
Stock Repurchase Program
In February 2023, our Board terminated a previous $300 million stock repurchase program that was approved in February 2022 (the "February 2022 Stock Repurchase Program") and authorized and approved a new stock repurchase program allowing us to repurchase up to $300 million of our common stock over a two-year period ending in February 2025 (the "February 2023 Stock Repurchase Program" and collectively with the February 2022 Stock Repurchase Program the "Stock Repurchase Programs"), subject to any applicable limitations or restrictions set forth in our credit facility and indentures related to our senior notes. Stock repurchases may 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 any future 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. During the year ended December 31, 2023, we repurchased in aggregate under the Stock Repurchase Programs approximately 14.6 million shares of our common stock for a total purchase price of $180 million, and as of December 31, 2023, $150 million remained available for stock repurchases under the February 2023 Stock Repurchase Program.
Sources and Uses of Our Cash and Cash Equivalents
The following tables summarize our net cash flows and key metrics related to our liquidity:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | Percent Change |
| | (in millions) | | |
| Net cash provided by operating activities | $ | 503 | | | $ | 409 | | | 23.0 | % |
| Net cash (used in) provided by investing activities | (217) | | | 87 | | | 349.4 | % |
| Net cash used in financing activities | (475) | | | (320) | | | 48.4 | % |
Operating Activities
Cash flow provided by operating activities are primarily generated from the operating income generated at our hotels. The $94 million increase in net cash provided by operating activities for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to an increase in cash from operations as a result of an increase in occupancy at our hotels, a decrease in cash paid for interest of $30 million, primarily due to the cessation of debt service payments toward the SF Mortgage Loan, and an increase in interest income of $25 million due to an increase in interest rates.
Investing Activities
The $217 million in net cash used in investing activities for the year ended December 31, 2023 was primarily attributable to $296 million in capital expenditures and land acquisitions and a $30 million reduction of restricted cash associated with the derecognition of the Hilton San Francisco hotels, partially offset by $116 million of net proceeds from the sale of one of our hotels.
The $87 million in net cash provided by investing activities for the year ended December 31, 2022 was primarily attributable to $244 million of net proceeds from the sale of five of our consolidated hotels and our ownership interests in the joint ventures that own and operate one hotel in addition to $11 million in distributions from the joint venture that sold one of our unconsolidated hotels, partially offset by $168 million in capital expenditures.
Financing Activities
The $475 million in net cash used in financing activities for the year ended December 31, 2023 was primarily attributable to the repurchase of approximately 14.6 million shares of our common stock for approximately $180 million, $152 million of dividends paid and $133 million of debt repayments.
The $320 million in net cash used in financing activities for the year ended December 31, 2022 was primarily attributable to the repurchase of approximately 12.7 million shares of our common stock for $227 million and $142 million
of debt repayments, partially offset by $50 million of borrowings under our Revolver and $30 million of proceeds from refinanced mortgage debt for one of our consolidated joint ventures.
Dividends
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 gains, to our stockholders on an annual basis. Therefore, as a general matter, after consideration of the allowable use of our net operating loss carryforward, we intend to make distributions of all, or substantially all, of our REIT taxable income (including net capital gains) to our stockholders, and, as a result, we will generally not be required to pay tax on our income. Consequently, before consideration of the use of any net operating loss carryforward, 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.
We declared the following dividends to holders of our common stock during 2023:
| | | | | | | | | | | | | | |
| Record Date | | Payment Date | | Dividend per Share |
| March 31, 2023 | | April 17, 2023 | | $ | 0.15 | |
| June 30, 2023 | | July 17, 2023 | | $ | 0.15 | |
| September 29, 2023 | | October 16, 2023 | | $ | 0.15 | |
December 29, 2023 | | January 16, 2024(1) | | $ | 1.70 | |
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(1) Of the full $1.70 per share payment, $0.93 per share represented the quarterly dividend for the fourth quarter based on 2023 results of operations. The remaining $0.77 per share was attributable to the required distribution from the effective exit from the Hilton San Francisco Hotels.
Debt
As of December 31, 2023, our total indebtedness was approximately $3.8 billion, including approximately $2.1 billion of our Senior Notes, and excluding both the $725 million SF Mortgage Loan on which we ceased making debt service payments in June 2023 and approximately $164 million of our share of debt from 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. Refer to Note 7: "Debt" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information.
Critical Accounting Estimates
The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in our historical consolidated financial statements and accompanying footnotes. We believe that of our significant accounting policies, which are described in Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our audited consolidated financial statements included elsewhere within this Annual Report on Form 10-K, the following accounting policies are critical because they involve a higher degree of judgment, and the estimates required to be made were based on assumptions that are inherently uncertain. As a result, these accounting policies could materially affect our financial position, results of operations and related disclosures. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that are believed to reflect the current circumstances. While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material effect on our financial position or results of operations.
Acquisitions
We evaluate each of our acquisitions to determine if it is as an asset acquisition or a business combination. An asset acquisition occurs 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, the total cash consideration, including transaction costs is allocated to the individual assets acquired and liabilities assumed, respectively, on a relative fair value basis. In a business combination, the assets acquired and liabilities assumed are measured at fair value. We evaluate several 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. Changes to these factors could affect the measurement of assets and liabilities.
Impairment of Long-Lived Assets with Finite Lives
We evaluate the carrying value of our property and equipment and intangible assets with finite lives by comparing the expected undiscounted future cash flows to the net book value of the assets if we determine there are indicators of potential impairment. If it is determined that the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is recorded in our consolidated statements of comprehensive income (loss) as an impairment loss.
As part of the process described above, we exercise judgment to:
•determine if there are indicators of impairment present. Factors we consider when making this determination include assessing the overall effect of trends in the hospitality industry and the general economy, historical experience, capital costs and other asset-specific information;
•determine the projected undiscounted future cash flows when indicators of impairment are present. Judgment is required when developing projections of future revenues and expenses based on estimated growth rates over the expected hold period of the asset group. These estimated growth rates are based on historical operating results, as well as various internal projections and external sources; and
•determine the asset fair value when required. In determining the fair value, we often use internally-developed discounted cash flow models. Assumptions used in the discounted cash flow models include estimating cash flows, which may require us to adjust for specific market conditions, as well as capitalization rates, which are based on location, property or asset type, market-specific dynamics and overall economic performance. The discount rate takes into account our weighted average cost of capital according to our capital structure and other market specific considerations.
Changes in estimates and assumptions used in our impairment testing of property and equipment and intangible assets with finite lives could result in future impairment losses, which could be material.
We did not identify any additional property and equipment and intangible assets with finite lives with indicators of impairment for which an additional 10% change in our estimates of undiscounted future cash flows or other significant assumptions would result in material impairment losses.
Income Taxes
We use a prescribed more-likely-than-not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return if there is uncertainty in income taxes recognized in the financial statements. Assumptions and estimates are used to determine the more-likely-than-not designation. Changes to these assumptions and estimates can lead to an additional income tax expense (benefit), which can materially change our consolidated financial statements.
Consolidation
We use judgment when evaluating whether we have a controlling financial interest in an entity, including the assessment of the importance of rights and privileges of the partners based on voting rights, as well as financial interests in an entity that are not controllable through voting interests. If the entity is considered to be a variable interest entity (“VIE”), we use judgment determining 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 interest in the entity. Changes to judgments used in evaluating our partnerships and other investments could materially affect our consolidated financial statements.
