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 2019 financial condition and results of
operations compared to 2020, 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, 2020.
Overview
We have a diverse portfolio of iconic and market-leading hotels and resorts with
significant underlying real estate value. We currently hold investments in
entities that have ownership or leasehold interests in 54 hotels, consisting of
premium-branded hotels and resorts with approximately 32,000 rooms, of which
over 86% are luxury and upper upscale and all are located in prime U.S. markets
and its territories. Our high-quality portfolio includes hotels in major urban
and convention areas, such as New York City, Washington, D.C., Chicago, San
Francisco, Boston, New Orleans and Denver; premier resorts in key leisure
destinations, including Hawaii, Orlando, Key West and Miami Beach; and hotels
adjacent to major gateway airports, such as Los Angeles International, Boston
Logan International and Miami International, as well as hotels in select
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: “Geographic and 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.
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COVID-19 Operational Update
The global outbreak of a novel strain of coronavirus and the disease it causes
(“COVID-19”) has had and continues to have a significant effect on the lodging
industry and our business. We cannot presently determine the extent or duration
of the overall operational and financial effects that COVID-19 will have on our
business. In March and April 2020, travel restrictions and mandated closings of
non-essential businesses were imposed, which resulted in temporary suspensions
of operations at a majority of our hotels, all except two of which have now
reopened. Temporary closings of restaurants and hotels as well as travel
restrictions across entire regions also contributed to severely reduced overall
lodging demand. The effects of COVID-19 continue to have a significant adverse
effect on the hospitality industry, including our business; however, the
increase in vaccination rates across the country and the easing or removal of
restrictions, quarantining, and “social distancing” mandates resulted in
increased travel and hospitality spending beginning in the second quarter of
2021 as compared to the same period in 2020. In December 2021, the rapid rise in
COVID-19 cases from the Omicron variant resulted in additional group
cancellations and cautious business travel sentiment during the first quarter of
2022, labor disruptions throughout the travel industry resulting in widespread
airline cancellations and hotel staff shortages, and re-imposed restrictions on
gatherings and business events by an increasing number of jurisdictions. Despite
the near-term reduction in demand due to the seasonal decline in leisure travel
following the holiday season and the delay in return of business travel, coupled
with concerns over the spread of the Omicron variant and related travel
restrictions, we expect a broader based recovery to continue beginning in the
second quarter of 2022 as leisure demand trends and group booking activity
continue to improve. We expect to see a return of group demand beginning in the
second quarter of 2022 in select markets as groups continued to push out
meetings originally scheduled for the second half of 2021 into 2022.
Beginning in March 2020, we experienced a significant decline in occupancy,
Average Daily Rate (“ADR”) and Revenue per Available Room (“RevPAR”) associated
with the COVID-19 pandemic throughout our consolidated portfolio, which has
resulted in a decline in our operating cash flow. As distribution of the
COVID-19 vaccine continues, we have seen improvement in traveler sentiment, and
as a result, an improvement in occupancy, ADR and RevPAR during 2021. Changes in
our 2021 pro-forma metrics, which exclude results from properties disposed of
and include results from properties acquired as of February 18, 2022, as
compared to the same periods in 2019 and 2020, respectively, and pro-forma
occupancy are as follows:
Change in Pro-forma ADR Change in Pro-forma Occupancy Change in Pro-forma RevPAR
2021
2021 vs. 2020 2021 vs. 2019 2021 vs. 2020 2021 vs. 2019 2021 vs. 2020 2021 vs. 2019 Pro-forma
Occupancy
Q1 2021 (28.9 )% (30.6 )% (35.0 )% pts (50.7 )% pts (69.3 )% (76.2 )% 26.6 %
Q2 2021 44.8 (16.7 ) 36.1 (43.4 ) 897.0 (58.9 ) 42.2
Q3 2021 50.0 (7.0 ) 32.2 (33.0 ) 301.6 (43.4 ) 51.3
October 2021 51.9 (13.8 ) 26.9 (34.3 ) 226.5 (48.7 ) 50.4
November 2021 59.3 (6.1 ) 32.4 (29.1 ) 321.8 (39.8 ) 52.1
December 2021 53.7 8.0 36.5 (20.9 ) 356.9 (21.7 ) 55.0
Q4 2021 55.8 (4.2 ) 31.9 (28.1 ) 297.9 (37.6 ) 52.5
We believe demand will remain significantly reduced as long as mandatory travel
restrictions, “social distancing” and cost-saving or other measures, such as the
postponing or cancelling of non-essential business travel, remain in place or if
these restrictions tighten or demand for travel continues to be depressed due to
virus variants. Although we were able to recommence operations at all except two
of our previously suspended hotels by the end of 2021, there remains
considerable uncertainty as to both the time it will take to see travel and
demand for lodging and travel-related experiences to fully recover. If demand
does not recover, or if virus variants increase or travel restrictions tighten,
we may be required to suspend operations at additional hotels. Further,
uncertainty as to the timing of when remaining restrictions will be removed
generally will make it more difficult to execute on our external growth
strategy. The uncertainties surrounding the COVID-19 pandemic recovery,
including new variants, make it difficult to predict operating results for our
hotels in 2022, thus there can be no assurances that we will not experience
further declines in hotel revenues or earnings at our hotels.
We and our hotel managers have taken various actions to mitigate the effects of
the COVID-19 pandemic, including temporarily suspending operations at a majority
of our hotels beginning in March 2020, limiting capacity at our open hotels,
deferring approximately $150 million of capital expenditures planned for 2020,
reducing capital expenditures for maintenance projects to approximately $44
million for 2021 and suspending our dividend after the first quarter of 2020.
Additionally, as a precautionary measure to increase liquidity and preserve
financial flexibility, we fully drew on our revolving credit facility
(“Revolver”) in 2020 and completed three corporate bond offerings totaling $2.1
billion in 2020 and 2021 and five asset sales in 2021, the proceeds of which
were used to fully repay the Revolver and our term loan due December 2021 (“2016
Term Loan”), as well as a majority of our unsecured delayed draw term loan
facility (“2019 Term Facility”).
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Since originally suspending operations, we have commenced the phased reopening
of all except two of our hotels. The timing of the reopening of these remaining
hotels will depend primarily on government restrictions imposed or re-imposed
and recovery in demand. The status of our hotels as of February 18, 2022 is as
follows:
Status Number of Hotels Total Rooms
Consolidated Open 46 26,551
Consolidated Suspended 2 1,338
Total Consolidated 48 27,889
Unconsolidated Open 6 4,036
Total Hotels 54 31,925
In addition, the operating environment for us and our hotel managers has
improved as government restrictions are lifted and demand for travel returns.
Economic indicators such as GDP growth, corporate earnings, consumer confidence
and employment are highly correlated with lodging demand and have generally
returned to pre-pandemic levels. We expect the significance of the COVID-19
pandemic, including the extent of its effect on our financial and operational
results, to be dictated by, among other things, its duration, the success of
efforts to contain it, the emergence of virus variants, efficacy, availability
and deployment of vaccinations and other treatments to combat COVID-19,
including public adoption rates of COVID-19 vaccines, and the effect of actions
taken in response (such as travel advisories and restrictions and social
distancing), including the extent and duration of such actions.
The extent and duration of the effects of COVID-19 are not yet clear. Despite
cost reduction initiatives, we do not expect to be able to fully, or even
materially, offset revenue losses from the COVID-19 pandemic. In addition, we
cannot predict whether our reopened hotels will be forced to suspend operations
again in the future or be subjected to operating restrictions following further
outbreaks or variants of COVID-19.
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. Due to the effects of COVID-19, we have experienced
a greater shift to transient business as a result of the cancellation or
postponement of business conferences and other group events.
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 Hilton Grand
Vacations (“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. Also included in the
comparative period, revenue from our laundry business prior to permanent
suspension of operations in 2020.
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
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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-level. 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.
Impairment and casualty loss, net. 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. 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.
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.
Acquisition costs. These costs include expenses associated with our hotel
acquisitions.
Other. These costs include costs to provide support services to certain HGV
timeshare properties. Also included in the comparative period, expenses for our
laundry business prior to permanent suspension of operations in 2020.
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.
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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. Room nights
available to guests have not been adjusted for suspended or reduced operations
at certain of our hotels as a result of COVID-19. Occupancy measures the
utilization of our hotels’ available capacity. Management uses 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. Room nights available to guests have not
been adjusted for suspended or reduced operations at certain of our hotels as a
result of COVID-19. 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
Historically, we have presented certain data for our hotels on a comparable
hotel basis as supplemental information for investors. We defined our comparable
hotels as those that: (i) were active and operating in our portfolio since
January 1st of the previous year; and (ii) have not sustained substantial
property damage or business interruption, have not undergone large-scale capital
projects or for which comparable results are not available. We presented
comparable hotel results to help us and our investors evaluate the ongoing
operating performance of our comparable hotels. However, given the significant
effect of COVID-19 on most of our hotels and the lack of comparability to prior
periods, we do not believe this supplemental information is useful to us or our
investors at this time. Under “Results of Operations” below, we have provided
information on the effects from dispositions and other factors to our results of
operations for the year ended December 31, 2021 as compared to the year ended
December 31, 2020. Change from other factors primarily relates to the effects of
COVID-19.
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.
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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:
•
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
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•
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 loss to Hotel Adjusted
EBITDA:
Year Ended December 31,
2021 2020
(in millions)
Net loss $ (452 ) $ (1,444 )
Depreciation and amortization expense 281 298
Interest income (1 ) (2 )
Interest expense 258 213
Income tax expense (benefit) 2 (6 )
Interest expense, income tax and depreciation and
amortization included in equity in earnings from
investments in affiliates 11
16
EBITDA 99 (925 )
Loss (gain) on sales of assets, net 5 (62 )
Gain on sale of investments in affiliates(1) – (1 )
Acquisition costs – 10
Severance expense – 33
Share-based compensation expense 19
20
Impairment and casualty loss, net 9 696
Other items(2) 10 35
Adjusted EBITDA 142 (194 )
Less: Adjusted EBITDA from investments in affiliates (7 ) 3
Add: All other(3) 42 44
Hotel Adjusted EBITDA $ 177 $ (147 )
(1) Included in other (loss) gain, net.
(2) For the year ended December 31, 2020, includes a $12 million reserve related
to ongoing claims in connection with our obligation to indemnify Hilton under
the spin-off agreements. Refer to Note 15: “Commitments and Contingencies” in
our audited consolidated financial statements included elsewhere within this
Annual Report on Form 10-K for additional information.
(3) Includes other revenues and other expenses, non-income taxes on TRS leases
included in other property-level 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.
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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; and
•
Other items that we believe are not representative of our current or future
operating performance.
The following table provides a reconciliation of net loss attributable to
stockholders to Nareit FFO attributable to stockholders and Adjusted FFO
attributable to stockholders:
Year Ended December 31,
2021 2020
(in millions)
Net loss attributable to stockholders $ (459 ) $ (1,440 )
Depreciation and amortization expense 281
298
Depreciation and amortization expense attributable to
noncontrolling interests (4 ) (4 )
Loss (gain) on sales of assets, net 5 (62 )
Gain on sale of investments in affiliates(1) – (1 )
Impairment loss 5
697
Equity investment adjustments:
Equity in losses from investments in affiliates 7 22
Pro rata FFO of investments in affiliates 2 (10 )
Nareit FFO attributable to stockholders (163 ) (500 )
Casualty loss (gain), net 4 (1 )
Severance expense – 33
Acquisition costs – 10
Share-based compensation expense 19 20
Other items(2) 4 49
Adjusted FFO attributable to stockholders $ (136 ) $ (389 )
Nareit FFO per share – Diluted(3) $ (0.69 ) (2.12 )
Adjusted FFO per share – Diluted(3) $ (0.57 ) (1.65 )
(1) Included in other (loss) gain, net.
(2) For the year ended December 31, 2020, includes $37 million of tax expense on
hotels sold during 2020.
(3) Per share amounts are calculated based on unrounded numbers.
Results of Operations
The following items have had a significant effect on the year-over-year
comparability of our operations and are illustrated further in the table of
Hotel Revenues and Operating Expenses below:
•
Property Dispositions: Between January 1, 2020 and December 31, 2021, we
disposed of seven consolidated hotels. As a result of these dispositions, our
revenues and operating expenses decreased for the year ended December 31, 2021
as compared to the same period in 2020. The results of operations during our
period of ownership of these hotels are included in our consolidated results.
•
COVID-19: Beginning in March 2020, we experienced a significant decline in ADR,
occupancy and RevPAR due to COVID-19. The economic contraction resulting from
the spread of COVID-19 has and is expected to continue to significantly affect
our business. As discussed in “Overview – COVID-19 Operational Update,” since
April, 2021, we have seen increases in ADR, occupancy and RevPAR each month
compared to 2020. Consequently, the results of our portfolio during the year
ended December 31, 2021 will not be comparable to the same period in 2020.
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Hotel Revenues and Operating Expenses
Year Ended December 31,
Change from Change
Property from Other
2021 2020 Change Dispositions Factors(1)
(in millions)
Rooms revenue $ 870 $ 526 $ 344 $ (12 ) $ 356
Food and beverage revenue 251 189 62 (3 ) 65
Ancillary hotel revenue 190 108 82 (2 ) 84
Rooms expense 254 193 61 (2 ) 63
Food and beverage expense 208 173 35 (3 ) 38
Other departmental and support
expense 423 359 64 (7 ) 71
Other property-level expense 191 258 (67 ) (5 ) (62)(2)
Management fees expense 59 30 29 (1 ) 30
(1) Change from other factors primarily relates to the effects of COVID-19,
except as otherwise noted. The increase in revenues and expenses was primarily
due to the reopening of most of our hotels that were suspended during 2020 and
improved occupancy due to an increase in leisure travel as compared to 2020.
(2) The reduction is primarily a result of $30 million of severance expense
incurred in 2020 that was not incurred in 2021 and a reduction of real estate
taxes of $15 million compared to 2021.
Group, transient, contract and other rooms revenue for the year ended December
31, 2021, as well as the change for each segment compared to 2020 are as
follows:
Year Ended December 31,
Change from Change
Property from Other
2021 2020 Change Dispositions Factors(1)
(in millions)
Group rooms revenue $ 114 $ 136 $ (22 ) $ (4 ) $ (18 )
Transient rooms revenue 690 330 360 (8 ) 368
Contract rooms revenue 50 48 2 – 2
Other rooms revenue 16 12 4 – 4
Rooms revenue $ 870 $ 526 $ 344 $ (12 ) $ 356
(1) Change from other factors primarily relates to the effects of COVID-19. The
increase in revenues was primarily due to the reopening of most of our hotels
that were suspended during 2020 and improved traveler sentiment as vaccine
distribution significantly increased and operating restrictions were lifted
throughout 2021.
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Other revenue and Other expense
During the second half of 2020, we permanently closed operations at all three of
our laundry facilities resulting in a decrease in both laundry revenue and
laundry expense. The increases in support services revenue and expense are due
to the reopening of our hotels that have service arrangements with HGV, which
were suspended for a majority of 2020.
Year Ended December 31,
2021 2020 Percent Change
(in millions)
Support services revenue $ 51 $ 27 88.9 %
Laundry revenue – 2 (100.0 )%
Total other revenue $ 51 $ 29 75.9 %
Year Ended December 31,
2021 2020 Percent Change
(in millions)
Support services expense $ 48 $ 26 84.6 %
Laundry expense 1 10 (90.0 )%
Total other expense $ 49 $ 36 36.1 %
Corporate general and administrative
Year Ended December 31,
2021 2020 Percent Change
(in millions)
General and administrative expenses $ 43 $ 40 7.5 %
Share-based compensation expense 19 20 (5.0 )
Disposition costs – 1 (100.0 )
Severance expense – 2 (100.0 )
Total corporate general and administrative $ 62 $ 63 (1.6 )%
Acquisition costs
During the year ended December 31, 2020, we incurred $10 million of acquisition
costs, primarily as a result of $9 million of transfer tax in connection with
the Merger with Chesapeake based on new information received during 2020.
Impairment and casualty loss, net
During the year ended December 31, 2021, we recognized an impairment loss of $5
million related to one of our hotels classified as held for sale as of June 30,
2021. We also recognized $4 million of casualty losses as a result of damage
caused by Hurricane Ida at one of our hotels.
During the year ended December 31, 2020, we recognized a net loss of $696
million primarily as a result of $607 million of impairment losses related to
our goodwill and $90 million of impairment losses primarily related to one of
our hotels, and our inability to recover the carrying value of the asset because
of COVID-19.
(Loss) Gain on sales of assets, net
During the year ended December 31, 2021, we recognized a net loss of $5 million
primarily as a result of the sales of five of our consolidated hotels.
During the year ended December 31, 2020, we recognized a net gain of $62 million
primarily as a result of the sale of two of our consolidated hotels.
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Non-operating Income and Expenses
Interest expense
Interest expense increased during the year ended December 31, 2021 compared to
the same period in 2020 as a result of the issuances of $2.1 billion of Senior
Secured Notes during the second and third quarters of 2020 and May 2021,
partially offset by a decrease in interest expense as a result of the full
repayment of the 2016 Term Loan in September 2020, partial repayment of the 2019
Term Facility during the second and third quarters of 2021 and the full
repayment of the Revolver during 2021. Interest expense associated with our debt
for the years ended December 31, 2021 and 2020 were as follows:
Year ended December 31,
2021 2020 Percent Change
(in millions)
SF and HHV Mortgage Loans(1) $ 85 $ 85 – %
Other Mortgage Loans 24 22 9.1 %
2016 Term Loan – 15 NM(2)
2019 Term Facility 12 20 (40.0 )%
Revolver 10 19 (47.4 )%
2025 Senior Secured Notes(3) 49 29 69.0 %
2028 Senior Secured Notes(3) 43 12 258.3 %
2029 Senior Secured Notes(3) 23 – NM(2)
Other 12 11 9.1 %
Total interest expense $ 258 $ 213 21.1 %
(1) In October 2016, we entered into a $725 million CMBS loan secured by the
Hilton San Francisco Union Square and the Parc 55 Hotel San Francisco (“SF
Mortgage Loan”) and a $1.275 billion CMBS loan secured by the Hilton Hawaiian
Village Waikiki Beach Resort (“HHV Mortgage Loan”).
(2) Percentage change is not meaningful.
(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 secured notes due 2025 (“2025 Senior Secured Notes”) and
an aggregate of $725 million of senior secured notes due 2028 (“2028 Senior
Secured Notes”), respectively. Additionally, in May 2021, our Operating Company,
PK Domestic and PK Finance issued an aggregate of $750 million of senior secured
notes due 2029 (“2029 Senior Secured Notes,” collectively with the 2025 Senior
Secured Notes and 2028 Senior Secured Notes, the “Senior Secured Notes”).
Our current debt outstanding is approximately $4.7 billion at a weighted average
interest rate of 5.0%, of which approximately 99% 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.
Other (loss) gain, net
During the year ended December 31, 2021, we recognized a net loss of $7 million,
which is primarily due to $5 million related to the loss on extinguishment of
debt during the year.
During the year ended December 31, 2020, we recognized a net loss of $15
million, which is primarily due to an additional $12 million reserve related to
ongoing claims in connection with our obligation to indemnify Hilton under the
spin-off agreements.
Income tax (expense) benefit
Year Ended December 31,
2021 2020 Percent Change
(in millions)
Income tax (expense) benefit $ (2 ) $ 6 NM(1)
(1) Percentage change is not meaningful.
Income tax expense for the year ended December 31, 2021, primarily consists of
$6 million of income tax expense related to our taxable REIT subsidiaries,
partially offset by $4 million of state tax benefits from utilizing state NOLs
and a $1 million benefit from the derecognition of deferred tax liabilities.
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Income tax benefit for the year ended December 31, 2020 includes a TRS income
tax benefit of $24 million from utilizing the NOL carryback provisions of the
CARES Act and $22 million of a net tax benefit from the derecognition of
deferred tax liabilities, partially offset by $37 million of income tax expense
from hotels sold during the period.
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,
2021, we had total cash and cash equivalents of $688 million and $75 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. We currently have higher than historical
balances in restricted cash due to certain of our mortgage loans that require
deposits of excess cash with the lender when certain financial ratios are not
met, which occurred during the period as a result of the effect from COVID-19 on
operating results at the associated hotels.
As a result of the economic uncertainty resulting from the effects of COVID-19,
including decreased occupancy, ADR and RevPAR at our hotels, as described above
under “COVID-19 Operational Update”, we expect our cash flows through at least
the first quarter of 2022 to be significantly lower than prior to COVID-19. We
have taken several steps to preserve capital and increase liquidity, including
drawing $1 billion from our Revolver in March 2020 (which we subsequently fully
repaid), issuing $650 million of 2025 Senior Secured Notes in May 2020 (a
portion of which was used to partially repay amounts outstanding under our
Revolver and 2016 Term Loan), issuing $725 million of 2028 Senior Secured Notes
in September 2020 (a portion of which was used to repay the 2016 Term Loan in
full as well as a portion of the Revolver), issuing $750 million of 2029 Senior
Secured Notes in May 2021 (a portion of which was used to partially repay the
Revolver and the 2019 Term Facility), suspending our dividend following the
payment of the first quarter 2020 dividend and implementing various cost saving
initiatives at our hotels including temporary suspension of operations at
certain hotels and selected restaurants and other businesses and outlets and
reductions in capital expenditures for maintenance projects to approximately $44
million for 2021. We will continue to assess when the deferred capital
expenditures will resume or if any of the deferred expenditures will be
cancelled.
In 2021, we sold five consolidated hotels, the W New Orleans – French Quarter,
the Hotel Indigo San Diego Gaslamp Quarter, the Courtyard Washington Capitol
Hill Navy Yard, the Hotel Adagio, Autograph Collection and the Le Meridien San
Francisco. Net proceeds from the sales of these hotels were used to repay $37
million outstanding under the Revolver, which currently has no remaining balance
outstanding, and to partially repay $419 million of the 2019 Term Facility.
We generated positive Hotel Adjusted EBITDA for the quarter ended December 31,
2021, the third consecutive quarter since the start of the pandemic. With the
availability under our Revolver and existing cash and cash equivalents as a
result of net proceeds from the offering of our Senior Secured Notes and the
proceeds from the sales of two consolidated hotels in 2020 and the sale of five
consolidated hotels in 2021, we have sufficient liquidity to pay our debt
maturities and to fund other liquidity obligations over the next year and
beyond. Only 2% of our total outstanding debt is maturing in 2022. We are
maintaining higher than historical cash levels due to the continued uncertainty
surrounding COVID-19, and we intend to do so until markets stabilize and demand
in the lodging industry significantly recovers. In addition, we also may take
other actions to improve our liquidity, such as the issuance of additional debt,
equity or equity-linked securities, if we determine that doing so would be
beneficial to us. However, there can no assurance as to the timing of any such
issuance, which may be in the near term, or that any such additional financing
will be completed on favorable terms, or at all. In 2020, we amended our credit
facilities, which in addition to providing enhanced liquidity, extending the
maturity of the Revolver and extending the waiver period for the testing of the
financial covenants, placed certain restrictions on the Company, including
limitations on our ability to make dividends and distributions (except to the
extent required to maintain REIT status, the ability to pay a $0.01 per share
per fiscal quarter dividend and certain other agreed exceptions). In February
2022, we further amended our credit and term loan facilities, including
extending the waiver period for the testing of the financial covenants, refer to
“Note 17: “Subsequent Events” in our audited consolidated financial statements
included elsewhere within this Annual Report on Form 10-K for additional
information.
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Our known short-term liquidity requirements primarily consist of funds necessary
to pay for operating expenses and other expenditures, including reimbursements
to our hotel manager for payroll and related benefits, costs associated with the
operation of our hotels, interest and scheduled principal payments on our
outstanding indebtedness, capital expenditures for renovations and maintenance
at our hotels, corporate general and administrative expenses, and, when resumed,
dividends to our stockholders. Many of the other expenses associated with our
hotels are relatively fixed, including portions of rent expense, property taxes
and insurance. 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 (to the extent not cancelled or deferred), and costs associated with
potential acquisitions. Despite the effect of COVID-19 on the global economy and
our business, we were able to access the debt capital markets during the past
two years to complete three separate offerings of our Senior Secured Notes.
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 $94 million for capital
expenditures at our properties, of which $72 million relates to the expansion
project at the Bonnet Creek complex. The Bonnet Creek expansion project includes
additional meeting space for the Signia by Hilton Orlando Bonnet Creek and the
Waldorf Astoria Orlando. 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 2019, our Board of Directors approved a stock repurchase program
allowing us to repurchase up to $300 million of our common stock over a two-year
period, which ended in February 2021. Stock repurchases were made through open
market purchases, in privately negotiated transactions, or in such other manner
that complied with applicable securities laws. The timing of stock repurchases
and the number of shares repurchased were dependent upon prevailing market
conditions and other factors. During the three months ended March 31, 2020, we
repurchased 4.6 million shares of our common stock for a total purchase price of
$66 million. No additional common stock was repurchased during 2020 or in the
first two months of 2021 prior to the expiration of this stock repurchase
program. We may make future stock repurchases, subject to the approval of a new
stock repurchase program by our Board of Directors.
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,
2021 2020 Percent Change
(in millions)
Net cash used in operating activities $ (137 ) $ (438 ) 68.7 %
Net cash provided by investing activities 394 119 231.1 %
Net cash (used in) provided by financing activities (475 )
914 NM(1)
(1) Percentage change is not meaningful.
Operating Activities
Cash flow from operating activities are primarily generated from the operating
income generated at our hotels.
The $301 million decrease in net cash used in operating activities for the year
ended December 31, 2021 compared to the year ended December 31, 2020 was
primarily due to an increase in cash from operations as a result of the increase
in occupancy as our hotels continue to recover from the effects of COVID-19,
partially offset by an increase in cash paid for interest of $55 million and an
increase in cash paid for taxes of $8 million.
Investing Activities
The $394 million in net cash provided by investing activities for the year ended
December 31, 2021 was primarily attributable to $454 million of net proceeds
from the sale of five of our consolidated hotels, partially offset by $54
million in capital expenditures.
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The $119 million in net cash provided by investing activities for the year ended
December 31, 2020 was primarily attributable to the $207 million in net proceeds
received from the sale of hotels, partially offset by $86 million in capital
expenditures.
Financing Activities
The $475 million in net cash used in financing activities for the year ended
December 31, 2021 was primarily attributable to $1.2 billion of debt repayments
and $15 million of debt issuance costs, partially offset by the issuance of $750
million of 2029 Senior Secured Notes.
The $914 million in net cash provided by financing activities for the year ended
December 31, 2020 was primarily attributable to borrowings of $1 billion from
our Revolver as a result of COVID-19, the issuance of our $650 million 2025
Senior Secured Notes and $725 million of 2028 Senior Secured Notes, partially
offset by $1.1 billion of debt repayments, $241 million in dividends paid and
the repurchase of 4.6 million shares of our common stock for $66 million.
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 gain, and after utilization of any NOL carryforward to our
stockholders on an annual basis. Therefore, as a general matter, it is unlikely
that we will be able to retain substantial cash balances that could be used to
meet our liquidity needs from our annual taxable income. Instead, we will need
to meet these needs from external sources of capital and amounts, if any, by
which our cash flow generated from operations exceeds taxable income. However,
as a precautionary measure in light of COVID-19, after the payment of the first
quarter dividend in 2020, we suspended our quarterly dividend. In addition,
except for certain exceptions described above under “-Overview,” our ability to
pay dividends is restricted pursuant to our amended credit facility. As
described above under Item 5: “Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities-Distribution
Information,” we are currently evaluating the reinstatement of a quarterly cash
distribution of $0.01 per share, subject to approval by our Board of Directors.
Any such distribution and any future distributions will be at the sole
discretion of our Board of Directors.
Debt
As of December 31, 2021, our total indebtedness was approximately $4.7 billion,
including approximately $2.1 billion of our Senior Secured Notes, as disclosed
above, and excluding approximately $225 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.
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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 (loss) income 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.
Consolidations
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.
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